10-Q 1 0001.txt JUNE 2000 10Q FOR CMPCO. UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 ------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES --- EXCHANGE ACT OF 1934 For the transition period from to ---------- --------- Commission Registrant, State of Incorporation, I.R.S. Employer File Number Address, and Telephone Number Identification No. ----------- ----------------------------------- ------------------ 001-14786 CMP GROUP, INC. 01-0519429 83 Edison Drive, Augusta, Maine 04336 (207) 623-3521 1-5139 CENTRAL MAINE POWER COMPANY 01-0042740 83 Edison Drive, Augusta, Maine 04336 (207) 623-3521 Indicate by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to the filing requirements for at least the past 90 days. CMP Group, Inc.: Yes X No Central Maine Power Company: Yes X No This combined Form 10-Q is separately filed by CMP Group, Inc., and Central Maine Power Company. Information contained herein relating to either individual registrant is filed by such registrant on its own behalf. Each registrant makes no representation as to information relating to the other registrant. As of August 10, 2000, the number of shares of Common Stock outstanding for each registrant was as follows: Registrant Shares CMP Group, Inc., Common Stock, $5 Par Value 32,442,552 Central Maine Power Company, Common Stock, $5 Par Value (All held by CMP Group, Inc.) 31,211,471 Table of Contents Page Number Glossary 1 Part I. Financial Information Item 1 - Consolidated Financial Statements CMP Group, Inc. Consolidated Statement of Earnings for the Three Months Ended June 30, 2000 and 1999 5 Consolidated Statement of Earnings for the Six Months Ended June 30, 2000 and 1999 6 Consolidated Balance Sheet - June 30, 2000 and December 31, 1999: Assets 7 Stockholders' Equity and Liabilities 8 Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2000 and 1999 9 Central Maine Power Company Consolidated Statement of Earnings for the Three Months Ended June 30, 2000 and 1999 10 Consolidated Statement of Earnings for the Six Months Ended June 30, 2000 and 1999 11 Consolidated Balance Sheet - June 30, 2000 and December 31, 1999: Assets 12 Stockholders' Equity and Liabilities 13 Consolidated Statement of Cash Flows for the Six Months Ended June 30, 2000 and 1999 14 Notes to Consolidated Financial Statements 15 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 29 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 44 Part II. Other Information 45 Signatures 47 GLOSSARY The following abbreviations or acronyms are used in the text of this Form 10-Q as defined below: Term Definition Form 10-K Annual Report on Form 10-K ARP Alternative Rate Plan APB Accounting Principles Board Assigned Agreements Maine Yankee's Power Contracts, Additional Power Contracts and Capital Funds Agreements, as amended, with its Sponsors. Central Maine Central Maine Power Company, a regulated electric utility and subsidiary of CMP Group. Central Securities Central Securities Corporation, a wholly owned subsidiary of Central Maine which owns and manages real estate. CERCLA Comprehensive Environmental Response, Compensation, and Liability Act. CMP Group CMP Group, Inc., is the holding company organized effective September 1, 1998, which owns all of the common stock of Central Maine Power Company, Union Water Power Company, MaineCom Services, CNEX, MainePower, TeleSmart and New England Gas Development. CMP Group System CMP Group and its wholly-owned and directly and indirectly controlled subsidiaries. CMP Natural Gas CMP Natural Gas, L.L.C., a limited-liability company owned by subsidiaries of CMP Group and Energy East to distribute natural gas in Maine. CNEX A wholly owned subsidiary of CMP Group, (previously called CMP International Consultants), which provided utility consulting (domestic and international) and research and was closed by CMP Group in July 2000. Connecticut DPUC Connecticut Department of Public Utility Control Cumberland Securities Cumberland Securities Corporation, a wholly owned subsidiary of Central Maine which owns and manages real estate. Connecticut Yankee Connecticut Yankee Atomic Power Company D&P Duff & Phelps Credit Rating Co. DOE United States Department of Energy DOJ United States Department of Justice EE Merger Corp. A Maine corporation that is a wholly-owned subsidiary of Energy East EITF Emerging Issues Task Force of FASB Energy East Energy East Corporation, a New York holding company which is an energy delivery, products and services company doing business in New York, Massachusetts, Maine and New Hampshire, in addition to being the parent company of NYSEG effective May 1, 1998, and which entered into an Agreement and Plan of Merger dated as of June 14, 1999, with CMP Group and EE Merger Corp. EPA United States Environmental Protection Agency. EPS Earnings per share ERAM Electric Revenue Adjustment Mechanism FASB Financial Accounting Standards Board FCC Federal Communications Commission FERC Federal Energy Regulatory Commission FEV Fairfield Energy Venture FPL FPL Group, Inc. Indenture General and Refunding Mortgage Indenture between Central Maine and State Street Bank and Trust Company, Trustee, dated as of April 15, 1976, as amended and supplemented. IPO Initial Public Offering IRC Internal Revenue Code IRS United States Internal Revenue Service ISO Independent System Operator Kwh Kilowatt-hour MaineCom MaineCom Services, a CMP Group subsidiary which arranges fiber-optic data service for bulk carriers. Maine Yankee Maine Yankee Atomic Power Company, a 38-percent owned subsidiary of Central Maine. MEPCO Maine Electric Power Company, Inc., a 78-percent owned subsidiary of Central Maine which owns a 345-KV transmission line from Wiscasset, Maine, to New Brunswick, Canada. Merger Agreement The Agreement and Plan of Merger dated as of June 14, 1999, by and among CMP Group, Energy East and EE Merger Corp. MRS Monitored Retrievable Storage Moody's Moody's Investors Service MPUC Maine Public Utilities Commission NB Power New Brunswick Power Corporation. NEON NorthEast Optic Network, Inc., a corporation of which MaineCom owns approximately 27-percent of the common stock, which is building