MAINE PUBLIC SERVICE CO
10-Q, 2000-08-11
ELECTRIC SERVICES
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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549



FORM 10-Q

Quarterly Report Under Section 13 or 15(d) of

The Securities Exchange Act of 1934



For Quarter Ended June 30, 2000

Commission File No. 1-3429



Maine Public Service Company

(Exact name of registrant as specified in its charter)

Maine

(State or other jurisdiction of incorporation or organization)



01-0113635

(I.R.S. Employer Identification No.)



209 State Street, Presque Isle, Maine

(Address of principal executive offices)

04769

(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 - 1,592,502 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 and six months ended June 30, 2000, and for the corresponding period of the preceding year; a consolidated balance sheet as of June 30, 2000, and as of December 31,1999, the end of the Company's preceding fiscal year; and a statement of consolidated cash flows for the period January 1 (beginning of the fiscal year) through June 30, 2000, and for the corresponding period of the preceding year.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements present fairly the financial position of the Companies at June 30, 2000 and December 31, 1999, and the results of their operations for the three and six months ended June 30, 2000 and their cash flows for the six months ended June 30, 2000, and for the corresponding period of the preceding year.








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MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES

STATEMENTS OF CONSOLIDATED OPERATIONS

(Unaudited)

(Dollars in Thousands Except Per Share Amounts)

Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
Operating Revenues $17,571 $16,423 $35,138 $33,892
EA-Standard Offer Service Margin 86 0 398 0
Total Revenues 17,657 16,423 35,536 33,892
Operating Expenses
Energy Supply 10,342 9,929 19,632 19,593
T & D Operation & Maintenance 2,981 2,921 5,976 5,660
Depreciation 580 630 1,160 1,231
Amortization of Stranded Costs 3,161 0 3,965 0
Amortization 15 376 267 761
Taxes other than Income (92) 403 254 850
Provision for Income Taxes (152) 530 999 1,674
Total Operating Expenses 16,835 14,789 32,253 29,769
Operating Income 822 1,634 3,283 4,123
Other Income (Deductions)
Equity in Income of Associated Companies 80 88 160 365
Allowance for Equity Funds
Used During Construction 3 12 4 22
Provision for Income Taxes (183) (113) (409) (147)
Other - Net 193 76 710 65
Total 93 63 465 305
Income Before Interest Charges 915 1,697 3,748 4,428
Interest Charges
Long-Term Debt & Notes Payable 794 992 1,810 1,971
Less Carrying Costs-Stranded Costs & Allowance for Borrowed Funds used During Construction (229) (7) (303) (14)
Total 565 985 1,507 1,957
Net Income Available for Common Stock $350 $712 $2,241 $2,471
Average Shares Outstanding (000's) 1,594 1,617 1,603 1,617
Basic & Diluted Earnings Per Share $0.22 $0.44 $1.40 $1.53
Dividends Declared per Common Share $0.30 $0.25 $0.60 $0.50

The accompanying notes are an integral part of these financial statements.

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MINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in Thousands)

June 30, 2000 December 31,
ASSETS (Unaudited) 1999
Utility Plant
Electric Plant in Service $75,421 $75,531
Less Accumulated Depreciation 35,611 34,701
Net Electric Plant in Service 39,810 40,830
Construction Work-in-Progress 2,731 1,052
Total 42,541 41,882
Investment in Associated Companies
Maine Yankee Atomic Power Company 3,635 3,753
Maine Electric Power Company, Inc. 318 279
Total 3,953 4,032
Net Utility Plant and Investments 46,494 45,914
Current Assets
Cash and Cash Equivalents 585 6,985
Deposits with Trustee-Asset Sale 0 18,242
Accounts Receivable - Net 6,111 7,043
Unbilled Base Revenue 1,973 1,149
Inventory 757 509
Prepayments 2,032 643
Total 11,458 34,571
Regulatory Assets
Uncollected Maine Yankee Decommissioning Costs 30,702 32,158
Recoverable Seabrook Costs 17,774 23,451
Regulatory Assets - SFAS 109 & 106 7,603 10,459
Deferred Fuel and Purchased Energy Costs 11,510 11,217
Regulatory Asset - Power Purchase Agreement Restructuring 8,706 8,706
Unamortized Debt Expense 3,087 1,014
Deferred Regulatory Costs, less accumulated amortization 410 581
Total 79,792 87,586
Other Assets
Restricted Investments 2,391 2,402
Miscellaneous 832 1,075
Total 3,223 3,477
Total Assets $140,967 $171,548
CAPITALIZATION AND LIABILITIES
Capitalization
Common Shareholders' Equity
Common Stock $13,071 $13,071
Paid-in Capital 38 38
Retained Earnings 31,045 29,765
Treasury Stock, at cost (6,157) (5,714)
Total 37,997 37,160
Long-Term Debt (less current maturities) 26,465 41,990
Current Liabilities
Long-Term Debt Due Within One Year 525 25
Notes Payable 5,000 3,600
Accounts Payable 4,180 5,717
Accounts Payable - Standard Offer Service 1,438 0
Current Deferred Income Taxes 0 195
Dividends Declared 478 485
Customer Deposits 21 17
Interest and Taxes Accrued 1,219 9,788
Total 12,861 19,827
Deferred Credits
Uncollected Maine Yankee Decommissioning Costs 30,702 32,158
Deferred Income Tax 19,120 17,160
Investment Tax Credits 270 288
Deferred Gain & Related Accounts-Generating Asset Sale 10,625 20,227
Miscellaneous 2,927 2,738
Total 63,644 72,571
Total Capitalization and Liabilities $140,967 $171,548


















The accompanying notes are an integral part of these financial statements.





















