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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 September 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 - 1,572,718 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 nine months ended September 30, 2000,
and for the corresponding period of the preceding year; a consolidated balance sheet as of September 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 September 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 September 30, 2000 and December 31, 1999, and the results of their operations for the three and nine months ended September 30, 2000 and their cash flows for the nine months ended September 30, 2000, 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 | Nine Months Ended | |||
| September 30, | September 30, | |||
| 2000 | 1999 | 2000 | 1999 | |
| Operating Revenues | $17,912 | $15,391 | $53,050 | $49,283 |
| EA-Standard Offer Service Margin | 1,218 | 0 | 1,616 | 0 |
| Total Revenues | 19,130 | 15,391 | 54,666 | 49,283 |
| Operating Expenses | ||||
| Energy Supply | 11,084 | 10,918 | 30,716 | 30,511 |
| T & D Operation & Maintenance | 2,982 | 2,832 | 8,958 | 8,492 |
| Depreciation | 581 | 546 | 1,741 | 1,777 |
| Amortization of Stranded Costs | 2,459 | 0 | 6,424 | 0 |
| Amortization | 15 | 359 | 282 | 1,120 |
| Taxes other than Income | 306 | 329 | 560 | 1,179 |
| Provision for Income Taxes | 530 | (116) | 1,529 | 1,558 |
| Total Operating Expenses | 17,957 | 14,868 | 50,210 | 44,637 |
| Operating Income | 1,173 | 523 | 4,456 | 4,646 |
| Other Income (Deductions) | ||||
| Equity in Income of Associated Companies | 87 | 65 | 247 | 430 |
| Allowance for Equity Funds used During Construction | 14 | 14 | 18 | 36 |
| Provision for Income Taxes | (115) | (39) | (524) | (186) |
| Other - Net | 74 | 332 | 784 | 397 |
| Total | 60 | 372 | 525 | 677 |
| Income Before Interest Charges | 1,233 | 895 | 4,981 | 5,323 |
| Interest Charges | ||||
| Long-Term Debt & Notes Payable | 642 | 1,214 | 2,452 | 3,185 |
| Less Carrying Costs-Stranded Costs & Allowance for Borrowed Funds used During Construction | (238) | (9) | (541) | (23) |
| Total | 404 | 1,205 | 1,911 | 3,162 |
| Net Income (Loss) Available for Common Stock | $829 | ($310) | $3,070 | $2,161 |
| Average Shares Outstanding (000's) | 1,573 | 1,617 | 1,593 | 1,617 |
| Basic & Diluted Earnings Per Share | $0.53 | ($0.19) | $1.93 | $1.34 |
| Dividends Declared per Common Share | $0.32 | $0.30 | $0.92 | $0.80 |
The accompanying notes are an integral part of these financial statements -3-
MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
| September 30, 2000 | December 31, 1999 | |
| ASSETS | (Unaudited) | |
| Utility Plant | ||
| Electric Plant in Service | $75,935 | $75,531 |
| Less Accumulated Depreciation | 36,023 | 34,701 |
| Net Electric Plant in Service | 39,912 | 40,830 |
| Construction Work-in-Progress | 3,616 | 1,052 |
| Total | 43,528 | 41,882 |
| Investment in Associated Companies | ||
| Maine Yankee Atomic Power Company | 3,584 | 3,753 |
| Maine Electric Power Company, Inc. | 345 | 279 |
| Total | 3,929 | 4,032 |
| Net Utility Plant and Investments | 47,457 | 45,914 |
| Current Assets | ||
| Cash and Cash Equivalents | 795 | 6,985 |
| Deposits with Trustee-Asset Sale | 0 | 18,242 |
| Accounts Receivable - Net | 7,940 | 7,043 |
| Unbilled Base Revenue | 2,335 | 1,149 |
| Inventory | 698 | 509 |
| Prepayments | 3,079 | 643 |
| Total | 14,847 | 34,571 |
| Regulatory Assets | ||
| Uncollected Maine Yankee Decommissioning Costs | 28,998 | 32,158 |
| Recoverable Seabrook Costs | 17,496 | 23,451 |
| Regulatory Assets - SFAS 109 & 106 | 7,573 | 10,459 |
| Deferred Fuel and Purchased Energy Costs | 11,742 | 11,217 |
| Regulatory Asset - Power Purchase Agreement Restructuring | 8,706 | 8,706 |
| Unamortized Debt Expense | 2,982 | 1,014 |
| Deferred Regulatory Costs, less accumulated amortization | 358 | 581 |
| Total | 77,855 | 87,586 |
| Other Assets | ||
| Restricted Investments | 2,391 | 2,402 |
