SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended SEPTEMBER 30, 1998 Commission File No. 0-505
------------------ -------------------------
BANGOR HYDRO-ELECTRIC COMPANY
------------------------------------------------------
(Exact Name of Registrant as specified in its Charter
MAINE 01-0024370
- ------------------------------- --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
33 STATE STREET, BANGOR, MAINE 04401
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 207-945-5621
------------
NONE
- -----------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report
Outstanding Common Stock, $5 Par Value - 7,363,424 Shares
September 30, 1998
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
----- ----
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
PART I - FINANCIAL INFORMATION
PAGE
----
Cover Page 1
Index 2
Consolidated Statements of Income 3
Management's Discussion and Analysis of Results of
Operations and Financial Condition 4
Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997 28
Consolidated Statements of Capitalization 30
Consolidated Statements of Cash Flows 31
Consolidated Statements of Common Stock Investment 32
Notes to the Consolidated Financial Statements 33
PART II - OTHER INFORMATION 48
Item 6 - Exhibits and Reports on Form 8-K 49
Signature Page 50
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF INCOME
000's Omitted Except Per Share Amounts
(UNAUDITED)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
---------------------------------------
ELECTRIC OPERATING REVENUES $ 49,158 $ 47,557 $ 144,859 $ 137,969
---------------------------------------
OPERATING EXPENSES:
Fuel for generation and
purchased power $ 20,610 $ 23,440 $ 62,014 $ 68,728
Other operation and maintenance 8,433 7,526 25,061 23,223
Depreciation and amortization 2,446 2,583 7,500 7,749
Amortization of Seabrook Nuclear Unit 424 424 1,274 1,274
Amortization of contract buyouts
and restructuring 5,201 6,530 15,242 16,987
Taxes -
Property and payroll 1,289 1,239 4,102 4,062
State income 363 (117) 775 (679)
Federal income 1,305 30 3,388 (830)
---------------------------------------
$ 40,071 $ 41,655 $ 119,356 $ 120,514
---------------------------------------
OPERATING INCOME $ 9,087 $ 5,902 $ 25,503 $ 17,455
---------------------------------------
OTHER INCOME AND (DEDUCTIONS):
Allowance for equity funds used
during construction $ 131 $ 63 $ 309 $ 246
Other, net of applicable income taxes 113 227 582 770
---------------------------------------
$ 244 $ 290 $ 891 $ 1,016
---------------------------------------
INCOME BEFORE INTEREST EXPENSE $ 9,331 $ 6,192 $ 26,394 $ 18,471
---------------------------------------
INTEREST EXPENSE:
Long-term debt $ 5,861 $ 5,581 $ 17,122 $ 17,058
Other 729 924 2,158 2,407
Allowance for borrowed funds used
during construction (208) (125) (510) (485)
---------------------------------------
$ 6,382 $ 6,380 $ 18,770 $ 18,980
---------------------------------------
NET INCOME (LOSS) $ 2,949 $ (188)$ 7,624 $ (509)
DIVIDENDS ON PREFERRED STOCK 312 344 935 1,033
---------------------------------------
EARNINGS (LOSS) APPLICABLE TO
COMMON STOCK $ 2,637 $ (532)$ 6,689 $ (1,542)
=======================================
WEIGHTED AVERAGE NUMBER OF SHARES 7,363 7,363 7,363 7,363
=======================================
EARNINGS (LOSS) PER COMMON SHARE,
Basic $ 0.36 $ (0.07)$ 0.91 $ (0.21)
Diluted $ 0.34 $ (0.07)$ 0.89 $ (0.21)
=======================================
DIVIDENDS DECLARED PER COMMON SHARE $ - $ - $ - $ -
=======================================
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
Management's Discussion and Analysis of the Results of
Operations and Financial Condition contained in Bangor Hydro-Electric
Company's (the Company) Annual Report on Form 10-K for the year ended
December 31, 1997 (1997 Form 10-K) should be read in conjunction with the
comments below.
EARNINGS
The quarter ended September 30, 1998 resulted in earnings of
$.36 per common share, compared to a loss of $.07 per common share for the
quarter ended September 30, 1997. The improvement in third quarter earnings
is attributable largely to the February 1998 rate increase authorized by the
Maine Public Utilities Commission (MPUC) designed to increase annual revenues
by approximately $13.2 million.
IMPORTANT CURRENT ACTIVITIES-
AGREEMENT ON SALE OF COMPANY'S GENERATING ASSETS - On September 25, 1998, the
Company and PP&L Global, Inc., a Pennsylvania corporation and a subsidiary of
PP&L Resources, Inc., reached an agreement for PP&L Global to acquire most of
the Company's electric generating assets with a combined base load capacity
of 89.2 megawatts and certain transmission rights for a sale price of $89
million. The proposed sale is a result of the Company s effort to comply
with Maine's electric utility restructuring legislation, which took effect in
September 1997. The Company began seeking proposals from prospective bidders
to purchase its generation and generation-related assets in early 1998 and as
part of the auction process, received final bids from various bidders in
August 1998.
The electric utility restructuring law requires all of Maine's
investor-owned electric utilities to divest all of their non-nuclear
generation assets and generation-related business before March 1, 2000. The
law was enacted to foster competition in an open market in which retail
consumers will choose among competitive energy providers of the electricity
that flows through the wires. The management of the "wires" or transmission
and distribution business will remain the regulated function of the existing
utilities. For further information on the Company's plan to divest its
generating assets, refer to the Company's Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the quarter ended June 30, 1998.
Pursuant to the agreement, the Company has agreed to sell to
PP&L Global (i) its Ellsworth, Howland, Milford, Medway, Orono, Stillwater
and Veazie hydroelectric facilities, which are all situated along the
Penobscot River Basin and Union River in Maine, (ii) the 50% ownership
interest owned by Penobscot Hydro Co., Inc., a wholly owned subsidiary of the
Company, in Bangor-Pacific Hydro Associates, which owns a 13 megawatt
hydroelectric generating facility located in Enfield and Howland, Maine,
(iii) the Company's 8.33% joint ownership interest in the William F. Wyman
Unit No. 4 oil-fired steam plant located in Yarmouth, Maine, (iv) the
Company's designs, applications and other rights with respect to the
potential development of the Basin Mills hydroelectric project, to be located
in Bradley and Orono, Maine, (v) the Company's designs, applications and
other rights with respect to the potential development of a high-voltage
transmission line from Orrington, Maine, to New Brunswick, Canada, and (vi)
certain of the Company's rights to transmission capacity, including its
rights as a participant in the regional utilities' agreements with Hydro
Quebec.
The sale is subject to certain closing conditions as set forth
in the agreement, including receipt of approvals by federal and state
regulatory agencies, which the Company expects may take six to twelve months.
In addition, third-party consents to the sale of certain of the assets will
be required, and the Company cannot predict whether or on what terms such
consents can be obtained. The Company anticipates that most of the net
after-tax proceeds from the sale will be used to retire outstanding debt.
The Company expects that a portion of the sale value will be applied to
reduce the Company's stranded costs for regulatory purposes, which should
lower the amounts that would otherwise be collected in the future from
customers.
SALE OF PROPERTY AT GRAHAM STATION - In September 1998, the Company sold
certain property and equipment at its Graham Station site in Veazie, Maine,
to Casco Bay Energy for $6.2 million. The property is to be utilized by
Casco Bay Energy, which plans to construct a $221 million gas-fired power
plant that will produce 520 megawatts of electricity. The plant will be
powered by the proposed Maritimes & Northeast gas transmission line and
regional transmission system. The Company realized a net gain from the sale
of $4.6 million, which has been deferred (reflected as a component of Other
Deferred Charges on the Consolidated Balance Sheet at September 30, 1998) in
anticipation that it will likely be utilized as a future reduction to the
Company's recoverable stranded costs. In connection with the sale, the $6.2
million in proceeds were deposited with a third party trustee, as a
requirement under the Company's bond indenture. It is expected that the $6.2
million will be utilized to repay a portion of the Company's medium term
notes. Also in connection with the sale, the Company deposited $400,000 with
a third party trustee to be utilized for future environmental remediation at
the site.