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MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES

Statements of Consolidated Cash Flows

(Unaudited)

(Dollars in Thousands)
Six Months Ended
June 30,
2000 1999
Cash Flow From Operating Activities
Net Income $2,241 $2,471
Adjustments to Reconcile Net Income to Net Cash Provided by Operations
Depreciation 1,160 1,231
Amortization 575 779
Amortization of Deferred Gain from Asset Sale (2,339) 0
Income on Tax Exempt Bonds-Restricted Funds 0 (11)
Deferred Income Taxes - Net 2,478 1,033
AFUDC (6) (36)
Accrued Interest on Generating Asset Sale Deferred Gain 161 0
Rate Stabilization Plan Revenue (379) 0
Change in Deferred Fuel & Purchased Energy (294) 574
Change in Deferred Regulatory and Debt Issuance Costs 209 177
Change in Deferred Reg Asset - Power Purchase Restructuring (44) 0
Gain on Sale of Non-Utility Property (205) 0
Change in Deferred Revenues 0 (1,170)
Change in Benefit Obligation 250 337
Change in Current Assets and Liabilities (2,219) (2,191)
Other 61 (417)
Net Cash Flow Provided By Operating Activities 1,649 2,777
Cash Flow From Financing Activities
Dividend Payments (967) (809)
Drawdown of Asset Sale Proceeds with Trustee 18,957 0
Deposit of Non-Utility Property Sale Proceeds with Trustee (211) 0
FAME Financing Costs 0 (5)
Deposit with Trustee - Asset Sale Proceeds 0 (7,938)
Drawdown of Tax Exempt Bonds Proceeds 0 428
Purchase of Common Stock (448) 0
Premium on Retirement of Long Term Debt (2,106) 0
Retirements on Long-Term Debt (15,025) (25)
Short-Term Borrowings (Repayments), Net 1,400 (2,100)
Net Cash Flow Provided By (Used For) Financing Activities 1,600 (10,449)
Cash Flow From Investing Activities
Payment of Taxes on Generating Asset Sale Deferred Gain (7,853) 0
Proceeds from Sale of Generating Assets 0 37,547
Proceeds from Sale of Non-Utility Property 208 0
Investment in Electric Plant (2,004) (1,749)
Net Cash Flow Provided By (Used For) Investing Activities (9,649) 35,798
Decrease in Cash and Cash Equivalents (6,400) 28,126
Cash and Cash Equivalents at Beginning of Year 6,985 1,454
Cash and Cash Equivalents at End of Period $585 $29,580
Change in Current Assets and Liabilities Providing (Utilizing)
Cash From Operating Activities
Accounts Receivable $933 ($473)
Unbilled Revenue (824) 612
Deferred Maine Yankee Replacement Power Costs 0 (1,200)
Inventory (248) (136)
Prepayments (1,321) (1,509)
Accounts Payable & Accrued Expenses (764) 522
Other Current Liabilities 5 (7)
Total Change ($2,219) ($2,191)
Supplemental Disclosure of Cash Flow Information:
Cash Paid During the Period For:
Interest $2,157 $1,999
Income Taxes (Includes $7.8 million payment in February, 2000
to Revenue Canada for 1999 asset sale taxes) $7,995 $2,242

The accompanying notes are an integral part of these financial statements.































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NOTES TO CONSOLIDATED 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 (ME&NB) 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 1999 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 1999 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.

As of March 1, 2000, the Company bills customers for the energy supplied by standard offer and competitive energy providers. The Company is at risk for the collection of the standard offer supply, as it is required to remit funds within 26 days of the billing date. Competitive energy providers are paid only after the funds are collected from customers. The Company records accounts receivable for the amounts billed to Standard Offer Service (SOS) customers and a corresponding accounts payable for the amounts due to the energy supplier. No revenue is recognized as the Company is acting as an agent.

For purposes of the statements of consolidated cash flows, the Company considers all highly liquid securities with a maturity, when purchased, of three months or less to be cash equivalents.

Certain reclassifications have been made to the 1999 financial statement amounts in order to conform to the 2000 presentation.

2. ENERGY ATLANTIC

In January, 1999, Energy Atlantic, the Company's wholly-owned unregulated marketing subsidiary, formally began operations. This marketing subsidiary was involved in wholesale energy transactions during 1999 and the first two months of 2000, and began selling to retail customers on March 1, 2000, the commencement of retail competition in the State of Maine.

Energy Atlantic's retail activity comprises standard offer service (SOS) and competitive energy supply (CES), both of which utilize power provided via a contract with Engage Energy (Engage). Revenues are received and expenses are paid directly by an escrow agent which is controlled by Engage. EA receives a percentage of the net profit from the sale of energy. EA is the SOS provider for approximately 525,000 residential and small non-residential customers in the Central Maine Power (CMP) service territory and was awarded 20% of the medium non-residential customer base in the Company's service territory. The utilities bear SOS account collection risk, as they are required to remit the amounts billed 26 days after the billing date to EA's escrow account and maintain the billing and customer service relationship. EA records the accrued net margin of the SOS activity as revenue in the financial statements. EA's CES activity is principally two large industrial customers in CMP's service territory, as well as residential and small non-residential customers throughout Maine. For CES sales, EA negotiates the price directly with the customer, maintains customer service responsibility and has collection risk. CES activity is recorded on a gross basis to include the related revenues and purchased power expenses.













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Energy Atlantic is subject to risk in scheduling electric load in the New England retail market. Under the terms of its Wholesale Power Sales Agreement with Engage, EA is required to forecast its expected hourly load in the New England market with the New England system operator, ISO-NE. If EA underforecasts that load, ISO-NE will provide the deficiency at the spot price in the New England market, which is essentially the highest marginal cost in that market during that hour. If that spot price is higher than the price at which EA has contracted to purchase power during that hour, EA is responsible for a portion of that difference under the terms of its Sale Agreement with Engage. By way of illustration, prices in ISO-NE rose as high as $6,000 per MWH during the afternoon of May 8, 2000. During that same period, EA had underforecasted its actual load by 4% to 5%. Although the final numbers have not yet been agreed to, EA estimates this underforecast could result in settlement costs up to $580,000. Prices of $6,000 per MWH are approximately 197 times the average ISO-NE market price of $30.50 per MWH for year-to-date May 7, 2000, and management considers this event unusual and infrequent. Several steps were taken to mitigate the risks of such occurrences in the future and these new procedures have produced $170,000 in positive market settlements since early May. EA's financial results for the periods presented are reflected below.