| Miscellaneous | 824 | 1,075 |
| Total | 3,215 | 3,477 |
| Total Assets | $143,374 | $171,548 |
| CAPITALIZATION AND LIABILITIES | ||
| Capitalization | ||
| Common Shareholders' Equity | ||
| Common Stock | $13,071 | $13,071 |
| Paid-in Capital | 38 | 38 |
| Retained Earnings | 31,371 | 29,765 |
| Treasury Stock, at cost | (6,626) | (5,714) |
| Total | 37,854 | 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 | 8,900 | 3,600 |
| Accounts Payable | 5,796 | 5,717 |
| Accounts Payable - Standard Offer Service | 416 | 0 |
| Current Deferred Income Taxes | 0 | 195 |
| Dividends Declared | 503 | 485 |
| Customer Deposits | 21 | 17 |
| Interest and Taxes Accrued | 1,907 | 9,788 |
| Total | 18,068 | 19,827 |
| Deferred Credits | ||
| Uncollected Maine Yankee Decommissioning Costs | 28,998 | 32,158 |
| Deferred Income Tax | 20,329 | 17,160 |
| Investment Tax Credits | 261 | 288 |
| Deferred Gain & Related Accounts-Generating Asset Sale | 8,752 | 20,227 |
| Miscellaneous | 2,647 | 2,738 |
| Total | 60,987 | 72,571 |
| Total Capitalization and Liabilities | $143,374 | $171,548 |
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)
| Nine Months Ended | ||
| September 30, | ||
| 2000 | 1999 | |
| Cash Flow From Operating Activities | ||
| Net Income | $3,070 | $2,161 |
| Adjustments to Reconcile Net Income to Net Cash Provided by Operations | ||
| Depreciation | 1,741 | 1,777 |
| Amortization | 877 | 1,030 |
| Amortization of Deferred Gain from Asset Sale | (4,158) | 0 |
| Income on Tax Exempt Bonds-Restricted Funds | 0 | (13) |
| Deferred Income Taxes - Net | 3,656 | 1,426 |
| AFUDC | (27) | (58) |
| Accrued Interest on Generating Asset Sale Deferred Gain | 161 | 315 |
| Rate Stabilization Plan Revenue | (379) | 0 |
| Change in Deferred Fuel & Purchased Energy | (525) | (378) |
| Change in Deferred Regulatory and Debt Issuance Costs | 370 | 372 |
| Change in Deferred Reg Asset - Power Purchase Restructuring | (103) | 0 |
| Gain on Sale of Non-Utility Property | (205) | 0 |
| Change in Deferred Revenues | 0 | (1,170) |
| Change in Benefit Obligation | (3) | 476 |
| Change in Current Assets and Liabilities | (4,096) | (1,011) |
| Other | 166 | (1,038) |
| Net Cash Flow Provided By Operating Activities | 545 | 3,889 |
| Cash Flow From Financing Activities | ||
| Dividend Payments | (1,445) | (1,294) |
| 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 | (921) | 0 |
| Premium on Retirement of Long Term Debt | (2,106) | 0 |
| Retirements on Long-Term Debt | (15,025) | (1,275) |
| Short-Term Borrowings (Repayments), Net | 5,300 | (2,600) |
| Net Cash Flow Provided By (Used For) Financing Activities | 4,549 | (12,684) |
| Cash Flow From Investing Activities | ||
| Payment of Taxes on Generating Asset Sale Deferred Gain | (7,853) | (3,542) |
| Proceeds from Sale of Generating Assets | 0 | 37,547 |
| Proceeds from Sale of Non-Utility Property | 208 | 0 |
| Investment in Electric Plant | (3,639) | (2,993) |
| Net Cash Flow Provided By (Used For) Investing Activities | (11,284) | 31,012 |
| Increase (Decrease) in Cash and Cash Equivalents | (6,190) | 22,217 |
| Cash and Cash Equivalents at Beginning of Year | 6,985 | 1,454 |
| Cash and Cash Equivalents at End of Period | $795 | $23,671 |
| Change in Current Assets and Liabilities Providing (Utilizing) | ||
| Cash From Operating Activities | ||
| Accounts Receivable | ($896) | ($572) |
| Unbilled Revenue | (1,187) | 668 |
| Deferred Maine Yankee Replacement Power Costs | 0 | (750) |
| Inventory | (190) | (40) |
| Prepayments | (2,362) | (824) |
| Accounts Payable & Accrued Expenses | 535 | 514 |
| Other Current Liabilities | 4 | (7) |
| Total Change | ($4,096) | ($1,011) |
| Supplemental Disclosure of Cash Flow Information: | ||
| Cash Paid During the Period For: | ||
| Interest | $2,656 | $3,659 |
| Income Taxes (Includes $7.8 million payment in February, 2000 | ||
| to Revenue Canada for 1999 asset sale taxes) | $7,883 | $4,553 |
The accompanying notes are an integral part of these financial statements.