PENOBSCOT ENERGY RECOVERY COMPANY - As previously reported the Company had
been working to restructure a power purchase contract with the Penobscot
Energy Recovery Company (PERC), its last remaining high-priced non-utility
generator contract that offers a potential for substantial savings. In June
1998 the Company successfully completed this major restructuring of its
obligations under various agreements with PERC.
The restructuring will result in a substantial savings for the
Company and will allow PERC to continue to meet the solid waste disposal
needs of Maine communities.
This major restructuring involves several separate components
including the following:
1) PERC refinanced $45 million in existing bonds with a remaining five year
term over a twenty year period using tax exempt bonds issued by the Finance
Authority of Maine under its Electric Rate Stabilization
Program.
2) PERC will share the net revenues generated by the facility on a pro rata
basis with the Company and the Municipal Review Committee (MRC) which
represents over 130 Maine municipalities receiving waste disposal service
from PERC.
3) The Company made a one-time payment of $6 million to PERC and will make
additional quarterly payments of $250,000 for four years totaling $4 million.
4) Bangor Hydro and PERC amended their existing power purchase agreement to
include the MRC as a party.
5) The MRC's constituent municipalities extended their contracts with PERC
by 15 years to supply solid waste to the facility through 2018.
6) Bangor Hydro issued two million warrants to purchase common stock, one
million each to PERC and the MRC. Each warrant entitles the warrant holder
to acquire one share of Bangor Hydro common stock at a price of $7 per share.
No warrants may be exercised within the first nine months after their
issuance, and they become exercisable in 500,000 share blocks following the
expiration of nine months, 21 months, 33 months, and 45 months from the
closing date.
Depending upon a number of assumptions, including the ultimate
cost of the warrants and markets for solid waste disposal, it is projected
that the restructuring will result in cost savings to Bangor Hydro over the
next twenty years with a net present value of $30-40 million. The
anticipated savings resulting from this transaction were used to reduce the
level of electric rates approved by the MPUC in the Company's recent general
rate case by approximately $3 million on an annual basis.
The refinancing by PERC was made possible by the Maine
Legislature through an amendment to the Electric Rate Stabilization Program
that allowed PERC to qualify for such financing. Under the Program, the State
of Maine's "moral obligation" supports the new non-recourse debt.
The Company has deferred, as a regulatory asset, the $6
million payment to PERC, approximately $1.5 million in costs associated with
the contract restructuring, and $2 million for the estimated fair value of
the warrants. As discussed above, the Company is currently recovering PERC
restructuring costs in rates. The $2 million in warrants have also increased
additional paid-in capital.
AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT - As previously
reported, during 1997 the Company negotiated amendments to the credit
agreement with its lending banks in order to resolve potential violations of
certain financial covenants. As a result of those amendments, the Company
reported that during 1998 or beyond, future cash needs might exceed the
borrowing capacity under the credit facility, and accordingly, the Company
might be required to find new sources of financing.
On June 29, 1998, the Company entered into an Amended and
Restated Revolving Credit and Term Loan Agreement with a new group of lenders
that provides a two year term loan of $45 million and a revolving credit
commitment of $30 million. Under current projections of cash needs, the new
facilities should provide adequate borrowing capacity. The new credit
agreement contains financial covenants which are not significantly different
than the covenants contained in the previous credit agreement. The Company
was in compliance with all covenants associated with the new credit agreement
as of September 30, 1998.
The credit agreement also provides for the issuance of a
letter of credit required to support $4.2 million of the Company's Pollution
Control Revenue Bonds. To secure the existing letter of credit related to
the Pollution Control Revenue Bonds, until the new letter of credit could be
issued, the Company deposited approximately $4.6 million of the proceeds from
this financing with a third party trustee. This amount has been included
with Other Investments on the Company's Consolidated Balance Sheets at
September 30, 1998. The new letter of credit was issued in October 1998, and
the $4.6 million deposited with the third party trustee was released to the
Company. These funds were utilized to repay amounts outstanding under the
Company's revolving credit facility.
REGULATORY MATTERS - The Company is preparing for the introduction of retail
electric competition on March 1, 2000, as required by a Maine legislative act
signed on May 29, 1997. In connection with the advent of retail competition,
the Company is engaged in a regulatory proceeding at the MPUC to determine
the revenue requirements of the stand-alone Bangor Hydro transmission and
distribution company and the manner of recovery of stranded costs.
MONETIZATION OF POWER SALE CONTRACT - As reported in the 1997 Form 10-K, the
Company had been negotiating a transaction for the monetization of a power
sale contract with UNITIL Power Corp. (UNITIL), a New Hampshire based
electric utility. The Company currently provides power to UNITIL at
significantly above-market rates, with the contract term ending in the year
2003. Based upon current projections of wholesale electricity markets, it is
expected that the rates charged under the UNITIL contract will remain at
above-market levels for the remainder of the contract term. Therefore, the
assignment of the Company's rights under the contract has a positive present
cash value. On March 31, 1998, the Company completed a transaction with a
financial institution that provided a loan of approximately $23.3 million in
net proceeds secured by the value of the UNITIL contract.
Also as previously reported, beginning in early 1997, the
Company failed to comply with certain financial covenants under its bank
lending agreements and received temporary waivers from the lending banks. By
using a portion of the proceeds of the UNITIL monetization to pay down a
portion of the bank obligations, the Company was able to negotiate permanent
waivers of the earlier financial covenant violations.
At the time the Company filed its 1997 Form 10-K, the
monetization of the UNITIL contract had not been completed and the financial
covenant violations had, therefore, not been waived permanently. As
discussed in the 1997 Form 10-K, all debt under the bank credit facilities,
including certain medium term notes, was classified as a current liability on
the Company's Consolidated Balance Sheets as of December 31, 1997. As a
result of the permanent waivers that became effective upon completion of the
UNITIL monetization, $22 million of medium term notes, previously classified
as a current liability, were reclassified as a long-term liability as of
March 31, 1998.
STORM DAMAGE - As discussed in the 1997 Form 10-K, the Company suffered
widespread damage throughout its service territory to its transmission and
distribution equipment during a major ice storm in January 1998. The
Company's incremental costs associated with the service restoration effort
were approximately $4.4 million, and possible additional incremental costs
associated with line clearance work are expected to be incurred in the
future. The $4.4 million has been deferred and included in Other Deferred
Charges on the Company's Consolidated Balance Sheets as of September 30,
1998. The MPUC issued an order authorizing the Company to defer incremental,
non-capitalized storm damage expenses for future recovery through the rates
charged to customers. MPUC proceedings on the recovery of the incremental
ice storm costs have been delayed, due to the possibility of federal funds
being available to utilities for ice storm property damage. The Company is
uncertain whether any federal funds will be received or the timing of MPUC
proceedings. The Company believes its storm damage costs were prudently
incurred and it should, therefore, be allowed to recover them in rates if it
does not otherwise receive publicly financed assistance.
BANGOR GAS JOINT VENTURE - In the second quarter of 1998, Bangor Gas Company,
LLC (Bangor Gas) received unconditional authority from the MPUC to provide
natural gas service to the greater Bangor area. In October 1998 the Company
received authorization from the MPUC to invest approximately $1.2 million in
Bangor Gas. For more discussion of the Bangor Gas joint venture, see the
1997 Form 10-K.
REVENUES
Electric operating revenue increased by $1.6 million, or 3.4%
in the third quarter of 1998 due principally to the impact of the 5.83% rate
increase effective February 1998. Electric operating revenues associated
with non-large special contract customers increased by $2.9 million or 8.2%
and corresponding kilowatt hour (KWH) sales increased by 11.9 million or 3.8%
in the third quarter of 1998 as compared to the 1997 quarter. Offsetting
these increases was a $918,000 or 12.6% decrease in electric operating
revenues associated with the Company's large special contract customers,
principally as a result of a 17.2 million or 11.8% reduction in KWH sales in
the third quarter of 1998. These large special contract customers
represented 12.9% of electric operating revenues and 28.4% of total KWH sales
in the 1998 quarter. Electric operating revenues were also affected by a
$436,000 decrease in off-system sales in the third quarter of 1998.