a fiber optic network in New England and New York. NEPOOL New England Power Pool NERC North American Electric Reliability Council NORVARCO A wholly-owned subsidiary of Central Maine. NORVARCO is one of two general partners with 50% interests in Chester SVC Partnership, which owns a static var compensator facility located in Chester, Maine. NPCC Northeast Power Coordinating Council NRC United States Nuclear Regulatory Commission NYSEG New York State Electric & Gas Corporation, a utility subsidiary of Energy East. NUG Non-utility generator New England Gas New England Gas Development Corporation, Development a wholly-owned subsidiary of CMP Group created in September 1998 to hold up to a 50-percent ownership interest in CMP Natural Gas. OASIS Open Access Same-time Information System. OPA Maine Office of the Public Advocate Plant Maine Yankee nuclear generating plant at Wiscasset, Maine PURPA Public Utility Regulatory Policies Act of 1978. RCRA Resource Conservation and Recovery Act. SAB Securities and Exchange Commission's Staff Accounting Bulletins. S&P Standard & Poor's Corp. SEC Securities and Exchange Commission Secondary Purchasers 28 municipal and cooperative utilities that had purchased Maine Yankee power under identical contracts with Maine Yankee sponsors. SFAS Statement of Financial Accounting Standards TeleSmart A wholly owned subsidiary of CMP Group which provided accounts receivable management and was closed by CMP Group in February 2000. Union Water The Union Water Power Company, a wholly owned subsidiary of CMP Group. Vermont Yankee Vermont Yankee Nuclear Power Corporation. Waste Act Federal Low-level Radioactive Waste Policy Amendments Act. Yankee Atomic Yankee Atomic Electric Company PART 1 - FINANCIAL INFORMATION Item 1. Financial Statements In the opinion of CMP Group, the unaudited financial statements included herein reflect all adjustments necessary to present fairly the Consolidated Balance Sheet as of June 30, 2000, and the Consolidated Statement of Income and Consolidated Cash Flows for the periods ended June 30, 2000 and 1999. CMP Group is the parent holding company of Central Maine, Union Water, MaineCom, CNEX and New England Gas Development. Central Maine constitutes substantially all of CMP Group's assets, revenues and expenses. All nonutility operating transactions are included in other non-utility revenues and operating expenses in CMP Group's Consolidated Statement of Income. CMP Group, Inc. and Subsidiaries Consolidated Statement Of Earnings (Unaudited) (Dollars in thousands, except per-share amounts) For the Three Months Ended June 30, -------------------- 2000 1999 ---- ---- Revenues Electric operating revenues $192,400 $214,686 Other non-utility revenues 6,801 10,482 ------- ------- Total Revenues 199,201 225,168 ------- ------- Operating Expenses Fuel used for company generation 279 1,260 Purchased power Energy 88,839 88,842 Other (capacity) 28,685 31,214 Other operation 68,227 64,747 Maintenance 11,611 8,025 Depreciation and amortization 8,622 12,005 Taxes other than income taxes 5,026 4,748 ------- -------- Total Operating Expenses 211,289 210,841 ------- -------- Operating Income (Loss) (12,088) 14,327 ------- -------- Other Income (Expense) Equity in earnings of associated companies (1,037) 320 Allowance for equity funds used during construction 107 115 Interest Income 2,732 7,874 Recovery of non provided deferred income taxes on asset sale (752) - Other, net 558 (913) Minority interest in consolidated net income (65) (69) Gain on security sales 51,094 - Gain on sale of investments and properties - 6,022 ------- -------- Total Other Income (Expense) 52,637 13,349 ------- -------- Interest Charges Long-term debt 3,409 7,579 Other interest 1,061 11,950 Allowance for borrowed funds used during construction (17) (77) ------- -------- Total Interest Charges 4,453 19,452 ------- -------- Income Before Income Taxes and Preferred Dividends 36,096 8,224 Income taxes 7,712 3,264 Dividends on Preferred Stock of Subsidiary 559 919 ------- --------- Net Income $ 27,825 $ 4,041 ======= ========= Weighted Average Number Of Shares Of Common Stock Outstanding 32,442,552 32,442,552 Earnings Per Share Of Common Stock - Basic $0.86 $0.12 Earnings Per Share Of Common Stock - Diluted $0.85 $0.12 Dividends Declared Per Share Of Common Stock $0.225 $0.225 The accompanying notes are an integral part of these financial statements.
CMP Group, Inc. and Subsidiaries Consolidated Statement Of Earnings (Unaudited) (Dollars in thousands, except per-share amounts) For the Six Months Ended June 30, ------------------- 2000 1999 ---- ---- Revenue Electric operating revenues $457,893 $485,380 Other non-utility revenues 13,188 16,421 ------- ------- Total Revenues 471,081 501,801 Operating Expenses Fuel used for company generation 549 10,207 Purchased power Energy 199,243 183,317 Other (capacity) 57,095 53,988 Other operation 121,553 117,951 Maintenance 18,067 16,299 Depreciation and amortization 19,394 26,677 Taxes other than income taxes 9,941 12,153 ------- ------- Total Operating Expenses 425,842 420,592 ------- ------- Operating Income 45,239 81,209 ------- ------- Other Income (Expense) Equity in earnings of associated companies (3,749) (2,659) Allowance for equity funds used during construction 330 307 Interest income 4,725 8,362 Recovery of non provided deferred income taxes on asset sale 74,669 - Other, net 3,395 (166) Minority interest in consolidated net income (124) (694) Gain on security sale 51,094 - Gain on sale of investments and properties 223 13,033 ------- ------- Total Other Income (Expense) 130,563 18,183 ------- ------- Interest Charges Long-term debt 6,873 18,132 Other interest 20,247 13,330 Allowance for borrowed funds used during construction (65) (214) ------- ------- Total Interest Charges 27,055 31,248 ------- ------- Income Before Income Taxes 148,747 68,144 Income taxes 91,425 29,008 Dividends on Preferred Stock of Subsidiary 1,118 1,838 ------- ------- Net Income $ 56,204 $ 37,298 ======= ======= Weighted Average Number Of Shares Of Common Stock Outstanding 32,442,552 32,442,552 Earnings Per Share Of Common Stock - Basic $1.73 $1.15 Earnings Per Share Of Common Stock - Diluted $1.71 $1.14 Dividends Declared Per Share Of Common Stock $0.45 $0.45 The accompanying notes are an integral part of these financial statements