-5-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
-6-
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 its wholesale supplier, Engage. If EA under forecasts that load, the deficiency is provided 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 under forecasted its actual load
by 4% to 5%. Although the final numbers have not yet been agreed to, EA estimates this under forecast 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
$659,000 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)
| 9/30/00 | 9/30/99 | |||||
| Total | Total | |||||
| EA | MPS | Company | EA | MPS | Company | |
| Operating Revenues | $11,422 | $6,490 | $17,912 | $2,023 | $13,368 | $15,391 |
| EA Standard Offer Service Margin | 1,218 | - | 1,218 | - | - | - |
| Total Revenues | 12,640 | 6,490 | 19,130 | 2,023 | 13,368 | 15,391 |
| Operations & Maintenance | ||||||
| Expense | 11,503 | 5,618 | 17,121 | 2,252 | 12,403 | 14,655 |
| Taxes | 495 | 341 | 836 | (92) | 305 | 213 |
| Total Operating Expenses | 11,998 | 5,959 | 17,957 | 2,160 | 12,708 | 14,868 |
| Operating Income (Loss) | 642 | 531 | 1,173 | (137) | 660 | 523 |
| Other Income & Deductions | 127 | (67) | 60 | 1 | 371 | 372 |
| Income Before Interest Charges | 769 | 464 | 1,233 | (136) | 1,031 | 895 |
| Interest Charges | 27 | 377 | 404 | 6 | 1,199 | 1,205 |
| Net Income | $742 | $87 | $829 | $(142) | $(168) | $(310) |
-7-
Nine Months Ended
(Dollars in Thousands)
| 9/30/00 | 9/30/99 | |||||
| Total | Total | |||||
| EA | MPS | Company | EA | MPS | Company | |
| Operating Revenues | $24,440 | $28,610 | $53,050 | $6,347 | $42,936 | $49,283 |
| EA Standard Offer Service Margin | 1,616 | - | 1,616 | - | - | - |
| Total Revenues | 26,056 | 28,610 | 54,666 | 6,347 | 42,936 | 49,283 |
| Operations & Maintenance | ||||||
| Expense | 24,794 | 23,327 | 48,121 | 6,591 | 35,309 | 41,900 |
| Taxes | 563 | 1,526 | 2,089 | (99) | 2,836 | 2,737 |
| Total Operating Expenses | 25,357 | 24,853 | 50,210 | 6,492 | 38,145 | 44,637 |
| Operating Income (Loss) | 699 | 3,757 | 4,456 | (145) | 4,791 | 4,646 |
| Other Income & Deductions | 208 | 317 | 525 | 3 | 674 | 677 |
| Income (Loss) Before | ||||||
| Interest Charges | 907 | 4,074 | 4,981 | (142) | 5,465 | 5,323 |
| Interest Charges | 65 | 1,846 | 1,911 | 12 | 3,150 | 3,162 |
| Net Income (Loss) | $842 | $2,228 | $3,070 | $(154) | $2,315 | $2,161 |
| Total Assets | $5,628 | $137,746 | $143,374 | $1,801 | $178,460 | $180,261 |
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 were 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.
-8-
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.