EXPENSES
Fuel for generation and purchased power expense decreased $2.8
million or 12.1% in the third quarter of 1998 as compared to 1997. The
decreased expense was a result of several factors. The largest was reduced
expense associated with the permanent shutdown of the Maine Yankee nuclear
power plant. In the third quarter of 1998, Maine Yankee related expenses,
including the cost of replacement power, were approximately $1.9 million
lower than in the 1997 quarter. The Company also recorded a $791,000 benefit
in the third quarter of 1998 related to savings to be realized from the
previously discussed PERC contract restructuring. The reduction in expense
in the third quarter of 1998 was also impacted by the previously mentioned
$436,000 decrease in off-system sales in the third quarter of 1998.
Other operation and maintenance (O&M) expense increased by
$907,000 in the third quarter of 1998. O&M payroll expense increased by
$100,000 due principally to the 3% union wage increase effective January 1,
1998, various nonunion wage increases and by higher employee levels in 1998.
Also impacting the increased other O&M expense in the 1998 quarter was a
$266,000 increase in postretirement medical and pension and active employee
medical costs in the 1998 quarter as compared to 1997. Bad debt expense
increased by $143,000 in the 1998 quarter as compared to 1997. Finally, the
Company incurred $100,000 in expense in the third quarter of 1998 in
connection with settlement with a large customer associated with a power
outage which occurred earlier in 1998.
Depreciation and amortization expense decreased $137,000 in
the third quarter of 1998 as compared to the 1997 quarter. Effective
February 1998, in connection with the Company's most recent rate order, the
Company lengthened the depreciable lives of its large information system
capital projects from seven to ten years, and began amortizing its $3.6
million overaccumulated depreciation reserve ($450,000 amortization in the
third quarter of 1998), thus reducing depreciation expense. These decreases
were offset to some extent by the impact of 1998 property additions.
The $1.3 million decrease in amortization of contract buyouts
and restructuring in the 1998 quarter was also due principally to the
emergency rate order effective July 1, 1997 and recent rate order effective
February 1998. In connection with the emergency rate order in 1997, the MPUC
required the Company to accelerate the amortization of the deferred
regulatory asset associated with the 1993 buyout of one of its high-priced
non-utility generator contracts, while in connection with the recent rate
order, the MPUC required the Company to reduce this amortization to the level
prior to the July 1, 1997 emergency rate order. Consequently, as a result of
the two rate orders, amortization associated with this regulatory asset was
$690,000 for the third quarter of 1998, as compared to $2.2 million in the
1997 quarter. Also impacting amortization of contract buyouts and
restructuring was the start of the amortization of the PERC contract
restructuring on July 1, 1998, resulting in $250,000 of amortization in the
1998 quarter.
The increase in income taxes was principally a function of
greater earnings in the third quarter of 1998 as compared to the 1997
quarter. See Footnote 2 to the Consolidated Financial Statements for a
reconciliation of the Company's effective income tax rate.
Long-term debt interest expense increased $280,000 in the
third quarter of 1998 as compared to 1997 due principally to the previously
discussed $24.8 million in medium term notes issued on March 31, 1998 and the
previously discussed $45 million term loan issued on June 29, 1998.
Offsetting these increases was $36 million in principal repayments ($1
million each on September 30, 1997 and December 31, 1997, $4 million on March
31, 1998, and the remaining principal balance outstanding of $30 million on
June 29, 1998) on the medium term notes associated with the Company's
previous revolving credit facility, sinking fund payments on the Company's
12.25% first mortgage bonds, the final maturity of $2.5 million of 6.75%
series First Mortgage Bonds in March 1998 and $1.8 million in principal
payments in 1998 associated with the medium term notes issued in connection
with the UNITIL contract monetization.
Other interest expense, which is composed principally of
interest expense on short term borrowings, decreased due to a $13.6 million
decrease in weighted average short-term borrowings outstanding in the 1998
quarter as compared to 1997, as well as by a decrease in average short-term
interest rates in 1998. The decrease in borrowings was due principally to
the utilization of proceeds from the UNITIL contract monetization to pay down
amounts due under the revolving credit facility. Offsetting these decreases
to some extent was a $143,000 increase in amortization of debt issuance costs
in the 1998 quarter. This increase was due primarily to issuance costs
associated with the $24.8 million medium term notes issued in March 1998 and
the Amended and Restated Revolving Credit and Term Loan Agreement entered
into in June 1998.
NINE MONTHS OF 1998 AS COMPARED TO THE NINE MONTHS OF 1997
EARNINGS
Earnings for the nine months ended September 30, 1998 were
$.91 per common share, compared to a loss of $.21 per common share for the
1997 period. As previously discussed, the increased earnings were
principally a result of the February 1998 rate increase authorized by the
MPUC.
Earnings in the 1997 period were positively affected by three
transactions that were nonrecurring in nature. The Company recorded $335,000
in revenues from the sale of air emission allowances to a coal fired
generating facility, and $350,000 in revenue was recognized under a shared
savings distribution agreement with another utility. Also, the Company
recorded a $204,000 state income tax benefit as the result of an IRS
examination of the Company's 1994 federal income tax return. Without the
impact of these one-time events benefitting earnings, the Company would have
incurred a $.29 loss per common share in the 1997 period.
REVENUES
The $6.9 million or 5% increase in electric operating revenues
was due primarily to the 3.8% temporary rate increase effective on July 1,
1997 and the additional 5.83% rate increase effective February 1998, as well
as a $1.2 million increase in off-system sales in the 1998 period.
Offsetting these increases, to some extent, were a 3.8% reduction in total
KWH sales (excluding off-system sales) in 1998 and the impact of the
previously discussed sale of air emission allowances and revenue associated
with the shared distribution savings with another utility in 1997. The
decrease in sales in 1998 was due to service interruption during the ice
storm in January 1998, as well as significantly warmer weather in the winter
and spring of 1998 as compared to 1997.
EXPENSES
Fuel for generation and purchased power expense decreased by
$6.7 million in the 1998 period as compared to 1997. The principal reason
for the reduction was lower expenses associated with the permanent shutdown
of the Maine Yankee nuclear power plant in 1998, as compared to maintaining
the plant in an operating mode in the first five months of 1997. Also, in
connection with the Company's recent rate order (See the 1997 Form 10-K for
discussion of the rate order), the Company was ordered to defer, for future
recovery, the excess of actual Maine Yankee related costs incurred during
1998 over the Maine Yankee costs included in the rate order. In the 1998
period, Maine Yankee related expenses, including the cost of replacement
power, were approximately $6.7 million lower than in 1997. The Company also
recorded a $1.3 million benefit in 1998 related to savings realized from the
previously discussed PERC contract restructuring. Offsetting these decreases
to some extent was the previously discussed $1.2 million increase in off-
system sales in the 1998 period.
Other O&M expense increased by $1.8 million for the nine
months ended September 1998 as compared to the 1997 period. O&M payroll
expense increased by $1.1 million due principally to significantly less
payroll charged to the Company's capital program in the 1998 period. The
lower capital labor was primarily a result of service restoration efforts
associated with the January 1998 ice storm. The Company was ordered by the
MPUC to defer incremental non-capital costs related to the ice storm, but the
non-incremental labor costs were charged principally to other O&M in the
first quarter of 1998. The increase from 1997 to 1998 was also affected by
the previously discussed wage rate increases.
Depreciation and amortization expense decreased $249,000 in
1998 as compared to 1997 due principally to the previously mentioned
lengthening of lives of information system capital assets and the
amortization of the overaccumulated depreciation reserve, offset by the
impact of 1998 property additions.