CMP Group, Inc. and Subsidiaries Consolidated Balance Sheet (Unaudited) (Dollars in thousands) ASSETS June 30, December 31, 2000 1999 -------- ------------ Current Assets Cash and cash equivalents $ 226,491 $ 129,950 Accounts receivable, less allowance for uncollectible accounts of $2,481 in 2000 and $2,904 in 1999 Service - billed 68,146 86,599 - unbilled 24,791 51,124 Other accounts receivable 16,826 21,662 Inventories, at average cost Fuel oil - 177 Materials and supplies 10,052 10,390 Prepayments and other current assets 5,259 9,716 --------- --------- Total Current Assets 351,565 309,618 --------- --------- Electric Property, at original cost 1,355,017 1,335,674 Less: Accumulated depreciation 561,039 551,014 --------- --------- Net electric property in service 793,978 784,660 --------- --------- Construction work in progress 33,092 33,681 Nuclear fuel, less accumulated amortization of $10,385 in 2000 and $9,996 in 1999 1,034 1,418 Property, non utility 22,096 18,487 Less: Accumulated Depreciation 6,334 5,574 --------- --------- Net non-utility property 15,762 12,913 --------- --------- Total net property 843,866 832,672 Investments In Associated Companies, at equity 42,875 51,059 --------- --------- Total Net Property and Investments in Associated Companies 886,741 883,731 --------- --------- Deferred Charges And Other Assets Recoverable costs of Seabrook 1 and abandoned projects, net - 73,052 Nuclear purchased-power contracts 249,854 270,311 Regulatory assets-nuclear impairment 16,035 77,489 Regulatory assets - deferred taxes 123,779 204,994 Other deferred charges and other assets 138,809 228,065 --------- --------- Deferred Charges and Other Assets, Net 528,477 853,911 --------- --------- Total Assets $1,766,783 $2,047,260 ========= ========= The accompanying notes are an integral part of these financial statements
CMP Group, Inc. and Subsidiaries Consolidated Balance Sheet (Unaudited) (Dollars in thousands) STOCKHOLDERS' EQUITY AND LIABILITIES June 30, December 31, 2000 1999 -------- ------------ Current Liabilities and Interim Financing Interim financing $ 750 $ 60,199 Sinking-fund requirements 20,538 11,937 Accounts payable 79,052 104,581 Dividends payable 7,324 7,412 Accrued interest 1,766 2,678 Accrued income taxes 1,020 - Accounts Payable to Energy Provider 17,817 - Miscellaneous current liabilities 17,200 16,731 --------- --------- Total Current Liabilities and Interim Financing 145,467 203,538 --------- --------- Commitments and Contingencies Reserves and Deferred Credits Accumulated deferred income taxes 58,699 66,472 Unamortized investment tax credits 10,171 13,926 Nuclear purchased-power contracts 249,854 270,311 Regulatory liabilities-deferred taxes 46,298 60,564 Deferred gain on generation asset sale 244,312 536,368 Other reserves and deferred credits 204,304 194,162 --------- --------- Total Reserves and Deferred Credits 813,638 1,141,803 --------- --------- Long-Term Debt Other long-term obligations 186,057 122,542 --------- --------- Total Long-Term Obligations 186,057 122,542 --------- --------- Redeemable Preferred Stock 910 910 --------- --------- Stockholders' Equity Common-stock 162,213 162,213 Other paid in capital 284,462 284,330 Reacquired common stock - (642) Retained earnings 138,508 97,038 Preferred stock 35,528 35,528 --------- --------- Total Stockholders' Equity 620,711 578,467 --------- --------- Total Stockholders' Equity and Liabilities $1,766,783 $2,047,260 ========= ========= The accompanying notes are an integral part of these financial statements.
CMP Group, Inc. and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Six Months ended June 30, ------------------ 2000 1999 ---- ---- CASH FROM OPERATIONS Net income $ 56,204 $ 37,298 Items not requiring (not providing) cash: Depreciation 17,772 21,627 Amortization 7,586 19,269 Deferred income taxes and investment tax credits, net (19,696) (14,739) Allowance for equity funds used during construction (330) (307) Preferred stock dividends of subsidiary 1,118 1,838 Gain on sale of investments and properties (51,094) (13,033) Incremental power supply (9,612) (13,903) Changes in certain assets and liabilities: Accounts receivable 35,969 22,464 Other current assets 3,520 4,302 Inventories 515 1,455 Accounts payable (21,413) (22,246) Accrued taxes and interest 108 4,103 Miscellaneous current liabilities 18,286 2,220 Changes in deferred balances and related carrying cost 7,626 4,000 MaineCom equity losses in NEON 6,087 5,687 Other, net 7,595 (4,364) ------- ------- Net Cash Provided by Operating Activities 60,241 55,671 ------- ------- INVESTING ACTIVITIES Construction expenditures (34,887) (21,470) Customer deposits for construction 22,737 - Central Maine sale of assets 850,629 Tax payments related to sale of assets (153,650) Selling expense for sale of generation assets (11,697) Proceeds from sale of investments and properties 54,363 18,119 Changes in accounts payable - investing activities (4,116) (4,783) ------- ------- Net Cash Provided by Investing Activities 38,097 677,148 ------- ------- FINANCING ACTIVITIES Issuances: Medium-term notes 75,000 - Redemptions: Mortgage bonds (118,717) Medium-term note (60,000) (217,000) Revolving credit agreement (50,000) Other long-term obligations (1,514) (11,860) Short-term obligations, net 551 (15,000) Purchase of treasury stock - (160) Dividends: Common stock (14,609) (14,609) Preferred stock of subsidiary (1,225) (919) ------- ------- Net Cash Used by Financing Activities (1,797) (428,265) ------- ------- Net Increase in Cash 96,541 304,554 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 129,950 30,540 ------- ------- CASH AND CASH EQUIVALENTS, END OF YEAR $226,491 $335,094 ======= ======= For purposes of the statement of cash flows, the Company considers all highly liquid instruments purchased having a maturity of three months or less to be cash equivalents. The accompanying notes are an integral part of these financial statements.