Under EITF 97-4, the Company is permitted to continue to defer certain costs as regulatory assets in instances where
recovery through future regulatory cash flows is anticipated.
At September 30, 2000, $77.9 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 September 30, 2000, $8.7 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 representing the return of and return on stranded cost items as described below, when deregulation began on March 1, 2000. The major components of stranded costs 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 less the available value from the sale of the generating 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 was signed by the Public
Advocate and approval was recommended by the MPUC staff. Under the Stipulation, the Company's total annual T&D
revenue requirements were $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 provided 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 provided that the
Company's recovery of unamortized investment tax credits and excess deferred income taxes associated with the
Company's generating assets 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.
-9-
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 included 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 consists 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 ratemaking 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 | Nine Months Ended | |||
| September 30, | September 30, | |||
| 2000 | 1999 | 2000 | 1999 | |
| Current income taxes | $(555) | $(680) | $ (1,743) | $4,066 |
| Deferred income tax | 1,209 | 612 | 3,823 | (2,282) |
| Investment credits | (9) | (9) | (27) | (40) |
| Total income taxes | $645 | $(77) | $2,053 | $1,744 |
| Allocated to: | ||||
| Operating Income | $530 | $(116) | $1,529 | $1,558 |
| Other income | 115 | 39 | 524 | 186 |
| Total | $645 | $(77) | $2,053 | $1,744 |
For the nine months ended September 30, 2000 and 1999, the effective income tax rates were 40.1% and 44.7%,
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 reasons 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 and 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 in 1999 are offset by corresponding
deferred income taxes.
-10-
The following summarizes accumulated deferred income taxes established on temporary differences under SFAS 109 as of
September 30, 2000 and December 31, 1999.
| (Dollars in Thousands) | ||
| September 30, | December 31, | |
| 2000 | 1999 | |
| Seabrook | $9,170 | $12,922 |
| Property | 6,232 | 6,249 |
| Deferred fuel | 4,493 | 4,164 |
| Pension and postretirement benefits | (142) | (206) |
| Generating asset sale | (3,072) | (7,666) |
| W-S up-front payment | 3,137 | 2,129 |
| Other | 511 | (432) |
| Net accumulated deferred income taxes | $20,329 | $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 Agreement for the decommissioning of Maine Yankee 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. For the year ended December
31, 2000 the Company selected the price based on the two year entitlement auction which was allowed under the
agreement. Based on this price, there was no liability for this period. The Company again selected the two year
entitlement auction price for the year ended December 31, 2001, which if accepted by the Maine Agencies, would not result
in a liability. On October 11, 2000, the Maine Agencies, (the MPUC and the Office of the Public Advocate) rejected the
Maine Owners' selection of the sales auction price as the benchmark for calendar year 2001. In a written response dated
October 20, 2000, the Maine owners requested that the Maine Agencies reconsider their rejection, which again was rejected
by the Maine Agencies. The parties continue to negotiate, but at this time, the Company cannot predict the outcome of this
proceeding nor anticipate whether it will be required to recognize all, some or none of the $4.1 million before tax
maximum amount against earnings.
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 September 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.
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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 $930million, of which the Company's 5%
share would be approximately $46.5 million. In December, 1998, June, 1999 and again in September 2000, 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 September 30, 2000, is carrying on its consolidated balance sheet a regulatory asset and a corresponding liability in the amount of $29.0 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.
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 December 31,
2001.
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, which
was subsequently transferred to the United States District Court in Maine. The Complaint, which seeks a declaration that
Federal has no obligation to pay Maine Yankee under the bonds, 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 has filed both a
counterclaim against Federal in the District Court seeking recovery up to the penal amounts of the bonds and a proof of
claim against Stone & Webster in the Bankruptcy Court seeking recovery of all additional costs resulting from the
termination of the Stone & Webster contract. Maine Yankee believes
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that its termination of the decommissioning operations contract was proper, but cannot predict the outcome of the litigation.
In response to a request for declaratory relief, Maine Yankee has on October 30, 2000 filed a Counterclaim requesting
damages, including interest and fees, and declaratory relief based upon its asserted rights to payment under the two bonds.
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. Maine Yankee expects to complete its review of proposals from prospective successor contractors and select a new contractor, if that is the alternative chosen, by the end of the year. 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.