The decrease in amortization of contract buyouts and
restructuring and the increase in income taxes in 1998 were due principally
to the same reasons discussed above for the third quarter of 1998 as compared
to the third quarter of 1997.
Other income decreased by $188,000 in 1998 due principally to
incurring start-up costs associated with non-core business ventures.
The increase in long-term debt interest expense in 1998 was
due primarily to the previously discussed issuance of the $24.8 million of
medium term notes on March 31, 1998 and the $45 million term loan issued in
June 1998, offset by the previously discussed principal repayments on various
long-term debt issues.
Other interest expense decreased due principally to a $8.2
million reduction in the weighted average short-term borrowings in the 1998
period as compared to the 1997 period. This was offset to some extent by a
slight increase in the weighted average interest rate on the borrowings and a
$202,000 increase in the amortization of debt issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
The Consolidated Statements of Cash Flows reflect events in
the first nine months of 1998 and 1997 as they affect the Company's
liquidity. Net cash provided by operations was $18.7 million in 1998 as
compared to $30.3 million in the 1997. Negatively impacting cash flows from
operations in the 1998 period were the approximately $7.5 million in costs
incurred to restructure the PERC purchased power contract as well as
approximately $4 million in incremental costs incurred in connection with the
January 1998 ice storm. Cash flows were also reduced by the effect of a
large customer, who prepaid its electric usage for a one-year period in the
third quarter of 1997.
Also reducing cash flows from operations was the previously
discussed Graham Station property sale proceeds. While the Company did
realize a $4.6 million gain on sale of the property, the full $6.2 million in
proceeds were required to be deposited with a third party trustee. The
deferred gain and the deposit of the proceeds with the trustee have been
reflected in "Other, net" on the Consolidated Statements of Cash Flows. Also
in connection with the sale, the Company deposited $400,000 with a third
party trustee to be utilized for future environmental remediation at the
site. Finally, reducing cash flows from operations in the 1998 period was
the incurring of approximately $1.3 million in costs associated with the new
revolving credit facility and term loan and the $24.8 million in medium term
notes. Offsetting these cash flow reductions was the beneficial impact of
the 3.8% temporary rate increase on July 1, 1997 and the 5.83% rate increase
effective February 1998.
Dividends paid on common stock were lower in 1998 due to the
suspension of the common dividend, beginning with the first quarter of 1997.
The reduction in preferred dividends paid resulted principally from a $1.5
million sinking fund payment made on the Company's 8.76% mandatory redeemable
preferred stock in December 1997.
The Company in each period made sinking fund payments on its
12.25% first mortgage bonds. In the first quarter of 1998 the Company made
the final $2.5 million payment on its 6.75% first mortgage bonds and made a
$4 million principal repayment on its medium term notes. In June 1998 the
Company made a $12.3 million principal payment on its Finance Authority of
Maine Revenue Notes. Also, as previously discussed, in connection with the
new credit agreement, the Company fully repaid its $30 million in outstanding
medium term notes in June 1998. In 1998 the Company has made $1.8 million in
principal payments associated with the medium term notes issued in connection
with the UNITIL contract monetization.
As previously discussed, in connection with the monetization
of the UNITIL contract, the Company issued $24.8 million in medium term notes
on March 31, 1998. The Company's net proceeds from this issuance were $23.3
million, due to the requirement to deposit $1.5 million in a capital reserve
fund for the final payment of principal and interest in 2002. Of the $23.3
million of proceeds received, the Company utilized $19 million to repay
borrowings outstanding under its revolving credit facility. The remaining
funds were utilized for the PERC purchased power contract restructuring
transaction discussed above.
As previously discussed, in June 1998 the Company entered into
an Amended and Restated Revolving Credit and Term Loan Agreement with a new
group of lenders that provides a two year term loan of $45 million and a
revolving credit commitment of $30 million. Under current projections of
cash needs, the new credit facilities should provide the Company with
adequate borrowing capacity. As previously discussed, in order to secure the
existing letter of credit related to the Pollution Control Revenue Bonds,
until a new letter of credit could be issued, the Company deposited
approximately $4.6 million of the proceeds from this financing with a third
party trustee. The new letter of credit was issued in October 1998, and the
$4.6 million deposited with the third party trustee was released to the
Company. These funds were utilized to repay amounts outstanding under the
Company's revolving credit facility.
IMPACT OF THE YEAR 2000 ISSUE
The "Year 2000" problem exists because some computer programs
and embedded microchips may not properly recognize a year that begins with
"20" instead of "19", and therefore may fail or create erroneous results.
The Company is actively engaged in identifying, assessing, and responding to
the implications of this problem for its operations.
The Company has identified all of its information technology
systems and is assessing and testing its Year 2000 Compliance. The Company
has established a structured approach which inventories and prioritizes its
electrical systems, client server and network applications, desktop and
personal computer systems, and facilities. The Company's goal is that most,
if not all, computer programs and embedded chips that support its mission
critical operations will be compliant by mid-year 1999.
The Company's business is dependent upon external parties,
such as suppliers and business partners, for the reliable delivery of its
products and services. The Company has inquired in writing to its suppliers
and service providers with regard to their Year 2000 compliancy, and has
established a follow-up procedure. The Company has also identified the third
parties with which it has a material relationship in order to establish their
Year 2000 status in a timely fashion, and is continuing to do so.
In addition to normal suppliers and business partners, the
Company has a risk that power will not be available on the New England Power
Pool (NEPOOL) grid for purchase and distribution to the Company's customers
if electrical system failures occur due to the Year 2000 issue. This is a
significant risk, since the Company purchases a substantial portion of its
energy, which is received through the NEPOOL grid. The Company is working to
mitigate this risk by participation on the Independent System Operator (ISO)
sub-committees and in the NEPOOL/ISO New England Year 2000 Joint Oversight
Committee which has been given responsibility for operational reliability of
the NEPOOL Control Area. This group is in the early stages of assessing
NEPOOL/ISO's Year 2000 problem and has a goal of ensuring the NEPOOL Control
Area is Year 2000 compliant by July 1, 1999.
The Company began an initial information technology awareness
plan in 1992 with the year 2000 in mind. There was an immediate development
of a long term (five year) technology plan to address the year 2000 as well
as other issues such as obsolete applications, hardware, and infrastructure.
Implementation of this five year plan began in 1994 with two mission critical
projects for replacing the Customer Information System and implementing a new
Geographical Information System. In addition, the Company began replacement
of its Financial Information Systems in 1995. These major projects and the
advancement of technology in general drove infrastructure upgrades.
In addition to the major applications mentioned above, the
Company has continually updated its transmission and distribution systems,
substations, and metering devices and has become increasingly more reliant on
various technologies.
Due to the nature of the technological architecture and the
fact that the Company has kept pace with technologies, many of the enterprise
information systems are stated to be compliant by the vendors and the Company
does not believe it will need to expend funds to implement totally new
enterprise systems. The Company does, however, have other hardware and
software that is not compliant and will need to be replaced or upgraded. In
addition, the Company will also be conducting comprehensive testing to help
ensure a compliant environment exists and conducting vendor inquiries and
contingency planning.
The estimated costs to conduct testing, develop or modify
contingency plans, and replace non-compliant technologies is approximately $2
million, with most of these costs to be incurred during 1999. The majority
of these costs will be capitalized, instead of being charged to expense,
since the costs relate principally to investments in new equipment and
technologies and not the modification of existing systems. To date,
approximately $192,000 has been expended in connection with the Year 2000
issue, of which $132,000 has been capitalized and $60,000 charged to expense.
Time and cost estimates are based on currently available information and
could be affected by the ability to correct all relevant computer codes and
equipment, and the Year 2000 readiness of the Company's business partners,
among other factors.