The Company has determined that EA's activity and related energy contracts are considered non-trading in accordance with EITF 98-10 "Accounting for Companies Involved in Energy Trading and Risk Management Activities".

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. 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 (MPS), and the energy marketing portion of the business, consisting of Energy Atlantic (EA). In June, 1999, ME&NB sold its generating assets and ceased operations.

Three Months Ended
(Dollars in Thousands)
6/30/00 6/30/9
EA MPS Total Company EA MPS Total Company
Operating Revenues $10,582 $6,989 $17,571 $2,863 $13,560 $16,423
EA Standard Offer Service Margin 86 - 86 - - -
Total Revenues 10,668 6,989 17,657 2,863 13,560 16,423
Operations & Maintenance Expense 10,682 6,397 17,079 2,792 11,064 13,856
Taxes 19 (263) (244) 27 906 933
Total Operating Expenses 10,701 6,134 16,835 2,819 11,970 14,789
Operating Income (Loss) (33) 855 822 44 1,590 1,634
Other Income & Deductions 80 13 93 2 61 63
Income Before Interest Charges 47 868 915 46 1,651 1,697
Interest Charges 21 544 565 4 981 985
Net Income $26 $324 $350 $42 $670 $712


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Six Months Ended
(Dollars in Thousands)
6/30/00 6/30/99
EA MPS Total Company EA MPS Total Company
Operating Revenues $13,018 $22,120 $35,138 $4,324 $29,568 $33,892
EA Standard Offer Service Margin 398 - 398 - - -
Total Revenues 13,416 22,120 35,536 4,324 29,568 33,892
Operations & Maintenance Exp 13,291 17,709 31,000 4,339 22,906 27,245
Taxes 68 1,185 1,253 (7) 2,531 2,524
Total Operating Expenses 13,359 18,894 32,253 4,332 25,437 29,769
Operating Income (Loss) 57 3,226 3,283 (8) 4,131 4,123
Other Income & Deductions 81 384 465 2 303 305
Income (Loss) Before Interest Charges 138 3,610 3,748 (6) 4,434 4,428
Interest Charges 38 1,469 1,507 6 1,951 1,957
Net Income (Loss) $100 $2,141 $2,241 $(12) $2,483 $2,471
Total Assets $3,145 $137,822 $140,967 $872 $184,643 $185,515




















3. RESTRUCTURING AND IMPLEMENTATION OF MULTI-YEAR RATE PLANS

Four-Year Rate Plan From January, 1996 to February, 2000

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 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 was entitled to a 3.66% specified rate increase as of April 1, 1999. Rather than increasing customer rates, the Company recognized the revenues related to this rate increase, approximately $1,695,000 through March 1, 2000, with $379,000 recognized in the first quarter of 2000. Subsequently, the MPUC allowed the deferred gain from the asset sale to be reduced in an amount corresponding to the specified rate increase.

(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, ending February, 2000, with $300,000 recognized in the first quarter of 2000.

Restructuring

As previously reported, 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 described in the Company's 1999 Form 10-K.

The MPUC has conducted several rulemaking proceedings associated with the new restructuring law.





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In accordance with EITF 97-4, after the details of the restructuring plan were determined by the MPUC rulemaking, the Company discontinued 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 in the fourth quarter of 1999. As a result the Company continues to defer certain costs as regulatory assets in instances where recovery through future regulatory cash flows is anticipated.

At June 30, 2000, $79.8 million of regulatory assets remained on the Company's books. These regulatory assets are being amortized over various periods in accordance with the MPUC approved Phase II filing on stranded cost recovery. The major components include the remaining investment in Seabrook 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. As approved by the MPUC, the amortization of these regulatory assets is offset by the recognition of the deferred gain from the sale of the generating assets. As of June 30, 2000, $10.6 million of deferred gain remains to be utilized.

Two -Year Rate Plan Effective March 1, 2000

On October 14, 1998, and subsequently amended on February 9, 1999 and August 11, 1999, the Company filed its determination of stranded costs, transmission and distribution costs and rate design with the MPUC. The Company's amended testimony supports its $95.7 million estimate of stranded costs, net of available value from the sale of the generating assets, representing the return of and return on stranded cost items as described below, when deregulation began 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.

On October 15, 1999, the Company filed with the MPUC a Stipulation resolving the revenue requirement and rate design issues for the Company's Transmission and Distribution (T&D) utility. This Stipulation has been signed by the Public Advocate and approval will be recommended by the MPUC staff. Under the Stipulation, the Company's total annual T&D revenue requirement will be $16,640,000, effective March 1, 2000. This revenue requirement includes a 10.7% return on equity with a capital structure based on 51% common equity. The Stipulation further provides that the precise level of stranded cost recovery cannot be determined until final determination of all costs associated with the sale of the Company's generating assets, but does set forth some general principles concerning the Company's ultimate stranded costs recovery, including agreement that the major components of the Company's stranded costs are legitimate, verifiable and unmitigable, and therefore subject to recovery in rates, and that the 3.66% recovery foregone in Docket 98-865 shall be added to stranded cost recovery in the manner specified in the stipulation in that Docket. The stipulation also provides that the Company's recovery of unamortized investment tax credits and excess deferred income taxes associated with the Company's generating assets must await a final determination ruling from the IRS, which ruling has been sought by Central Maine Power Company. On December 1, 1999, the MPUC approved this Stipulation. In early January, 2000, CMP received its ruling from the IRS which concluded that the unamortized investment tax credits and excess deferred income taxes associated with the sale of the generating assets could not be used to reduce customer rates without violating the tax normalization rules for public utilities.





