For further discussion, see the Company's 1999 Annual Report (Exhibit 13 of the 1999 Form 10K), Note 11 to the
consolidated financial statements.
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.
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 | (1.9) |
| Other | .7 |
| Available deferred gain | 21.3 |
| Utilization of available value per MPUC orders | (12.8) |
| Remaining deferred gain, net of tax* | $8.5 |
*The $8.5 million deferred gain above is the $8.7 million "Deferred Gain and Related Accounts-Generating Asset Sale"
as of September 30, 2000 reduced by the remaining deferral of transition costs allowed by the MPUC.
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The Company offset a portion of its Recoverable Seabrook costs with available value from its deferred asset sale gain as follows:
| Deferred | ||
| Seabrook | 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 |
With the partial 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.
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. ISSUANCE OF LONG-TERM DEBT
On October 19, 2000 the Maine Public Utilities Financing Bank (MPUFB) issued $9 million of its tax-exempt bonds due
October 1, 2025 (The 2000 Series) on behalf of the Company. The proceeds have been placed in trust to be drawn down
for the reimbursement of issuance costs and for the construction of qualifying distribution property. Pursuant to the
long-term note issued under a loan agreement between the Company and the MPUFB, the Company has agreed to make
payments to the MPUFB for the principal and interest on the bonds. Concurrently, pursuant to a letter of credit and
reimbursement agreement, the Company caused a Direct Pay Letter of Credit for an initial term of nineteen months to be
issued by the Bank of New York for the benefit of the holders of such bonds. To secure the Company's obligations under
the letter of credit and reimbursement agreement, the Company issued first and second mortgage bond agreements, in the
amounts of $5 million and $4.525 million, respectively . The Company has the option of selecting weekly, monthly,
annual or term interest rate periods for the 2000 Series, and at issuance, selected the weekly interest period, with an initial
interest rate of 4.35%.
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8. WPS COMPLAINT
October 30, 2000, WPS Energy Services (WPS), a Competitive Electricity Provider (CEP) offering retail sales of
electricity in the Company's service territory, filed a Complaint against the Company as well as a Petition to Alter or
Amend the MPUC's September 2, 1998 Order in Docket No. 98-138.
The Complaint alleges that the Company has violated various provisions of Chapter 304 of the MPUC's Regulations
governing relations between the Company and all CEPs, including the Company's own marketing subsidiary, Energy
Atlantic, LLC (EA). According to the Complaint, various of the Company's employees have engaged in conduct that either
awards EA a competitive advantage over other CEPs or has burdened WPS with an unfair disadvantage relative to EA.
These allegations include such practices as denying WPS information made available to EA, or providing EA with
information about WPS's customers that is not available publicly. The Company does not believe it has in any way
violated any provisions of Chapter 304 and intends to so argue before the MPUC.
In its September 2, 1998 Order in Docket No. 98-138 authorizing the formation of EA, the Commission allowed the
Company and EA to share the services of certain employees under certain conditions on the ground that such sharing was
in the public interest and would not have any anti-competitive effect on the retail market for electricity. WPS claims that
the sharing does not conform to the conditions set forth in the Order and that, in any event, the Commission should now
find such sharing not in the public interest, thereby amending its original September 2, 1998 Order.
The Complaint and Petition to Amend the September 2, 1998 Order, in addition to requesting a prohibition on the sharing
of certain employees, also seeks a formal investigation of the Complaint, penalties for any violations of the Commission's
rules and certain specific relief for violations of Chapter 304.
The Company believes the Complaint and Petitions are completely without merit and are motivated by EA's recent
competitive successes against WPS in the local retail electricity market. The Company intends to vigorously contest the
matter at the MPUC, but cannot predict the outcome of this proceeding.