PART I - FINANCIAL INFORMATION Item 1. Financial Statements In the opinion of Central Maine, the unaudited financial statements included herein reflect all adjustments necessary to present fairly the Consolidated Balance Sheet as of June 30, 2000, and the Consolidated Statement of Income and Consolidated Cash Flows for the periods ended June 30, 2000 and 1999. Central Maine's consolidated financial statements include the accounts of Central Maine and its wholly owned and controlled subsidiaries. All nonutility operating transactions are included in other non-utility revenues and operating expenses in Central Maine's Consolidated Statement of Income. Central Maine Power Company and Subsidiaries Consolidated Statement Of Earnings (Unaudited) (Dollars in thousands, except per-share amounts) For the Three Months Ended June 30, -------------------- 2000 1999 ---- ---- Revenues Electric operating revenues $192,437 $214,737 Other non-utility revenues 121 631 ------- ------- Total Revenues 192,558 215,368 ------- ------- Operating Expenses Fuel used for company generation 279 1,260 Purchased power Energy 88,839 88,842 Other (capacity) 28,685 31,214 Other operation 59,767 55,518 Maintenance 11,674 7,978 Depreciation and amortization 8,095 11,757 Taxes other than income taxes 5,010 4,735 ------- ------- Total Operating Expenses 202,349 201,304 ------- ------- Operating Income (Loss) (9,791) 14,064 ------- ------- Other Income (Expense) Equity in earnings of associated companies 626 2,712 Allowance for equity funds used during construction 107 115 Interest income 2,187 7,960 Recovery of non provided deferred income taxes on asset sale (781) - Other, net 1,012 (1,735) Minority interest in consolidated net income (65) (69) Gain on sale of investments and properties - 24 -------- ------- Total Other Income (Expense) 3,086 9,007 -------- ------- Interest Charges Long-term debt 3,361 7,534 Other interest 1,065 11,793 Allowance for borrowed funds used during construction (17) (77) ------- ------- Total Interest Charges 4,409 19,250 ------- ------- Income (Loss) Before Income Taxes (11,114) 3,821 Income taxes (5,571) 567 ------- ------- Net Income (Loss) (5,543) 3,254 Dividends on Preferred Stock 559 919 ------- ------- Earnings Applicable to Common Stock $ (6,102) $ 2,335 ======= ======= Weighted Average Number Of Shares Of Common Stock Outstanding 31,211,471 31,211,471 Earnings Per Share Of Common Stock - Basic and Diluted ($0.20) $0.07 Dividends Declared Per Share Of Common Stock $0.36 $0.36 The accompanying notes are an integral part of these financial statements.
Central Maine Power Company and Subsidiaries Consolidated Statement Of Earnings (Unaudited) (Dollars in thousands, except per-share amounts) For the Six Months Ended June 30, ------------------- 2000 1999 ---- ---- Revenues Electric operating revenues $458,010 $485,307 Other non-utility revenues 344 1,110 ------- ------- Total Revenues 458,354 486,417 Operating Expenses Fuel used for company generation 549 10,207 Purchased power Energy 199,243 183,317 Other (capacity) 57,095 53,988 Other operation 106,522 103,367 Maintenance 18,150 16,039 Depreciation and amortization 18,493 26,206 Taxes other than income taxes 9,909 12,096 ------- ------- Total Operating Expenses 409,961 405,220 ------- ------- Operating Income 48,393 81,197 ------- ------- Other Income (Expense) Equity in earnings of associated companies 2,380 3,683 Allowance for equity funds used during construction 330 307 Interest income 4,027 8,243 Recovery of non provided deferred income taxes on asset sale 74,640 - Other, net 3,816 (1,444) Minority interest in consolidated net income (124) (694) Gain on sale of investments and properties 223 7,034 ------- ------- Total Other Income (Expense) 85,292 17,129 ------- ------- Interest Charges Long-term debt 6,781 18,038 Other interest 20,245 13,166 Allowance for borrowed funds used during construction (65) (214) ------- ------- Total Interest Charges 26,961 30,990 ------- ------- Income Before Income Taxes 106,724 67,336 Income taxes 78,499 26,435 ------- ------- Net Income 28,225 40,901 Dividends on Preferred Stock 1,118 1,838 ------- ------- Earnings Applicable to Common Stock $ 27,107 $ 39,063 ======= ======= Weighted Average Number Of Shares Of Common Stock Outstanding 31,211,471 31,211,471 Earnings Per Share Of Common Stock (Basic and Diluted) $0.87 $1.25 Dividends Declared Per Share Of Common Stock $0.720 $0.585 The accompanying notes are an integral part of these financial statements
Central Maine Power Company and Subsidiaries Consolidated Balance Sheet (Unaudited) (Dollars in thousands) ASSETS June 30, December 31, 2000 1999 ---- ---- Current Assets Cash and cash equivalents $ 155,329 $ 112,872 Accounts receivable, less allowance for uncollectible accounts of $2,481 in 2000 and $2,904 in 1999 Service - billed 68,004 86,455 - unbilled 24,791 51,124 Other accounts receivable 12,955 19,647 Prepaid income taxes 10,915 - Inventories, at average cost Fuel oil - 177 Materials and supplies 9,983 9,927 Prepayments and other current assets 5,068 8,393 --------- --------- Total Current Assets 287,045 288,595 --------- --------- Electric Property, at original cost 1,355,013 1,335,670 Less: Accumulated depreciation 561,035 550,990 --------- --------- Net electric property in service 793,978 784,680 --------- --------- Construction work in progress 33,059 32,357 Nuclear fuel, less accumulated amortization of $10,385 in 2000 and $9,996 in 1999 1,034 1,418 Property, non utility 10,231 10,430 Less: Accumulated Depreciation 3,730 3,069 --------- --------- Net non-utility property 6,501 7,361 --------- --------- Total net property 834,572 825,816 Investments In Associated Companies, at equity 38,677 38,236 --------- --------- Total Net Property and Investments in Associated Companies 873,249 864,052 --------- --------- Deferred Charges And Other Assets Recoverable costs of Seabrook 1 and abandoned projects, net - 73,052 Nuclear purchased-power contracts 249,854 270,311 Regulatory asset-nuclear impairment 16,035 77,489 Regulatory assets - deferred taxes 123,779 204,994 Other deferred charges and other assets 132,976 223,341 --------- --------- Deferred Charges and Other Assets, Net 522,644 849,187 --------- --------- Total Assets $1,682,938 $2,001,834 ========= ========= The accompanying notes are an integral part of these financial statements.