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On January 27, 2000, the MPUC approved a Stipulation in Phase II of Docket No. 98-577 that provided for the recovery in rates of the Company's stranded investment. The major element of the Phase II Stipulation was the $12.5 million of stranded investment recoverable annually beginning March 1, 2000. This revenue requirement includes a return on unrecovered stranded investment based on the capital structure approved by the MPUC in its December 1, 1999 Order. The approved capital structure will consist of 51% common equity with an authorized return on equity of 10.7%. The Phase II Stipulation also allowed the Company to offset its unrecovered stranded investment in Seabrook by approximately $7 million, representing an amount equal to 35% of the available value from the sale of the generating assets.

The parties to the Phase II Stipulation also resolved several rate design issues, principally the elimination of the inclining block rate for residential customers. In addition, the Company was granted several accounting orders incorporating certain accounting methodologies used in determining the elements of stranded costs. The annual revenue requirement associated with the recovery of stranded costs will be reviewed every two years.

With the award of the standard offer rate on November 18, 1999, and orders approving the Company's T&D rates and stranded investment recovery rates described above, the MPUC has established all elements of customer rates effective March 1, 2000, the beginning of deregulation in Maine. On average, our customers' rates will be reduced by approximately 6%.

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 rate making purposes, with the exception of Energy Atlantic activity, which is above the line and not allowable for ratemaking purposes. The tax effect of items not included in rate base is allocated as "Other Income (Deductions)".

(Dollars in Thousands)
Three Months Ended Six Months Ended
June 30, June, 30,
2000 1999 2000 1999
Current income taxes $(1,858) $4,153 $ (1,188) $4,746
Deferred income tax 1,898 (3,495) 2,614 (2,894)
Investment credits (9) (15) (18) (31)
Total income taxes $31 $643 $1,408 $1,821
Allocated to:
Operating Income $(152) $530 $999 $1,674
Other income 183 113 409 147
Total $31 $643 $1,408 $1,821




For the six months ended June 30, 2000 and 1999, the effective income tax rates were 38.6% and 42.4%, respectively. During the second quarter of 2000, the Company paid a premium of $2.1 million to retire the $15 million 9.775% bonds using proceeds from the sale of the Company's generating assets. This premium is currently deductible for tax purposes, but is deferred for book purposes, resulting in the decrease in current income taxes. 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, principally Seabrook, required by regulation and state income taxes. Current income taxes recorded on the Company's deferred gain from the generating asset sale are offset by corresponding deferred income taxes.

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The following summarizes accumulated deferred income taxes established on temporary differences under SFAS 109 as of June 30, 2000 and December 31, 1999.

(Dollars in Thousands)
June 30 , December 31,
2000 1999
Seabrook $9,217 $12,922
Property 6,231 6,249
Deferred fuel 4,503 4,164
Pension and postretirement benefits (248) (206)
Generating asset sale (3,764) (7,666)
W-S up-front payment 2,801 2,129
Other 380 (432)
Net accumulated deferred income taxes $19,120 $17,160

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).

During 1998 and early 1999 the active interveners, 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 which resulted in the filing of a settlement agreement with the FERC on January 19, 1999. A separate negotiated settlement filed with the FERC on February 5, 1999 resolved 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. Both settlements were found to be in the public interest and approved by the FERC on June 1, 1999. The settlements constitute a full settlement of all issues raised in the FERC proceeding including decommissioning-cost issues and issues pertaining to the prudence of management, operation and decision to permanently cease operation of the Plant.

The primary settlement provided for Maine Yankee to collect $33.1 million in the aggregate annually, effective August 1, 1999, including both decommissioning costs and costs related to Maine Yankee's planned independent spent fuel storage installation (ISFSI). The 1997 FERC filing had called for an aggregate annual collection rate of $36.4 million for decommissioning and the ISFSI, based on a 1997 estimate. Pursuant to the approved settlement the amount collected annually has been reduced to approximately $25.6 million, effective October 1, 1999, as a result of 1999 Maine legislation allowing Maine Yankee to (1) use for decommissioning the ISFSI funds 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.

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The 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 maximum allowed equity amounts, which resulted in a pro-rata refund of $9.3 million (including tax impacts) to the sponsors on July 15, 1999. The Settling Parties also agreed 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 ISFSI-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.

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 settlement, no refunds would be required, but such excess amounts would be credited to the customers to the extent required by the RSP.

Finally, 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 the maximum amount would be $4.1 million for the period. Based on the results of the two year entitlement auction already completed, the Company will not incur any liability for this provision in 2000 and does not believe that it will incur any liability in 2001.

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. Beginning in April, 1999 the Company began amortizing an additional $150,000 per month as part of a stipulation described in Note 3, "Implementation of Multi-Year Rate Plan". As of June 30, 2000, the Company has a deferred Maine Yankee replacement power cost balance of approximately $3.0 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 and again in June, 1999, 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 regulation precedent established by the FERC in its opinion relating to the decommissioning of the Yankee Atomic nuclear plant, the Company believes that it is entitled to recover substantially all of its share of such costs from its customers and, as of June 30, 2000, is carrying on its consolidated balance sheet a regulatory asset and a corresponding liability in the amount of $30.7 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.















-12-

The MPUC on January 27, 2000, approved a Stipulation providing for the recovery of stranded investment, which includes the Company's share of Maine Yankee decommissioning expenses, Maine Yankee replacement costs, and the remaining Maine Yankee investment.