9 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 September 30, 2000 along with the corresponding information for the previous year are as follows:
| Three Months Ended | ||
| September 30, | ||
| 2000 | 1999 | |
| Earnings per share | $ .53 | $(.19) |
| Net income in thousands | $ 829 | $(310) |
For the third quarter of 2000 compared to the same quarter last year, the increase in consolidated earnings per share (EPS) of $.72 is attributable to the following:
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Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
Change in EPS - Third Quarter of 2000
Compared to Third Quarter of 1999
| EPS
Increase (Decrease) | |
| Change in Energy Atlantic net income | .56 |
| Reduction in net interest costs with use of asset sale proceeds | .20 |
| Decrease in retail revenues and sales for resale, reduction in power-procurement expenses and amortization of stranded costs according to rate stipulation for deregulation beginning March 1, 2000 | (.16) |
| Other | .12 |
| Total | .72 |
Consolidated operating revenues for the quarters ended September 30, 2000 and 1999, are as follows:
| 2000 | 1999 | |||
| (Dollars in Thousands) | $ | MWH | $ | MWH |
| Maine Public Service (MPS) | ||||
| - Retail | 5,976 | 126,547 | 11,584 | 120,440 |
| - Other Revenues | 515 | - | 1,784 | 28,734 |
| Energy Atlantic, LLC (EA) | ||||
| - Competitive Energy Supply | 11,421 | 251,933 | - | - |
| - Other Revenues | - | - | 2,023 | 55,402 |
| - Standard Offer Margin | 1,218 | - | - | - |
| Totals | 19,130 | 378,480 | 15,391 | 204,576 |
With the start of retail competition on March 1, 2000, the Parent Company's (MPS) retail revenues reflect transmission
and distribution charges only, while revenues for the same quarter last year include energy supply. Therefore, comparisons
with periods after February, 2000 are difficult. MPS retail sales increased by 5.1% (6,107 MWH), reflecting increases in
sales to large commercial customers of 15.3%, principally McCain Foods, and medium commercial customers of 3.1%. In
the third quarter of 1999, the output from Wyman, which the Parent Company continued to purchase after the sale of the
generating assets on June 8, 1999 and until March 1, 2000, was sold at market prices.
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Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
The Company's wholly-owned marketing subsidiary, Energy Atlantic, LLC's (EA) Competitive Energy Supply sales
increased by 251,933 MWH, reflecting sales to retail customers beginning March 1, 2000 as discussed below in "Energy
Atlantic Operations".
For the quarters ended September 30, 2000 and 1999, total operating expenses were $17,957,000 and $14,868,000, respectively. The changes in operating expenses and energy sources are as follows:
| Increase/(Decrease) | ||
| (Dollars in Thousands) | $ | MWH |
| MPS Purchases | (9,100) | (158,716) |
| EA Purchases | 9,266 | 196,477 |
| Total Energy Supply | 166 | 37,761 |
| T&D Operation & Maintenance Expenses | 150 | |
| Depreciation | 35 | |
| Amortization | (344) | |
| Amortization of Stranded Costs | 2,459 | |
| Income Taxes | 646 | |
| Taxes Other than Income | (23) | |
| Total | 3,089 | 37,761 |
With the start of retail competition on March 1, 2000, the Company provides transmission and distribution (T&D) or
delivery services and no longer purchases or generates energy supply for its customers. During the quarter ended
September 30, 1999, MPS purchased 158,716 MWH's to serve customers at a cost of $9.1 million. Purchases by EA
increased by 196,477 MWH, $9,266,000, when it began serving customers as a competitive energy supplier beginning on
March 1, 2000. MPS continues to purchase power from Wheelabrator-Sherman (W-S) under an agreement that expires in
2006, at prices above current market conditions. Beginning on March 1, 2000, as a result of competitive bidding, the
output from W-S is sold to the successful bidder, and the above-market amount is included in stranded cost amortization,
i.e., $3,245,000 for the third quarter of 2000. The amortization of stranded costs of $2,459,000 reflects the recognition of
stranded costs beginning March 1, 2000, including the W-S above-market costs discussed above, less recognition of the
deferred gain from the 1999 sale of the Company's generating assets, 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. T&D operation and maintenance expenses increased by $150,000 reflecting increases in
regulatory, legal and consulting expenses, and a reclassification of load dispatching labor expenses, which had been
recorded as other purchase power expenses in 1999.
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Form 10-Q
PART 1. FINANCIAL INFORMATION
Item 2. Management's Analysis of Quarterly Income Statements
Results of Operations (Continued)
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.
EA 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
its wholesale supplier, Engage. If EA underforecasts that load, the deficiency is provided 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 $659,000
in positive market settlements since early May. EA's net income for the third quarter of 2000 increased $716,000
compared to the second quarter of the current year, primarily as a result of taking these steps.