Central Maine Power Company and Subsidiaries Consolidated Balance Sheet (Unaudited) (Dollars in thousands) STOCKHOLDERS' EQUITY AND LIABILITIES June 30, December 31, 2000 1999 -------- ------------ Current Liabilities and Interim Financing Interim financing $ - $ 60,000 Sinking-fund requirements 20,538 11,937 Accounts payable 77,213 107,600 Dividends payable 24 112 Accrued interest 1,766 2,678 Income taxes payable to parent company - - Accounts payable to energy provider 17,817 - Miscellaneous current liabilities 15,298 15,855 --------- --------- Total Current Liabilities and Interim Financing 132,656 198,182 --------- --------- Commitments and Contingencies Reserves and Deferred Credits Accumulated deferred income taxes 63,774 63,792 Unamortized investment tax credits 10,171 13,926 Nuclear purchased-power contracts 249,854 270,311 Regulatory liabilities-deferred taxes 46,298 60,564 Deferred gain on generation asset sale 244,312 536,368 Other reserves and deferred credits 190,332 181,348 --------- --------- Total Reserves and Deferred Credits 804,741 1,126,309 --------- --------- Long-Term Debt Other long-term obligations 183,748 120,186 --------- --------- Total Long-Term Obligations 183,748 120,186 --------- --------- Redeemable Preferred Stock 910 910 --------- --------- Stockholders' Equity Common-stock 162,213 162,213 Other paid in capital 276,844 276,709 Reacquired common stock (19,000) (19,000) Retained earnings 105,255 100,754 Preferred stock 35,571 35,571 --------- --------- Total Stockholders' Equity 560,883 556,247 --------- --------- Total Stockholders' Equity and Liabilities $1,682,938 $2,001,834 ========= ========= The accompanying notes are an integral part of these financial statements.
Central Maine Power Company and Subsidiaries CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in thousands) For the Six Months Ended June 30, ------------------ 2000 1999 ---- ---- CASH FROM OPERATIONS Net income $ 28,225 $ 40,901 Items not requiring (not providing) cash: Depreciation 16,878 21,161 Amortization 7,578 19,262 Deferred income taxes and investment tax credits, net (11,895) (14,407) Allowance for equity funds used during construction (330) (307) Gain on Sale of Investments and Properties (223) (7,034) Incremental power supply (9,612) (13,903) Changes in certain assets and liabilities: Accounts receivable 37,823 13,792 Other current assets 2,388 4,669 Inventories 121 1,552 Accounts payable (26,271) (18,989) Accrued taxes and interest (11,827) 3,316 Miscellaneous current liabilities 17,260 1,695 Deferred Ice storm costs (100) - Changes in deferred balances and related carrying cost 8,351 4,000 Other, net 8,430 36 ------- ------- Net Cash Provided by Operating Activities 66,796 55,744 ------- ------- INVESTING ACTIVITIES Construction expenditures (32,786) (20,786) Customer deposits for construction 22,737 - Central Maine sale of assets - 850,629 Tax payments related to sale of assets - (153,650) Selling expense for sale of generation assets - (11,697) Proceeds from sale of investments and properties - 7,813 Changes in accounts payable - investing activities (4,116) (4,793) ------- ------- Net Cash Provided (Used) by Investing Activities (14,165) 667,516 ------- ------- FINANCING ACTIVITIES Issuances: Medium-term notes 75,000 - Redemptions: Mortgage bonds - (118,717) Medium term notes (60,000) (217,000) Revolving Credit Agreement - (50,000) Other long-term obligations (1,467) (11,887) Short-term obligations - (15,000) Dividends: Common stock (22,482) (18,268) Preferred stock (1,225) (919) ------- ------- Net Cash Used by Financing Activities (10,174) (431,791) ------- ------- Net Increase in Cash 42,457 291,469 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 112,872 22,628 ------- ------- CASH AND CASH EQUIVALENTS, END OF PERIOD $155,329 $314,097 ======= ======= For purposes of the statement of cash flows, the Company considers all highly liquid instruments purchased having a maturity of three months or less to be cash equivalents. The accompanying notes are an integral part of these financial statements
CMP Group and Central Maine Power Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies ------------------------------------------ General Description - CMP Group was organized effective September 1, 1998, at which time all of the shares of common stock of Central Maine were converted into an equal number of shares of common stock of CMP Group. CMP Group owns all of the shares of common stock of Central Maine and the former non-utility subsidiaries of Central Maine (TeleSmart, MaineCom, CNEX and Union Water Power Company) in addition to New England Gas Development Corporation, a subsidiary organized in 1998. Central Maine is primarily engaged in the business of transmitting and distributing electric energy generated by others for the benefit of customers in southern and central Maine. On March 1, 2000, Central Maine's obligation to generate or otherwise supply electric energy terminated as part of the restructuring of the electric utility industry in Maine, except as directed by the MPUC to secure a supply of energy for the default standard offer for medium and large customers. CMP Group, Energy East and EE Merger Corp., a Maine corporation that is a wholly-owned subsidiary of Energy East, entered into an Agreement and Plan of Merger, dated as of June 14, 1999, providing for a merger transaction among CMP Group, Energy East and EE Merger Corp. Refer to Note 2 "Commitments and Contingencies." Financial Statements - CMP Group's consolidated financial statements include the accounts of CMP Group and its wholly owned and controlled subsidiaries, including Central Maine. Central Maine's consolidated financial statements include its accounts as well as those of its wholly owned and controlled subsidiaries. Central Maine's financial position and results of operations account for substantially all of CMP Group's consolidated financial position and results of operations. All intercompany accounts and transactions have been eliminated in the consolidated financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Beginning March 1, 2000, Central Maine became a billing agent for standard offer providers and competitive energy providers. These transactions are not recorded as revenues, but as Accounts Receivable and Accounts Payable. Supplemental Cash Flow Disclosure - Cash paid for the three months ended June 30, 2000 and 1999: (In Millions) 2000 1999 ---- ---- CMP Group Interest, net of amounts capitalized $ 8.8 $ 26.9 Income taxes 32.7 195.6 Central Maine Interest, net of amounts capitalized $ 8.5 $ 26.8 Income Taxes 24.8 193.4 Stock-Based Compensation - Under CMP Group's Long-Term Incentive Plan, stock options were granted in 1998 and 1999 with an exercise price equal to the fair market value on the date of the grants. They expire seven years from their grant date. One third of the options vest annually, commencing on the first anniversary of the options grant date. Upon vesting stock options are exercisable during periods of active employment or within thirty days after termination of employment, provided termination did not occur due