On May 4, 2000, Maine Yankee notified its decommissioning operations contractor, Stone & Webster Engineering Corporation ("Stone & Webster"), that it was terminating its decommissioning operations contract pursuant to the terms of the contract. Subsequently, Stone & Webster notified Maine Yankee that it was disputing Maine Yankee's grounds for terminating the contract. On May 8, 2000, Stone & Webster announced that it had signed a letter of intent with Jacobs Engineering Group, Inc. ("Jacobs"), regarding a proposed transaction in which Jacobs would acquire substantially all of Stone & Webster's assets in exchange for an immediate credit facility and other consideration, including cash and stock. Stone & Webster said the credit facility was intended to enable it to address its liquidity difficulties and continue to operate its businesses until the asset sale was completed. Stone & Webster also announced that it intended to seek bankruptcy court approval of the asset sale and credit agreement.

On June 2, 2000, Stone & Webster filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware. By Sale Order dated July 13, 2000, the Bankruptcy Court approved the sale of substantially all of Stone & Webster's assets to the successful bidder in the Chapter 11 sale, The Shaw Group, Inc. ("Shaw"), for cash, stock, and the assumption of certain liabilities of Stone & Webster, and the earlier agreement with Jacobs was terminated. Stone & Webster reported that the Shaw transaction was effectively closed on July 14, 2000, and that it would continue to operate as a Debtor-in-Possession subject to the supervision and orders of the Bankruptcy Court.

On May 10, 2000, Maine Yankee entered into an interim agreement with Stone & Webster in order to allow decommissioning work to continue and avoid the adverse consequences of an abrupt or inefficient demobilization from the Plant site. After obtaining assignments of several subcontracts from Stone & Webster and upon termination of the interim agreement on July 1, Maine Yankee at least temporarily assumed the general contractor role, utilizing a reduced number of Stone & Webster personnel under a revised interim agreement that expires September 30, 2000. The decommissioning of the Plant site is progressing, with major emphasis being directed to maintaining the schedule on critical-path projects such as a construction of the ISFSI and preparation of the Plant's reactor vessel for eventual shipment to an off-site disposal facility.

On June 30, 2000, Federal Insurance Company ("Federal"), which provided performance and payment bonds in the amount of $37.6 million each in connection with the decommissioning operations contract, filed a Complaint for Declaratory Judgement against Maine Yankee in the United States Bankruptcy Court for the District of Delaware. The Complaint alleges that Maine Yankee improperly terminated the decommissioning operations contract with Stone & Webster and failed to give proper notice of the termination to Federal under the contract, and that Federal therefore had no further obligations under the bonds. Maine Yankee believes that its termination of the decommissioning operations contract was proper, but cannot predict the outcome of the litigation.

Maine Yankee is evaluating all available long-term alternatives for safely and efficiently completing the decommissioning of the Plant site, including the possibilities of contracting with a new decommissioning operations contractor or assuming that function itself on a long-term basis. However, Maine Yankee cannot predict at this point what effect the financial difficulties of Stone & Webster and the termination of its decommissioning operations contract with Maine Yankee will have on the cost or schedule of the decommissioning project.

6. GENERATING ASSET DIVESTITURE

On July 7, 1998, the Company and WPS Power Development, Inc. (WPD-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 required the approvals of the MPUC and the FERC.



-13-

On June 8, 1999, after receiving all of the major regulatory approvals, the Company completed the sale to WPD-PDI for $37.4 million. The Company's 5% ownership in Maine Yankee was not part of the sale,

since the plant is being decommissioned. After paying Canadian, Federal and State income taxes, the remaining proceeds will be used to reduce the Company's debt. The gain from the sale is currently deferred, and is being recognized according to the Maine Public Utilities Commission's (MPUC) decision on the Company's determination of stranded costs, transmission and distribution costs and rate design.

The components of the deferred gain are as follows:

(Dollars in Millions)
Gross proceeds $37.5
Settlement adjustment (.1)
Net proceeds 37.4
Net book value (11.5)
Excess taxes on sale of Canadian assets (3.4)
Transition costs, net (1.8)
Other .7
Available deferred gain 21.4
Utilization of available value per MPUC orders (11.0)
Remaining deferred gain, net of tax* $10.4




*The $10.4 million deferred gain above is the $10.6 million "Deferred Gain and Related Accounts-Generating Asset Sale" as of June 30, 2000 reduced by the remaining deferral of transition costs allowed by the MPUC.

The Company offset a portion of its Recoverable Seabrook costs with available value from its deferred asset sale gain as follows:

Seabrook Deferred Gain
- Write-off of recoverable Seabrook costs $5,060
- Write-off of deferred tax liability associated with recoverable Seabrook costs (3,644)
- Recognition of deferred asset sale gain $7,006
- Recognition of deferred tax associated with deferred asset sale gain (2,795)
- Write-off of SFAS 109 Regulatory Asset associated with Seabrook 2,795
- Net Change $4,211 $4,211

Upon formal liquidation of the subsidiary in December, 1999, approximately $14.1 million of the proceeds were transferred to the first mortgage trustee for paydown of long-term debt. After a $15 million paydown on June 14, 2000, the Company has reduced long-term debt by $18.9 million using generating asset sale proceeds. In addition, the Company paid an early retirement premium of $2,106,000. Consistent with past treatment, the Company has deferred this premium and will amortize the balance over the remaining life of the original debt issue.



-14-

With the sale of the Company's generating assets in June, 1999, the Company purchased energy from the new owners, PDI, under an agreement that expired February 29, 2000, and these purchases are classified as purchased energy .

As part of the generating assets sale on June 8,1999, the Company has entered into two indemnity

obligations with the purchaser, WPS-PDI. First, the Company will be liable, with certain limitations, for certain Aroostook River flowage damage. This liability will continue for ten years after the sale and shall not exceed $2,000,000 in the aggregate. Second, the Company has warranted the condition of the sites sold to WPS-PDI, with an aggregate limit of $3,000,000 for two years after the date of sale, and five years after the sale for environmental claims. The Company is unaware of any pending claims under either of these indemnity obligations.