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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 $545,000 for the first nine months of 2000. For the period, the Company paid $1,445,000 in dividends, deposited $211,000 of proceeds 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 reduce short-term borrowings, and provide $15,000,000 of principal, and the $2,106,000 premium on the early retirement of the 9.775% series of First Mortgage Bonds. The Company also paid a scheduled sinking fund payment of $25,000 on long-term debt and repurchased 45,000 shares of common stock for $921,000 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 $5,300,000. For the period, the Company invested $3,639,000 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 $3,889,000 for the first nine 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 $2,993,000 in electric plant, paid $3,542,000 in Canadian income taxes on the generating asset sale, paid $1,294,000 in dividends and used $1,275,000 to reduce long-term debt. Short-term borrowings decreased by $2,600,000 because of the cash flows from operations and use of some of the asset sale proceeds to pay down the revolving credit line.
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 as of September 30,
2000 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. On October 19, 2000, as discussed in Note 7 of this Form 10-Q, the Maine Public
Utility Financing Bank (MPUFB) issued tax-exempt variable rate bonds on behalf of the Company. The Company also has
interest rate risk for the new bonds for purposes other than trading.
(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.
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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.
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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
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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 when deregulation began on March 1, 2000. The major components of stranded costs 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 less the available value from the sale of the generating 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 was signed by the Public Advocate
and approval was recommended by the MPUC staff. Under the Stipulation, the Company's total annual T&D revenue
requirements were $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 provided 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 provided that the Company's
recovery of unamortized investment tax credits and excess deferred income taxes associated with the Company's generating
assets await a final determination ruling from the IRS, which ruling has been sought by Central Maine Power Company.
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Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - continued
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 included 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 consists 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 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 third
quarter of 2000, the Company purchased 20,000 shares at a cost of $474,000, increasing the current program's total to
45,000 shares at a cost of $921,000.
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Form 10-Q
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - continued
(d) WPS Energy Services, Inc., Complaint against Maine Public Service Company, and Petition to Alter or Amend the
MPUC's Order Authorizing the Formation of Energy Atlantic, LLC, MPUC Docket Nos. 98-138 and 00- .
On October 30, 2000, WPS Energy Services (WPS), a Competitive Electricity Provider (CEP) offering retail sales of
electricity in the Company's service territory, filed a Complaint against the Company as well as a Petition to Alter or
Amend the MPUC's September 2, 1998 Order in Docket No. 98-138.
The Complaint alleges that the Company has violated various provisions of Chapter 304 of the MPUC's Regulations
governing relations between the Company and all CEPs, including the Company's own marketing subsidiary, Energy
Atlantic, LLC (EA). According to the Complaint, various of the Company's employees have engaged in conduct that either
awards EA a competitive advantage over other CEPs or has burdened WPS with an unfair disadvantage relative to EA.
These allegations include such practices as denying WPS information made available to EA, or providing EA with
information about WPS's customers that is not available publicly. The Company does not believe it has in any way
violated any provisions of Chapter 304 and intends to so argue before the MPUC.
In its September 2, 1998 Order in Docket No. 98-138 authorizing the formation of EA, the Commission allowed the
Company and EA to share the services of certain employees under certain conditions on the ground that such sharing was
in the public interest and would not have any anti-competitive effect on the retail market for electricity. WPS claims that
the sharing does not conform to the conditions set forth in the Order and that, in any event, the Commission should now
find such sharing not in the public interest, thereby amending its original September 2, 1998 Order.
The Complaint and Petition to Amend the September 2, 1998 Order, in addition to requesting a prohibition on the sharing
of certain employees, also seeks a formal investigation of the Complaint, penalties for any violations of the Commission's
rules and certain specific relief for violations of Chapter 304.
The Company believes the Complaint and Petitions are completely without merit and are motivated by EA's recent
competitive successes against WPS in the local retail electricity market. The Company intends to vigorously contest the
matter at the MPUC, but cannot predict the outcome of this proceeding.
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
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
MAINE PUBLIC SERVICE COMPANY
(Registrant)
Date: November 13, 2000 By: /s/ Larry E. LaPlante
Larry E. LaPlante
Vice President, Treasurer and
Chief Financial Officer
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