There is no certainty as to whether the Company will be able
to solve its potential Year 2000 issues. Consequently, the Company is in the
process of identifying and verifying realistic failure scenarios which will
require contingency plans. While its analysis has not been completed, the
Company anticipates establishing a prioritized list of potential failures
with a formal contingency plan for each one deemed critical to its ongoing
operations during 1999.
Based on information reviewed to date, the Company believes
its plans of action are adequate for Year 2000 compliance of its critical
systems and to reduce the risk of external impacts to its operations.
Nevertheless, achieving Year 2000 compliance is subject to the risks and
uncertainties described above and adverse effects, should they occur, could
be material despite the Company s efforts to prevent or mitigate them.
NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FASB 133), and is effective for fiscal years beginning after
June 15, 1999. FASB 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The affects of the adoption of FASB 133 on the Company's financial statements
are currently not known. The Company believes that its fuel swap agreements
would continue to qualify for hedge accounting treatment under FASB 133.
OTHER
Management's Discussion and Analysis of Results of Operations
and Financial Condition contains items that are "forward-looking" as defined
in the Private Securities Litigation Reform Act of 1995. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated in the forward-looking statements.
Readers should not place undue reliance on forward-looking statements, which
reflect management's view only as of the date hereof. The Company undertakes
no obligation to publicly revise these forward-looking statements to reflect
subsequent events or circumstances. Factors that might cause such differences
include, but are not limited to, future economic conditions, relationship
with lenders, earnings retention and dividend payout policies, electric
utility restructuring, developments in the legislative, regulatory and
competitive environments in which the Company operates, and other
circumstances that could affect revenues and costs.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
000's Omitted
(Unaudited)
Sept. 30, Dec. 31,
ASSETS 1998 1997
----------- ----------
INVESTMENT IN UTILITY PLANT:
Electric plant in service, at original cost $ 345,526 $ 341,009
Less - Accumulated depreciation and amortization 102,231 96,595
---------- ----------
$ 243,295 $ 244,414
Construction work in progress 20,012 12,011
---------- ----------
$ 263,307 $ 256,425
Investments in corporate joint ventures:
Maine Yankee Atomic Power Company $ 5,985 $ 5,532
Maine Electric Power Company, Inc. 402 326
---------- ----------
$ 269,694 $ 262,283
---------- ----------
OTHER INVESTMENTS, principally at cost $ 17,063 $ 5,274
---------- ----------
FUNDS HELD BY TRUSTEE, at cost $ 23,039 $ 21,196
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents $ 1,281 $ 937
Accounts receivable, net of reserve 18,270 16,615
Unbilled revenue receivable 9,261 11,605
Inventories, at average cost:
Material and supplies 2,859 2,759
Fuel oil 430 35
Prepaid expenses 459 1,207
Deferred Maine Yankee refueling costs - 286
---------- ----------
Total current assets $ 32,560 $ 33,444
---------- ----------
DEFERRED CHARGES:
Investment in Seabrook Nuclear Project, net of
accumulated amortization of $29,748 in 1998
and $28,474 in 1997 $ 29,094 $ 30,368
Costs to terminate/restructure power contracts,
net of accumulated amortization of $74,858
in 1998 and $59,616 in 1997 141,924 147,633
Maine Yankee decommissioning costs 54,860 60,924
Deferred regulatory assets 32,924 32,551
Demand-side management costs 1,010 1,705
Other 6,452 5,205
---------- ----------
Total deferred charges $ 266,264 $ 278,386
---------- ----------
Total assets $ 608,620 $ 600,583
========== =========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED BALANCE SHEETS
000's Omitted
(Unaudited)
Sept. 30, Dec. 31,
STOCKHOLDERS' INVESTMENT AND LIABILITIES 1998 1997
----------- ----------
CAPITALIZATION:
Common stock investment $ 115,332 $ 106,558
Preferred stock 4,734 4,734
Preferred stock subject to mandatory redemption,
exclusive of current sinking fund requirements 9,183 9,137
Long-term debt, net of current portion 270,273 221,643
---------- ----------
Total capitalization $ 399,522 $ 342,072
---------- ----------
CURRENT LIABILITIES:
Notes payable - banks $ 19,000 $ 34,000
---------- ----------
Other current liabilities -
Current portion of long-term debt and sinking
fund requirements on preferred stock $ 20,989 $ 52,172
Accounts payable 11,177 13,171
Dividends payable 296 327
Accrued interest 4,710 3,667
Customers' deposits 306 297
Deferred revenue - 1,571
Current income taxes payable - 8
---------- ----------
Total other current liabilities $ 37,478 $ 71,213
---------- ----------
Total current liabilities $ 56,478 $ 105,213
---------- ----------
DEFERRED CREDITS AND RESERVES:
Deferred income taxes - Seabrook $ 15,102 $ 15,766
Other accumulated deferred income taxes 61,544 55,859
Maine Yankee decommissioning liability 54,860 60,926
Deferred regulatory liability 9,718 9,972
Unamortized investment tax credits 1,802 1,962
Accrued pension and postretirement benefit costs 7,689 7,034
Other 1,905 1,779
---------- ----------
Total deferred credits and reserves $ 152,620 $ 153,298
---------- ----------
Total Stockholders' Investment and Liabilities $ 608,620 $ 600,583
========== =========
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
000's Omitted
(Unaudited)
Sept. 30, Dec. 31,
1998 1997
--------------------
COMMON STOCK INVESTMENT
Common stock, par value $5 per share- $ 36,817 $ 36,817
Authorized -- 10,000,000 shares
Outstanding -- 7,363,424 shares in 1998 and 1997
Amounts paid in excess of par value 59,054 56,969
Retained earnings 19,461 12,772
--------------------
Total common stock investment $ 115,332 $ 106,558
--------------------
PREFERRED STOCK-Non participating, cumulative-
Par value $100 per share, authorized 600,000 shares
Not redeemable or redeemable solely at the
option of the issuer-
7%, Noncallable, 25,000 shares, authorized
and outstanding $ 2,500 $ 2,500
4.25%, Callable at $100, 4,840 shares,
authorized and outstanding 484 484
4%, Series A, Callable at $110, 17,500 shares,
authorized and outstanding 1,750 1,750
--------------------
$ 4,734 $ 4,734
--------------------
8.76%, Subject to mandatory redemption requirements-
Callable at 103.75% if called on or prior to
December 27, 1998,
150,000 shares authorized and 105,000 shares
outstanding
in 1998 and 1997 $ 10,777 $ 10,731
Less: Sinking fund requirements 1,594 1,594
--------------------
$ 9,183 $ 9,137
--------------------
LONG-TERM DEBT
First Mortgage Bonds-
6.75% Series due 1998 $ - $ 2,500
10.25% Series due 2019 15,000 15,000
10.25% Series due 2020 30,000 30,000
8.98% Series due 2022 20,000 20,000
7.38% Series due 2002 20,000 20,000
7.30% Series due 2003 15,000 15,000
12.25% Series due 2001 3,743 5,521
--------------------
$ 103,743 $ 108,021
Less: Current maturity in 1997 and sinking
fund requirements 1,675 4,278
--------------------
Total first mortgage bonds $ 102,068 $ 103,743
--------------------
Variable rate demand pollution control revenue bonds
Series 1983 due 2009 $ 4,200 $ 4,200
--------------------
Other Long-Term Debt-
Finance Authority of Maine - Taxable Electric Rate
Stabilization Revenue Notes, 7.03% Series
1995A, due 2005 $ 113,700 $ 126,000
Medium Term Notes, Variable interest rate-
LIBO Rate plus 2%,
due 2000 (Fully repaid June 1998) - 34,000
Medium Term Notes, Variable interest rate-
LIBO Rate plus 1.125%, due 2002 23,025 -
Medium Term Notes, Variable interest rate-
LIBO Rate plus 2%, due 2000 45,000 -
--------------------
$ 181,725 $ 160,000
Less: Current portion of long-term debt 17,720 46,300
--------------------
$ 164,005 $ 113,700
--------------------
Total long-term debt $ 270,273 $ 221,643
--------------------
Total Capitalization $ 399,522 $ 342,072
====================
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
000's Omitted
(Unaudited)
1998 1997
---------- ----------
Cash Flows From Operations:
Net income (loss) $ 7,624 $ (509)
Adjustments to reconcile net income (loss)
to net cash
provided by(used in) operations:
Depreciation and amortization 7,500 7,749
Amortization of Seabrook Nuclear Project 1,274 1,274
Amortization of contract buyouts and
restructuring 15,242 16,987
Other amortizations 1,469 1,255
Payment received related to contract buyout - 1,000
Costs to restructure purchased power contract (7,448) -
Allowance for equity funds used during
construction (309) (246)
Deferred income tax provision and
investment tax credits 4,041 (1,562)
Changes in assets and liabilities: -
Deferred incremental ice storm costs (4,192) -
Deferred incremental Maine Yankee costs (869) -
Deferred fuel revenue and Maine Yankee 286 (2,433)
refueling costs