7. ACCOUNTING PRONOUNCEMENTS

In June, 1998, the FASB issued SFAS No. 133, (Accounting for Derivative Instruments and Hedging Activities". It requires companies to record derivatives on their balance sheet at their fair value depending on the intended use of the derivative. The new standard applies to all entities and the original effective date was for all fiscal years beginning after June 15, 1999. On May 19, 1999, the FASB determined that the implementation of the statement should be delayed for one year. Based on current business activities, the Company is currently reviewing the impact, if any, that EA's energy contracts will have when this pronouncement is implemented in the future. The Company has reviewed its revenue recognition policies and concluded they comply with the provisions of Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" and EITF No. 99-19, "Recording Revenue Gross as a Principal versus Net as an Agent".



































































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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 June 30, 2000 along with the corresponding information for the previous year are as follows:

Three Months Ended
June 30,
2000 1999
Earnings per share $ .22 $ .44
Net income in thousands $ 350 $ 712






For the second quarter of 2000 compared to the same quarter last year, the decrease in consolidated earnings per share (EPS) of $.22 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 - Second Quarter of 2000

Compared to Second Quarter of 1999

EPS

Increase (Decrease)

Decreased retail revenues and sales for resale due to deregulation starting March 1, 2000 $(2.25)
Decrease in power procurement and Maine Yankee expenses, offset by amortization of stranded costs according to rate stipulation beginning March 1, 2000 1.66
Reduction in net interest costs with use of asset sale proceeds .21
Decrease in taxes other than income, principally property tax refund .19
Decrease in other revenues, principally power marketing earnings (.12)
Change in operating and maintenance expenses .05
Other .04
Total $ (.22)

Consolidated operating revenues for the quarters ended June 30, 2000 and 1999, are as follows:

2000 1999
(Dollars in Thousands) $ MWH $ MWH
Maine Public Service (MPS)
- Retail 6,209 128,083 11,892 121,376
- Other Revenues 780 - 1,668 37 ,089
Energy Atlantic, LLC (EA)
- Competitive Energy Supply 10,582 233,912 - -
- Other Revenues - - 2,863 108,469
- Standard Offer Margin 86 - - -
Totals 17,657 361,995 16,423 266,934

With the start of retail competition on March 1, 2000, the Parent Company's (MPS) retail revenues will reflect transmission and distribution charges, and do not include energy supply. Therefore, comparisons with periods after February, 2000 are difficult. MPS retail sales increased by 5.5% (6,707 MWH), reflecting increases in the following

-17-

Form 10-Q

PART 1. FINANCIAL INFORMATION



Item 2. Management's Analysis of Quarterly Income Statements

Results of Operations (Continued)

customer classes: large commercial (17.5%), principally McCain Foods, medium commercial (2.3%), and small commercial (3.0%), offset by a 2.3% (913 MWH) decrease in residential sales.. Offsetting these increases was a 37,089 MWH decrease in Other Sales due to the termination of the sales agreement with Perth-Andover and a decrease in sales of Wyman output after the generating asset sale on June 8, 1999. The new owners of the generating assets now provide service to Perth-Andover. The Company's wholly-owned marketing subsidiary, Energy Atlantic, LLC's (EA)Competitive Energy Supply sales increased by 233,912 MWH, reflecting sales to retail customers beginning March 1, 2000 as discussed below in "Energy Atlantic Operations".

For the quarters ended June 30, 2000 and 1999, total operating expenses were $16,835,000 and $14,789,000, respectively. The changes in operating expenses and energy sources are as follows:

Increase/(Decrease)
(Dollars in Thousands) $ MWH
MPS Purchases (6,693) (103,825)
System Generation (624) (60,897)
EA Purchases 7,730 120,217
Total Energy Supply 413 (44,505)
T&D Operation & Maintenance Expenses 60
Depreciation (50)
Amortization (361)
Amortization of Stranded Costs 3,161
Income Taxes (682)
Taxes Other than Income (495)
Total 2,046 (44,505)




The 44,505 MWH net decrease in energy supply reflects the start of retail competition on March 1, 2000, with the Company providing transmission and distribution (delivery) services but no longer selling energy supply. Purchases by EA increased by 120,217 MWH when it began serving customers as a competitive energy supplier beginning on March 1, 2000. The $624,000 (60,897 MWH) decrease in generation expenses is a result of the sale of the Company's generating assets on June 8, 1999 and, under an agreement that expired on February 29, 2000, the Company purchased the output from the new owners, PDI. Beginning on March 1, 2000, as a result of competitive bidding, PDI is paying market price to the Company for W-S output, and the above-market amount is included in stranded cost amortization, i.e., $3,841,000 for the second quarter of 2000. Taxes other than income decreased by $495,000 due to a $420,000 property tax rebate. This rebate was received from the City of Caribou in settlement of property tax issues

-18-

Form 10-Q

PART 1. FINANCIAL INFORMATION



Item 2. Management's Analysis of Quarterly Income Statements

Results of Operations (Continued)

from 1996 through 1999. T&D (transmission and distribution) operation and maintenance expenses increased by $60,000 reflecting increases in administrative and general and medical expenses, offset by decreased legal and regulatory expenses. The amortization of stranded costs of $3,161,000 reflects the recognition of stranded costs beginning March 1, 2000, including the W-S above-market costs discussed above, in accordance with the Stipulation approved by the MPUC on January 27, 2000 (discussed further in Item (b) of the Legal Proceedings section) providing for recovery of the Company's stranded investment.