to cause. Coincident with the completion of the proposed merger of CMP Group with Energy East, all stock options will be cancelled and holders of the options will be entitled to payment from CMP Group of the excess of $29.50 per share over the exercise price of the options. Performance shares are granted at the beginning of a three-year performance cycle and are paid out in the form of CMP Group common stock at the end of the cycle, based on achievement of performance goals directly linked to increasing shareholder value. If the goals are not achieved at the end of the three-year cycle, the performance shares are forfeited. Performance shares were granted in 1997, 1998 and 1999. In 2000, phantom shares were granted which will be prorated and paid out as cash equivalents by CMP Group at the merger date. All grants of performance shares have a three-year cycle and are being accrued accordingly. The amount expensed in the first half of 2000 for all performance cycles was $1.6 million. Also coincident with the completion of the proposed merger, performance shares for cycles that are not completed will vest and the grantees will be entitled to payment of $29.50 by CMP Group for each performance share that vests. The outstanding options and performance shares at June 30, 2000 are as follows: Year 2000 1999 1998 ---- ---- ---- ---- Options 0 254,304 176,016 Performance Shares* 98,036 67,150 64,518 *Accrued over three year performance cycle, actual awards range from 0 to 150 percent of the grant based on performance levels achieved. Earnings per Share - Stock options and performance shares granted to date under CMP Group's Long-Term Incentive Plan resulted in potential incremental shares of common stock outstanding for purposes of computing both basic and diluted earnings per share for the three and six months ended June 30, 2000 and 1999. The following table presents the calculations of earnings per share for CMP Group: Three Months Six Months Ended June 30, Ended June 30, --------------------- --------------------- (In thousands except per share amounts) 2000 1999 2000 1999 ---- ---- ---- ---- Net income $27,825 $4,041 $56,204 $37,298 Basic average shares outstanding 32,442,552 32,442,552 32,442,552 32,442,552 Dilutive effect of stock and options 333,725 216,524 332,782 173,487 ---------- ---------- ---------- ------------ Diluted average shares outstanding 32,776,277 32,659,076 32,775,334 32,616,039 Basic earnings per share $.86 $.12 $1.73 $1.15 Diluted earnings per share $.85 $.12 $1.71 $1.14
Reclassification - Certain amounts from prior years financial statements have been reclassified to conform to the current year presentation. Impact of New Accounting Standards - In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and Hedging Activities. The new standard applies to all entities and is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, with earlier adoption encouraged. It requires companies to record derivatives on the balance sheet at their fair value depending on the intended use of the derivative. The adoption of this standard did not have an impact on these financial statements. 2. Commitments and Contingencies ----------------------------- Proposed Merger with Energy East - CMP Group, Energy East and EE Merger Corp., a Maine corporation that is a wholly-owned subsidiary of Energy East, entered into an Agreement and Plan of Merger, dated as of June 14, 1999, providing for a merger transaction among CMP Group, Energy East and EE Merger Corp. Energy East is an energy delivery, products and services holding company doing business in New York, Massachusetts, Maine, New Hampshire and New Jersey, which delivers electricity and natural gas to retail customers and provides electricity, natural gas and energy management and other services to retail and wholesale customers in the Northeast. Pursuant to the merger agreement, EE Merger Corp. will merge with and into CMP Group with CMP Group being the surviving corporation and becoming a wholly-owned subsidiary of Energy East. We expect the merger, which was unanimously approved by the respective boards of directors of CMP Group, Energy East and EE Merger Corp., to occur shortly after all of the conditions to the consummation of the merger, including the receipt of required regulatory approvals, are satisfied. Under the terms of the merger agreement, each outstanding share of CMP Group common stock, $5.00 par value per share, other than any treasury shares or shares owned by Energy East or any subsidiary of CMP Group or Energy East, will be converted into the right to receive $29.50 in cash. Pursuant to the merger agreement, approximately $957 million in cash will be paid to holders of shares of CMP Group common stock, with additional payments being made to holders of stock options and performance shares awarded under CMP Group's performance incentive plans. The merger is subject to certain customary closing conditions, including without limitation the receipt of all necessary governmental approvals and the making of all necessary governmental filings. CMP Group's shareholders approved the merger at a special meeting on October 7, 1999. The MPUC, the U.S. Department of Justice, the Federal Trade Commission, Federal Communications Commission, the NRC, the Connecticut DPUC and the FERC have approved the merger. The final regulatory approval is pending from the SEC. If the SEC approval is granted, we estimate that the merger could be completed during the third quarter of 2000. Permanent Shutdown of Maine Yankee Plant - On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at its nuclear generating plant at Wiscasset, Maine (the "Plant") and to begin decommissioning the Plant. The Plant had 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 NRC was scheduled to expire in 2008. FERC Rate Case - On November 6, 1997, Maine Yankee submitted to FERC for filing certain amendments to the Power Contracts (the "Amendatory Agreements") and revised rates to reflect the decision to shut down the Plant and to request approval of an increase in the decommissioning component of its formula rates. Maine Yankee's submittal also requested certain other rate changes, including recovery of unamortized investment (including fuel) and certain changes to its billing formula, consistent with the non-operating status of the Plant. By Order dated January 14, 1998, the FERC accepted Maine Yankee's new rates for filing, subject to refund after a minimum suspension period, and set for hearing Maine Yankee's Amendatory Agreements, rates, and issues concerning the prudence of the Plant-shutdown decision that had been raised by intervenors. During 1998 and early 1999 the active intervenors, including among others the MPUC Staff, the Maine Office of the Public Advocate ("OPA"), Central Maine and other owners, municipal and cooperative purchasers of Maine Yankee power (the "Secondary Purchasers"), and a Maine environmental group (together, the "Settling Parties"), engaged in extensive discovery and negotiations, which resulted in the filing of a settlement agreement with the FERC on January 19, 1999. A separately negotiated settlement