Accounts receivable, net and unbilled revenue 689 4,565
Accounts payable (1,994) (2,447)
Accrued interest 1,043 1,178
Current and deferred income taxes 133 210
Accrued postretirement benefit costs 573 455
Deferred revenue (1,571) 2,460
Other current assets and liabilities, net 262 1,353
Other, net (5,090) (972)
---------- ----------
Net Cash Provided By Operations $ 18,663 $ 30,317
---------- ----------
Cash Flows From Investing:
Construction expenditures $ (13,244)$ (13,330)
Allowance for borrowed funds used during construction (510) (485)
---------- ----------
Net Cash Used In Investing $ (13,754)$ (13,815)
---------- ----------
Cash Flows From Financing:
Dividends on preferred stock $ (920)$ (1,020)
Dividends on common stock - (1,325)
Payments on long-term debt (52,353) (14,853)
Proceeds from issuance of long-term debt, net of
capital reserve fund requirements 68,300 -
Short-term debt, net (15,000) 500
Special deposit associated with securing
letter of credit (4,592) -
---------- ----------
Net Cash Used In Financing $ (4,565)$ (16,698)
---------- ----------
Net Change in Cash and Cash Equivalents $ 344 $ (196)
Cash and Cash Equivalents at Beginning of Period 937 1,274
---------- ----------
Cash and Cash Equivalents at End of Period $ 1,281 $ 1,078
========== ==========
Cash Paid During the Nine Months For:
Interest (Net of Amount Capitalized) $ 16,776 $ 17,119
Income Taxes 425 360
========== ==========
See notes to consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCK INVESTMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
000's Omitted
(Unaudited)
Amounts Total
Paid in Common
Common Excess of Retained Stock
Stock Par Value Earnings Investment
BALANCE DECEMBER 31, 1996 $36,817 $56,969 $14,535 $108,321
Net loss - - (509) (509)
Cash dividends declared on-
Preferred stock - - (988) (988)
Other - - (45) (45)
-------------------- ---------------------
BALANCE SEPTEMBER 30, 1997 $36,817 $56,969 $12,993 $106,779
==================== =====================
BALANCE DECEMBER 31, 1997 36,817 56,969 12,772 106,558
Net income - - 7,624 7,624
Cash dividends declared on-
Preferred stock - - (889) (889)
Other - - (46) (46)
Issuance of warrants - 2,085 - 2,085
-------------------- ---------------------
BALANCE SEPTEMBER 30, 1998 $36,817 $59,054 $19,461 $115,332
==================== =====================
See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
-------------
(Unaudited)
(1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES:
---------------------------------------------
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted in this Form 10-Q
pursuant to the Rules and Regulations of the Securities and Exchange
Commission. However, in the opinion of Bangor Hydro-Electric Company (the
Company), the disclosures contained in this Form 10-Q are adequate to make
the information presented not misleading. The year end condensed balance
sheet data was derived from audited consolidated financial statements but
does not include all disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the
consolidated financial statements, footnotes and all other information
included in the 1997 Form 10-K.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements reflect all adjustments, including normal recurring
accruals, necessary to present fairly the financial position as of
September 30, 1998 and the results of operations and cash flows for the
periods ended September 30, 1998 and 1997.
The Company's significant accounting policies are described in the
Notes to the Consolidated Financial Statements included in its 1997 Form
10-K filed with the Securities and Exchange Commission. For interim
reporting purposes, the Company follows these same basic accounting
policies but considers each interim period as an integral part of an annual
period. Accordingly, certain expenses are allocated to interim periods
based upon estimates of such expenses for the year.
(2) INCOME TAXES:
------------
The following table reconciles a provision calculated by multi- plying
income before federal income taxes by the statutory federal income tax rate
to the federal income tax provision:
Nine Months Ended Sept. 30,
1998 1997
Amount % Amount %
------------ ------------
(Dollars in Thousands)
Federal income tax provision
at statutory rate $4,279 35 $(505) (34)
Plus permanent reductions
in tax expense resulting
from statutory exclusions
from taxable income 33 - 104 7
------ --- ----- ---
Federal income tax provision before
effect of temporary differences
and investment tax credits $4,312 35 $(401) (27)
(Less)plus temporary differences that
are flowed through for rate-
making and accounting purposes (421) (4) 26 2
(Less) utilization and amortization
of investment tax credits (160) (1) (43) (3)
------ --- ----- ---
Federal income tax provision $3,731 30 $(418) (28)
====== === ===== ===
(3) INVESTMENT IN JOINTLY OWNED FACILITIES:
--------------------------------------
Condensed financial information for Maine Yankee Atomic Power Company
("Maine Yankee"), Maine Electric Power Company, Inc. ("MEPCO"), Bangor-
Pacific Hydro Associates ("BPHA") and Chester SVC Partnership ("Chester")
is as follows:
MAINE YANKEE MEPCO
(Dollars in Thousands)
(Unaudited)
Operations for Nine Months Ended
----------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
OPERATIONS: -------- -------- -------- --------
As reported by investee-
Operating revenues $ 92,814 $198,716 $ 2,466 $ 23,838
======== ======== ======== ========
Earnings applicable to
common stock $ 6,386 $ 5,455 $ 822 $ 1,004
======== ======== ======== ========
Company's reported equity-
Equity in net income $ 447 $ 382 $ 117 $ 143
Add(Deduct)-Effect of
adjusting Company's
estimate to actual 9 (1) (34) (21)
-------- -------- -------- --------
Amounts reported by Company $ 456 $ 381 $ 83 $ 122
======== ======== ======== ========
MAINE YANKEE MEPCO
(Dollars in Thousands)
(Unaudited)
Financial Position at
---------------------------------------
Sept. 30, Dec. 31, Sept. 30, Dec. 31,
1998 1997 1998 1997
FINANCIAL POSITION: ---------- ---------- --------- --------
As reported by investee-
Total assets $1,238,898 $1,368,143 $ 5,014 $ 4,362
Less-
Preferred stock 16,800 17,400 - -
Long-term debt 74,000 143,665 270 420
Other liabilities and
deferred credits 1,064,937 1,128,128 1,630 1,578
---------- --------- -------- --------
Net assets $ 83,161 $ 78,950 $ 3,114 $ 2,364
========== ========== ======== ========
Company's reported equity-
Equity in net assets $ 5,821 $ 5,527 $ 442 $ 336
Add(Deduct)- Effect
of adjusting Company's
estimate to actual 164 5 (40) (10)
---------- ---------- -------- --------
Amounts reported by Co. $ 5,985 $ 5,532 $ 402 $ 326
========== ========== ======== ========
BPHA Chester
------------------- -------------------
(Dollars in Thousands)
(Unaudited)
Operations for Nine Months Ended
------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------- --------- --------- ---------
OPERATIONS:
As reported by investee-
Operating revenues $ 5,663 $ 5,506 $ 3,347 $ 3,442
======= ======= ======= =======
Net Income $ 2,010 $ 1,639 $ - $ -
======= ======= ======= =======
Company's reported equity
in net income $ 1,005 $ 820 $ - $ -
======= ======= ======= =======
Financial Position at
Sept. 30, Dec. 31, Sept. 30, Dec. 31,
1998 1997 1998 1997
--------- -------- --------- --------
FINANCIAL POSITION:
As reported by investee-
Total assets $ 38,363 $39,013 $ 26,785 $27,633
Less-
Long-term debt 26,850 28,500 24,950 25,837
Other liabilities 2,466 2,425 1,835 1,796
------- ------- -------- -------
Net assets $ 9,047 $ 8,088 $ - $ -
======= ======= ======== =======
Company's reported equity
in net assets $ 4,524 $ 4,044 $ - $ -
======= ======= ======== =======
(4) EARNINGS PER SHARE:
------------------
The following table reconciles basic and diluted earnings per
common share assuming all stock warrants were converted to common
shares in accordance with Statement of Financial Accounting Standards
No. 128, "Earnings Per Share":
(Amounts in 000's, except per share data)
For the Quarters For the Nine Months
Ended Ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
-------- --------- -------- --------
Earnings (loss)
applicable to
common stock $ 2,637 $ (532) $ 6,689 $ (1,542)
-------- -------- -------- --------
Average common
shares outstanding 7,363 7,363 7,363 7,363
Plus: incremental
shares from assumed
conversion 461 - 164 -
-------- -------- -------- --------
Average common shares
outstanding plus
assumed warrants
converted 7,824 7,363 7,527 7,363
-------- -------- -------- --------
Basic earnings (loss)
per common share $ .36 $ (.07) $ .91 $ (.21)
======== ======= ======= =======
Diluted earnings (loss)
per common share $ .34 $ (.07) $ .89 $ (.21)
======== ======= ======= =======
(5) MONETIZATION OF POWER SALE CONTRACT:
-----------------------------------
As reported in the 1997 Form 10-K, the Company had been
negotiating a transaction for the monetization of a contract with
UNITIL Power Corp. (UNITIL), a New Hampshire based electric utility.