Energy Atlantic Operations

Energy Atlantic's (EA) retail activity comprises standard offer service (SOS) and competitive energy supply (CES), both of which utilize power provided via a contract with Engage Energy (Engage). Revenues are received and expenses are paid directly by an escrow agent which is controlled by Engage. EA receives a percentage of the net profit from the sale of energy. EA is the SOS provider for approximately 525,000 residential and small non-residential customers in the Central Maine Power (CMP) service territory and was awarded 20% of the medium non-residential customer base in the Company's service territory. The utilities bear SOS account collection risk, as they are required to remit the amounts billed 26 days after the billing date to an escrow account and maintain the billing and customer service relationship. EA records the accrued net margin of the SOS activity as revenue in the financial statements. EA's CES activity is principally two large industrial customers in CMP's service territory, as well as residential and small non-residential customers throughout Maine. For CES sales, EA negotiates the price directly with the customer, maintains customer service responsibility and has collection risk. CES activity is recorded on a gross basis to include the related revenues and purchased power expenses.

Energy Atlantic is subject to risk in scheduling electric load in the New England retail market. Under the terms of its Wholesale Power Sales Agreement with Engage, EA is required to forecast its expected hourly load in the New England market with the New England system operator, ISO-NE. If EA underforecasts that load, ISO-NE will provide the deficiency at the spot price in the New England market, which is essentially the highest marginal cost in that market during that hour. If that spot price is higher than the price at which EA has contracted to purchase power during that hour, EA is responsible for a portion of that difference under the terms of its Sale Agreement with Engage. By way of illustration, prices in ISO-NE rose as high as $6,000 per MWH during the afternoon of May 8, 2000. During that same period, EA had underforecasted its actual load by 4% to 5%. Although the final numbers have not yet been agreed to, EA estimates this underforecast could result in settlement costs up to $580,000. Prices of $6,000 per MWH are approximately 197 times the average ISO-NE market price of $30.50 per MWH for year-to-date May 7, 2000, and management considers this event unusual and infrequent. Several steps were taken to mitigate the risks of such occurrences in the future and these new procedures have produced $170,000 in positive market settlements since early May.







-19-

Form 10-Q

PART 1. FINANCIAL INFORMATION



Item 2. Management's Analysis of Quarterly Income Statements

Results of Operations (Continued)

Liquidity

Net cash flows from operating activities were $1,649,000 for the first six months of 2000. For the period, the Company paid $967,000 in dividends, deposited $211,000 ofproceeds from the sale of land into the trustee account and drew down $18,957,000 of the asset sale proceeds from the trustee. The proceeds were used to pay down long-term debt by $15,000,000, along with a scheduled paydown of $25,000, and to pay the $2,106,000 premium on the early retirement of long-term debt. The Company also repurchased 25,000 shares of common stock for $448,000 in order to manage its capital structure to limit common equity to 51%, as explained in Item (c) of the Legal Proceedings section, and increased short-term borrowings by $1,400,000. For the period, the Company invested $2,004,000 in electric plant, paid $7,853,000 in Canadian income taxes on the generating asset sale, and received proceeds of $208,000 from the sale of land.

Net cash flows from operating activities were $2,777,000 for the first six months of 1999. The Company received $37,547,000, adjusted for closing items, from the sale of its generating assets, with $7,938,000 required to be deposited with the first mortgage trustee. The Company drew down $428,000 from the trustee of the tax-exempt revenue bond proceeds based on qualifying property. For the period, the Company invested $1,749,000 in electric plant, paid $809,000 in dividends and used $25,000 to reduce long-term debt. Final financing costs of $5,000 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 $2,100,000 because of the cash flows from operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

(a) The Company has interest rate risk with two variable rate debt issues of the regulated business for purposes other than trading. These issues are discussed in detail in the Company's 1999 Annual Report, which is Exhibit 13 of the Company's 1999 Form 10- K. The discussion occurs in Note 9, "Long-Term Debt", of the Notes to Consolidated Financial Statements.

(b) The Company's unregulated marketing subsidiary, Energy Atlantic, LLC (EA) is engaged in retail and wholesale energy transactions for purposes other than trading. This activity exposes EA to a number of risks such as market liquidity, forecasting, deliverability and credit risk. EA seeks to assure that risks are identified, evaluated and actively managed.



















-20-

Form 10-Q

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

(a) Restructuring of Maine's Electric Utility Industry

In the Company's Form 10-K's for December 31, 1996, 1997, 1998 and 1999, 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 law are as follows:

1) Beginning on March 1, 2000, all consumers of electricity have the right to purchase generation services directly from competitive electricity suppliers who will not be subject to rate regulation.

2) By March 1, 2000, the Company, Central Maine Power Company (CMP) and Bangor Hydro-Electric Company (BHE) must divest of all generation related assets and business functions except for:

(a) contracts with qualifying facilities, such as the Company's power contract with Wheelabrator-Sherman (W-S), and conservation providers;

(b) nuclear assets, namely, the Company's investment in the Maine Yankee Atomic Power Company, however, the MPUC may require divestiture on or after January 1, 2009;

(c) facilities located outside the United States, i.e., the Company's hydro facility in New Brunswick, Canada; and

(d) assets that the MPUC determines necessary for the operation of the transmission and distribution services. The MPUC can grant an extension of the divestiture deadline if the extension will improve the selling price. For assets not divested, the utilities are required to sell the rights to the energy and capacity from these assets. The Company sold its generating assets on June 8, 1999.

3) Billing and metering services will be subject to competition beginning March 1, 2002, but permits the MPUC to establish an earlier date, no sooner than March 1, 2000.

4) The Company, through an unregulated affiliate, may market and sell electricity both within and outside its current service territory, without limitation. Both CMP and BHE are limited to 33% of the load within their respective service territories, but may sell an unlimited amount outside their service territories. Consumer-owned utilities are allowed to market and sell within their service territories, but the MPUC can limit or prohibit competition in their service territory, if the tax-exempt status of the consumer-owned utility is threatened.