filed with the FERC on February 5, 1999, resolved the issues raised by the Secondary Purchasers by limiting the amounts they will pay for decommissioning the Plant and by settling other points of contention affecting individual Secondary Purchasers. Both settlements were found to be in the public interest and approved by the FERC on June 1, 1999. The settlements constitute full settlement of all issues raised in the FERC proceeding, including decommissioning-cost issues and issues pertaining to the prudence of the management, operation, and decision to permanently cease operation of the Plant. The primary settlement provided for Maine Yankee to collect $33.1 million in the aggregate annually, effective August 1, 1999, including both decommissioning costs and costs related to Maine Yankee's planned on-site independent spent fuel storage installation ("ISFSI"). The 1997 FERC filing had called for an aggregate annual collection rate of $36.4 million for decommissioning and the ISFSI, based on a 1997 estimate. Pursuant to the approved settlement the amount collected annually was reduced to approximately $25.6 million, effective October 1, 1999, as a result of 1999 Maine legislation allowing Maine Yankee to (1) use for construction of the ISFSI funds held in trust under Maine law for spent-fuel disposal, and (2) access approximately $6.8 million held by the State of Maine for eventual payment to the State of Texas pursuant to a compact for low-level nuclear waste disposal, the future of which is in question after rejection of the selected disposal site in west Texas by a Texas regulatory agency. The settlement also provides for recovery of the unamortized investment (including fuel) in the Plant, together with a return on equity of 6.50 percent, effective January 15, 1998, on equity balances up to maximum allowed equity amounts, which resulted in a pro-rata refund of $9.3 million (including tax impacts) to the sponsors on July 15, 1999. The Settling Parties also agreed not to contest the effectiveness of the Amendatory Agreements submitted to FERC as part of the original filing, subject to certain limitations including the right to challenge any accelerated recovery of unamortized investment under the terms of the Amendatory Agreements after a required informational filing with the FERC by Maine Yankee. In addition, the settlement contains incentives for Maine Yankee to achieve further savings in its decommissioning and ISFSI-related costs and resolves issues concerning restoration and future use of the Plant site and environmental matters of concern to certain of the intervenors in the proceeding. As a separate part of the settlement, Central Maine, the other two Maine utilities which own interests in Maine Yankee, the MPUC Staff, and the OPA entered into a further agreement resolving retail rate issues and other issues specific to the Maine parties, including those that had been raised concerning the prudence of the operation and shutdown of the Plant (the "Maine Agreement"). Under the Maine Agreement Central Maine is recovering its Maine Yankee costs in accordance with its most recent rate order from the MPUC. Finally, the Maine Agreement requires Central Maine and the other two Maine utilities, 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. Central Maine's share of that amount would be $31.2 million for the period. Based on the results of the two year entitlement auction already completed, the Company will not incur any liability for this provision in 2000 and does not believe that it will incur any liability in 2001. CMP Group and Central Maine believe that the approved settlement, including the Maine Agreement, constitutes a reasonable resolution of the issues raised in the Maine Yankee FERC proceeding, which eliminated significant uncertainties concerning CMP Group's and Central Maine's future financial performance. Termination of Decommissioning Operations Contract - As previously reported, on May 4, 2000, Maine Yankee notified its decommissioning operations contractor, Stone & Webster Engineering Corp. ("Stone & Webster"), that it was terminating its decommissioning operations contract pursuant to the terms of the contract. Stone & Webster subsequently notified Maine Yankee that it was disputing Maine Yankee's grounds for terminating the contract. On May 8, 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 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 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. As previously reported, on May 10, 2000, Maine Yankee entered into an interim agreement with Stone & Webster in order to allow decommissioning work to continue and avoid the adverse consequences of an abrupt or inefficient demobilization from the Plant site. After obtaining assignments of several subcontracts from Stone & Webster and upon termination of the interim agreement on July 1, Maine Yankee at least temporarily assumed the general contractor role, utilizing a reduced number of Stone & Webster personnel under a revised interim agreement that expires September 30, 2000. The decommissioning of the Plant site is progressing, with major emphasis being directed to maintaining the schedule on critical-path projects such as 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 Judgment against Maine Yankee in the United States Bankruptcy Court for the District of Delaware. The Complaint alleges that Maine Yankee improperly terminated the decommissioning operations contract with Stone & Webster and failed to give proper notice of the termination to Federal under the contract, and that Federal therefore had no further obligations under the bonds. Maine Yankee believes that its termination of the decommissioning operations contract was proper, but cannot predict the outcome of the litigation. Maine Yankee is evaluating all available long-term alternatives for safely and efficiently completing the decommissioning of the Plant site, including the possibilities of contracting with a new decommissioning operations contractor or assuming that function itself on a long-term basis. However, we 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. Legal and Environmental Matters - CMP Group, Central Maine and certain of its affiliates are subject to regulation by federal and state authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products. Electric utility companies generally use or generate in their operations a range of potentially hazardous products and by-products that are the focus of such regulation. CMP Group and Central Maine believe that their current practices and operations are in compliance with all existing environmental laws except for such non-compliance as would not have a material adverse effect on their financial position. Central Maine reviews its overall compliance and measures the liability quarterly by assessing a range of reasonably likely costs for each identified site using currently available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level of involvement and financial condition of other potentially responsible parties. These estimates include costs for site investigations, remediation, operation