The Company currently provides power to UNITIL at significantly above-
market rates, with the contract term ending in the year 2003. Based
upon current projections of wholesale electricity markets, it is
expected that the rates charged under the UNITIL contract will remain
at above-market levels for the remainder of the contract term.
Therefore, the assignment of the Company's rights under the contract
has a positive present cash value. On March 31, 1998, the Company
completed a transaction with a financial institution that provided
loan proceeds of approximately $23.3 million, net of a requirement to
deposit $1.5 million of the proceeds in a debt service reserve fund.
The loan is secured by the value of the UNITIL contract.
Also as previously reported, beginning in early 1997, the
Company failed to comply with certain financial covenants under its
bank lending agreements and received temporary waivers from
the lending banks. By using a portion of the proceeds of the UNITIL
monetization to pay down a portion of the bank obligations, the
Company was able to negotiate permanent waivers of the earlier
financial covenant violations.
At the time the Company filed its 1997 Form 10-K, the
monetization of the UNITIL contract had not been completed and the
financial covenant violations referred to above had, therefore, not
been waived permanently. As discussed in the 1997 Form 10-K, all debt
under the bank credit facilities, including certain medium term notes,
was classified as a current liability on the Company's Consolidated
Balance Sheets as of December 31, 1997. As a result of the permanent
waivers that became effective upon completion of the UNITIL
monetization, $22 million of medium term notes, previously classified
as a current liability, were reclassified as a long-term liability as
of March 31, 1998.
(6) STORM DAMAGE:
------------
As discussed in the 1997 Form 10-K, the Company suffered
widespread damage throughout its service territory to its transmission
and distribution equipment during a major ice storm in January 1998.
The Company's incremental costs associated with the service
restoration effort were approximately $4.4 million, and additional
incremental costs associated with line clearance work are expected to
be incurred in the future. The $4.4 million has been recorded as a
deferred asset on the Company's Consolidated Balance Sheets as of
September 30, 1998. The MPUC issued an order authorizing the Company
to defer incremental, non-capitalized storm damage expenses for future
recovery through the rates charged to customers. MPUC proceedings on
the recovery of the incremental ice storm costs have been delayed, due
to the possibility of federal funds being available to utilities for
ice storm property damage.
The Company is uncertain whether any federal funds will be
received or the timing of MPUC proceedings. The Company believes its
storm damage costs were prudently incurred and it should, therefore,
be allowed to recover them in rates if it does not otherwise receive
publicly financed assistance.
(7) PENOBSCOT ENERGY RECOVERY COMPANY:
---------------------------------
As previously reported the Company has been working to
restructure a power purchase contract with the Penobscot Energy
Recovery Company (PERC), its last remaining high-priced non-utility
generator contract that offers a potential for substantial savings. In
June 1998 the Company successfully completed this major restructuring
of its obligations under various agreements with PERC.
The restructuring will result in a substantial savings for the
Company and will allow PERC to continue to meet the solid waste
disposal needs of Maine communities.
This major restructuring involves several separate components
including the following:
- - PERC refinanced $45 million in existing bonds with a remaining
five year term over a twenty year period using tax exempt bonds issued
by the Finance Authority of Maine under its Electric Rate
Stabilization Program.
- - PERC will share the net revenues generated by the facility on a
pro rata basis with the Company and the Municipal Review Committee
(MRC) which represents over 130 Maine municipalities receiving waste
disposal service from PERC.
- - The Company made a one-time payment of $6 million to PERC and
will make additional quarterly payments of $250,000 for four years
totaling $4 million.
- - Bangor Hydro and PERC amended their existing power purchase
agreement to include the MRC as a party.
- - The MRC's constituent municipalities extended their contracts with
PERC by 15 years to supply solid waste to the facility through 2018.
- - Bangor Hydro issued two million warrants to purchase common stock,
one million each to PERC and the MRC. Each warrant entitles the
warrant holder to acquire one share of Bangor Hydro common stock at a
price of $7 per share. No warrants may be exercised within the first
nine months after their issuance, and they become exercisable in
500,000 share blocks following the expiration of nine months, 21
months, 33 months, and 45 months from the closing date.
Depending upon a number of assumptions, including the ultimate
cost of the warrants and markets for solid waste disposal, it is
projected that the restructuring will result in cost savings to Bangor
Hydro over the next twenty years with a net present value of $30-40
million. The anticipated savings resulting from this transaction were
used to reduce the level of electric rates approved by the MPUC in the
Company's recent general rate case by approximately $3 million on an
annual basis. With the completion of the transaction, the Company
will now begin realizing these benefits.
The refinancing by PERC was made possible by the Maine
Legislature through an amendment to the Electric Rate Stabilization
Program that allowed PERC to qualify for such financing. Under the
Program, the State of Maine's "moral obligation" supports the new non-
recourse debt.
The Company has deferred, as a regulatory asset, the $6 million
payment to PERC, approximately $1.5 million in costs associated with
the contract restructuring, and $2 million for the estimated fair
value of the warrants. As discussed above, the Company is currently
recovering PERC restructuring costs in rates. The $2 million in
warrants have also increased additional paid-in capital.
(8) AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT:
-------------------------------------------------------------
As previously reported, during 1997 the Company negotiated
amendments to the credit agreement with its lending banks in order to
resolve potential violations of certain financial covenants. As a
result of those amendments, the Company reported that during 1998 or
beyond, future cash needs might exceed the borrowing capacity under
the credit facility, and accordingly, the Company might be required to
find new sources of financing.
On June 29, 1998, the Company entered into an Amended and
Restated Revolving Credit and Term Loan Agreement with a new group of
lenders that provides a two year term loan of $45 million and a
revolving credit commitment of $30 million. Under current projections
of cash needs, the new facilities should provide adequate borrowing
capacity. The new credit agreement contains financial covenants which
are not significantly different than the covenants contained in the
previous credit agreement. The Company was in compliance with all
covenants associated with the new credit agreement as of September 30,
1998.