5) The Company will continue to provide transmission and distribution services which will be subject to continued regulation by the MPUC.





-21-

Form 10-Q

PART II. OTHER INFORMATION

Item 1. Legal Proceedings - continued

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.

On January 27, 2000, the MPUC approved a Stipulation, as detailed further in Item 1(b) below, that provided for recovery in rates of the Company's stranded investment.

The MPUC shall include in the rates to be charged by the transmission and distribution utility decommissioning expenses for Maine Yankee. By 2003 and no later than 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

-22-

Form 10-Q

PART II. OTHER INFORMATION

Item 1. Legal Proceedings - 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.

(b) 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 and August 11, 1999, the Company filed its determination of stranded costs, transmission and distribution costs and rate design with the MPUC. The Company's amended testimony supports its $95.7 million estimate of stranded costs, net of available value from the sale of the generating assets, when deregulation began 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.

On October 15, 1999, the Company filed with the MPUC a Stipulation resolving the revenue requirement and rate design issues for the Company's Transmission and Distribution (T&D) utility. This Stipulation has been signed by the Public Advocate and approval will be recommended by the MPUC staff. Under the Stipulation, the Company's total annual T&D revenue requirement will be $16,640,000, effective March 1, 2000. This revenue requirement includes a 10.7% return on equity with a capital structure based on 51% common equity. The Stipulation further provides that the

precise level of stranded cost recovery cannot be determined until final determination of all costs associated with the sale of the Company's generating assets, but does set forth some general principles concerning the Company's ultimate stranded costs recovery, including agreement that the major components of the Company's stranded costs are

legitimate, verifiable and unmitigable, and therefore subject to recovery in rates, and that the 3.66% recovery foregone in Docket 98-865 shall be added to stranded cost recovery in the manner specified in the stipulation in that Docket. The stipulation also provides that the Company's recovery of unamortized investment tax credits and excess deferred





-23-

Form 10-Q

PART II. OTHER INFORMATION

Item 1. Legal Proceedings - continued

income taxes associated with the Company's generating assets must await a final determination ruling from the IRS, which ruling has been sought by Central Maine Power Company. On December 1, 1999, the MPUC approved this Stipulation. In early January, 2000, CMP received its ruling from the IRS which concluded that the unamortized investment tax credits and excess deferred income taxes associated with the sale of the generating assets could not be used to reduce customer rates without violating the tax normalization rules for public utilities.

On January 27, 2000, the MPUC approved a Stipulation in Phase II of Docket No. 98-577 that provided for the recovery in rates of the Company's stranded investment. The major element of the Phase II Stipulation was the $12.5 million of stranded investment recoverable annually beginning March 1, 2000. This revenue requirement includes a return on unrecovered stranded investment based on the capital structure approved by the MPUC in its December 1, 1999 Order. The approved capital structure will consist of 51% common equity with an authorized return on equity of 10.7%. The Phase II Stipulation also allowed the Company to offset its unrecovered stranded investment in Seabrook by approximately $7 million, representing an amount equal to 35% of the available value from the sale of the generation assets. The parties to the Phase II Stipulation also resolved several rate design issues, principally the elimination of the inclining block rate for residential customers. In addition, the Company was granted several accounting orders incorporating certain accounting methodologies used in determining the elements of stranded costs. The annual revenue requirement associated with the recovery of stranded costs will be reviewed every two years.

With the award of the standard offer rate on November 18, 1999, and orders approving the Company's T&D rates and stranded investment recovery rates described above, the MPUC has established all elements of customer rates effective March 1, 2000, the beginning of deregulation in Maine. On average, our customers' rates will be reduced by approximately 6%.

(c) Maine Public Utilities Commission Approves Common Stock Repurchase Program, Docket No. 99-610

Reference is made to Item 3(e) of the Company's Form 10-K, in which the Company reported that stipulations resolving revenue requirements and rate design issues for transmission and distribution rates, as well as stranded investment, have been approved by the Maine Public Utilities Commission (MPUC). In the Stipulations, approved by the MPUC, the parties also agreed to a capital structure consisting of 51% common equity and 49% of debt. After paying off debt with proceeds from the sale of the Company's generating assets, as required under the Company's mortgage indentures, the Company projects that the percentage of common equity as a component in its capital structure would exceed 51%.

In order to manage its capital structure to limit common equity to 51%, the MPUC on November 17, 1999, approved the Company's request to repurchase up to 500,000 shares of its common stock over a period of five years. The shares will be repurchased through an open-market program. Previously over a five-year period from September, 1989 to September, 1994, the Company purchased 250,000 shares at a cost of $5.7 million, all of







-24-

Form 10-Q

PART II. OTHER INFORMATION

Item 1. Legal Proceedings - continued

which are held in treasury shares, in order to maintain the Company's capital structure at

levels appropriate for an investor-owned electric utility. During the second quarter of 2000, the Company purchased 15,000 shares at a cost of $277,000, increasing the current program's total to 25,000 shares at a cost of $448,000.

Item 4. Submission of Matters to a Vote of Security Holders

At the Company's 2000 Annual Meeting of Stockholders, held on May 9, 2000, the only matter voted upon was the uncontested election of the following directors to serve until the 2003 Annual Meeting of Stockholders, each of whom received the votes shown:

Non-votes and
Nominee For Against Abstentions
Robert E. Anderson 1,471,324 9,818 126,108
Nathan L. Grass 1,471,690 9,452 126,108
J. Paul Levesque 1,470,974 10,168 126,108


Item 5. Other Information

None



Item 6. Exhibits and 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: August 11, 2000

By: /s/ Larry E. LaPlante

Larry E. LaPlante

Vice President, Treasurer and

Chief Financial Officer















-25-



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