The credit agreement also provides for the issuance of a letter
of credit required to support $4.2 million of the Company's Pollution
Control Revenue Bonds. To secure the existing letter of credit
related to the Pollution Control Revenue Bonds, until the new letter
of credit could be issued, the Company deposited approximately $4.6
million of the proceeds from this financing with a third party
trustee. This amount has been included with Other Investments on the
Company's Consolidated Balance Sheets at September 30, 1998.
(9) AGREEMENT ON SALE OF COMPANY'S GENERATING ASSETS:
------------------------------------------------
On September 25, 1998, the Company and PP&L Global, Inc., a
Pennsylvania corporation and a subsidiary of PP&L Resources, Inc.,
reached an agreement for PP&L Global to acquire most of the Company's
electric generating assets with a combined base load capacity of 89.2
megawatts and certain transmission rights for a sale price of $89
million. The proposed sale is a result of the Company s effort to
comply with Maine's electric utility restructuring legislation, which
took effect in September 1997. The Company began seeking proposals
from prospective bidders to purchase its generation and generation-
related assets in early 1998 and as part of the auction process,
received final bids from various bidders in August 1998.
The electric utility restructuring law requires all of Maine's
investor-owned electric utilities to divest all of their non-nuclear
generation assets and generation-related business before March 1,
2000. The law was enacted to foster competition in an open market in
which retail consumers will choose among competitive energy providers
of the electricity that flows through the wires. The management of
the "wires" or transmission and distribution business will remain the
regulated function of the existing utilities. For further information
on the Company's plan to divest its generating assets, refer to the
Company's Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the quarter ended June 30, 1998.
Pursuant to the agreement, the Company has agreed to sell to
PP&L Global (i) its Ellsworth, Howland, Milford, Medway, Orono,
Stillwater and Veazie hydroelectric facilities, which are all situated
along the Penobscot River Basin and Union River in Maine, (ii) the 50%
ownership interest owned by Penobscot Hydro Co., Inc., a wholly owned
subsidiary of the Company, in Bangor-Pacific Hydro Associates, which
owns a 13 megawatt hydroelectric generating facility located in
Enfield and Howland, Maine, (iii) the Company's 8.33% joint ownership
interest in the William F. Wyman Unit No. 4 oil-fired steam plant
located in Yarmouth, Maine, (iv) the Company's designs, applications
and other rights with respect to the potential development of the
Basin Mills hydroelectric project, to be located in Bradley and Orono,
Maine, (v) the Company's designs, applications and other rights with
respect to the potential development of a high-voltage transmission
line from Orrington, Maine, to New Brunswick, Canada, and (vi) certain
of the Company's rights to transmission capacity, including its rights
as a participant in the regional utilities' agreements with Hydro
Quebec.
The sale is subject to certain closing conditions as set forth
in the agreement, including receipt of approvals by federal and state
regulatory agencies, which the Company expects may take six to twelve
months. In addition, third-party consents to the sale of certain of
the assets will be required, and the Company cannot predict whether or
on what terms such consents can be obtained. The Company anticipates
that most of the net after-tax proceeds from the sale will be used to
retire outstanding debt. The Company expects that a portion of the
sale value will be applied to reduce the Company's stranded costs for
regulatory purposes, which should lower the amounts that would
otherwise be collected in the future from customers.
(10) SALE OF PROPERTY AT GRAHAM STATION:
----------------------------------
Also in September 1998, the Company sold certain property and
equipment at its Graham Station in Veazie, Maine, to Casco Bay Energy
for $6.2 million. The property is to be utilized by Casco Bay Energy,
which plans to construct a $221 million gas-fired power plant that
will produce 520 megawatts of electricity. The plant will be powered
by the proposed Maritimes & Northeast gas transmission line and
regional transmission system. The Company realized a net gain from the
sale of $4.6 million, which has been deferred (reflected as a
component of Other Deferred Charges on the Consolidated Balance Sheet
at September 30, 1998) to be utilized as a future reduction to the
Company's recoverable stranded costs. In connection with the sale,
the $6.2 million in proceeds were deposited with a third party
trustee, as a requirement under the Company's bond indenture. It is
expected that the $6.2 million will be utilized to repay a portion of
the Company's medium term notes. Also in connection with the sale,
the Company deposited $400,000 with a third party trustee to be
utilized for future environmental remediation at the site.
(11) NEW ACCOUNTING STANDARDS:
------------------------
In June 1997 the FASB issued Statement No. 130, "Reporting
Comprehensive Income" (FAS 130), which establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. This Statement requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. This Statement is effective for fiscal years
beginning after December 15, 1997. There was no impact in
adopting FAS 130 on the Company's consolidated financial statements
for the quarter and six months ended September 30, 1998.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133), and is effective for fiscal years beginning
after June 15, 1999. FAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The affects of the adoption of FAS 133 on
the Company's financial statements are currently not known. The
Company believes that its fuel swap agreements would continue to
qualify for hedge accounting treatment under FASB 133.
(12) RECLASSIFICATIONS -
-----------------
Certain 1997 amounts have been reclassified to conform with the
presentation used in Form 10-Q for the quarter ended September 30, 1998.
BANGOR HYDRO-ELECTRIC COMPANY
FORM 10-Q FOR PERIOD ENDING SEPTEMBER 30, 1998
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------ --------------------------------
EXHIBITS: None.
--------
REPORTS ON FORM 8-K
-------------------
Two Current Reports on Form 8-K, dated July 1, 1998 and October 6, 1998,
were filed in the third quarter of 1998 regarding restructuring of power
purchase contract, Amended and Restated Revolving Credit and Term Loan
Agreement (8-K dated July 1, 1998) and the Agreement of Sale of Company s
Generating Assets (8-K dated October 6, 1998).
BANGOR HYDRO-ELECTRIC COMPANY
FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 1998
The information furnished in this report reflects all adjustments which
are, in the opinion of management, necessary to a fair statement of the
results for the interim period.
SIGNATURES
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.
BANGOR HYDRO-ELECTRIC COMPANY
(Registrant)
/s/ Frederick S. Samp
---------------------
Dated: November 12, 1998
Frederick S. Samp
Vice President - Finance & Law
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from Bangor
Hydro-Electric Co.'s Form 10Q, 3rd Qtr. 1998 and is qualified in its entirety by
reference to such From 10Q.
</LEGEND>
<CIK> 0000009548
<NAME> BANGOR-HYDRO ELECTRIC COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 243,295
<OTHER-PROPERTY-AND-INVEST> 66,501
<TOTAL-CURRENT-ASSETS> 32,560
<TOTAL-DEFERRED-CHARGES> 266,264
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 608,620
<COMMON> 36,817
<CAPITAL-SURPLUS-PAID-IN> 59,054
<RETAINED-EARNINGS> 19,461
<TOTAL-COMMON-STOCKHOLDERS-EQ> 115,332
9,183
4,734
<LONG-TERM-DEBT-NET> 270,273
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 19,000
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 19,395
1,594
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 169,109
<TOT-CAPITALIZATION-AND-LIAB> 608,620
<GROSS-OPERATING-REVENUE> 144,859
<INCOME-TAX-EXPENSE> 4,163
<OTHER-OPERATING-EXPENSES> 115,193
<TOTAL-OPERATING-EXPENSES> 119,356
<OPERATING-INCOME-LOSS> 25,503
<OTHER-INCOME-NET> 891
<INCOME-BEFORE-INTEREST-EXPEN> 26,394
<TOTAL-INTEREST-EXPENSE> 18,770
<NET-INCOME> 7,624
935
<EARNINGS-AVAILABLE-FOR-COMM> 6,689
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 22,913
<CASH-FLOW-OPERATIONS> 18,663
<EPS-PRIMARY> $0.91
<EPS-DILUTED> $0.89
</TABLE>