and maintenance, monitoring and site closure. New and changing environmental requirements could hinder the construction and/or modification of transmission and distribution lines, substations and other facilities, and could raise operating costs significantly. As a result, Central Maine may incur significant additional environmental costs, greater than amounts reserved, in connection with the transmission of electricity and the storage, transportation and disposal of by-products and wastes. Central Maine may also encounter significantly increased costs to remedy the environmental effects of prior waste handling activities. The cumulative long-term cost impact of increasingly stringent environmental requirements cannot accurately be estimated. Central Maine has recorded a liability, based upon currently available information, for what it believes are the estimated environmental remediation costs that it expects to incur for identified waste disposal sites. In most cases, additional future environmental cleanup costs are not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes. Central Maine cannot predict the schedule or scope of remediation due to the regulatory process and involvement of non-governmental parties. At June 30, 2000, the liability recorded by Central Maine for its estimated environmental remediation costs amounted to $3.6 million, which management has determined to be the most probable amount within the range of $3.6 million to $13.4 million. Such costs may be higher if Central Maine is found to be responsible for cleanup costs at additional sites or identifiable possible outcomes change. Wyman No. 4 Arbitration - By notice of claim dated June 24, 1999, the non-operator owners of the Wyman No. 4 oil-fired generating unit in Yarmouth, Maine, which was approximately 60-percent owned by Central Maine, served notice on Central Maine that they believe they are entitled to a portion of the proceeds of the sale of Central Maine's interest in the unit as part of the April 1999 sale of its non-nuclear generation assets to FPL Energy. The claimants contend that certain sections of the joint ownership agreement under which they share in the output of the unit require a pro-rata distribution to them of part of those proceeds as a result of Central Maine's sale of its interest in the unit. The joint ownership agreement provides for arbitration of claims arising under the agreement. Central Maine believes that although the amount of the claim is substantial (up to $62 million), the claimants have suffered no loss and are not entitled to any part of the generation-asset sale proceeds. Central Maine intends to continue to contest the claim vigorously, but cannot predict the result of the arbitration proceeding. Millstone Unit No. 3 Litigation - In August 1997 Central Maine and other minority owners of Millstone Unit No. 3 filed suit in Massachusetts Superior Court against Northeast Utilities and its trustees, and initiated an arbitration claim against two of its subsidiaries, alleging mismanagement of the unit by the defendants. The minority owners were seeking to recover their additional costs resulting from such mismanagement, including their replacement power costs. On January 28, 2000, Central Maine entered into a settlement agreement with the defendants and subsequently dismissed its lawsuit and arbitration claim. The settlement is generally similar to earlier settlements with the defendants by two joint owners which own in the aggregate approximately sixteen percent of the unit. It called for the payment of $4.8 million to Central Maine, which was reflected in 1999 net income, and other amounts contingent upon future events, and provides for Central Maine's 2.5-percent interest in the unit to be included in the auction to Dominion Resources, Inc., of the majority interests and certain of the minority interests in the Millstone units expected to be completed in 2001. Non-Utility Generators - Central Maine has entered into a number of long-term, non-cancelable contracts for the purchase of capacity and energy from non-utility generators ("NUG"). The agreements generally have terms of five to 17 years, with expiration dates ranging from 2000 to 2016. They require Central Maine to purchase the energy at specified prices per kilowatt-hour, which are often above market prices. As required by the Maine restructuring legislation, on July 30, 1999, Central Maine offered at auction its rights to the capacity and energy from its undivested generation assets and generation-related business. Upon completion of the auctions, in December 1999 Central Maine contracted to sell such rights with respect to its undivested nuclear generation assets (Vermont Yankee and Millstone Unit 3) and its NUG contract entitlements to the successful bidder for a two-year period commencing March 1, 2000. Central Maine also auctioned its Hydro-Quebec entitlement to a different buyer for the same period. All of the auction results were approved by the MPUC. The aggregate above-market costs associated with the NUG contracts is estimated to be approximately $1 billion over the lives of the contracts, based on certain market price assumptions. Those costs are being recovered in rates as stranded costs over the lives of the contracts pursuant to Central Maine's January 27, 2000, MPUC rate-case settlement. Natural Gas Distribution - New England Gas Development Corporation ("New England Gas"), which is a wholly owned subsidiary of CMP Group, held approximately a 12 percent interest at June 30, 2000, in CMP Natural Gas, L.L.C., now called Maine Natural Gas, L.L.C. ("Maine Natural Gas"). Maine Natural Gas is a joint venture of New England Gas and Energy East Enterprises, a wholly owned subsidiary of Energy East. Maine Natural Gas was formed to construct, own and operate a natural gas distribution system to serve certain areas of Maine that did not have gas service, utilizing natural gas delivered to Maine through new interstate pipeline facilities. Maine Natural Gas began construction of its first local distribution system in Windham, Maine, in early 1999 and began serving its first customer in May 1999. On July 8, 1999, Maine Natural Gas and Calpine Corporation, a California-based independent power company, announced the signing of a 20-year contract for Maine Natural Gas to provide natural gas delivery service to Calpine's 540-megawatt natural gas-fired power plant under construction in Westbrook, Maine. Maine Natural Gas expects to commence service to the plant in the summer of 2000, after construction of a two-mile lateral pipeline along an existing Central Maine transmission corridor. If the merger of CMP Group and Energy East is completed, Maine Natural Gas will become a wholly owned subsidiary of Energy East Enterprises, and New England Gas will cease to exist. During 1999 Energy East also agreed to business combinations with two established natural gas distribution companies in Connecticut and one in western Massachusetts, subject to customary closing conditions, including shareholder votes and regulatory approvals. One of the Connecticut acquisitions was completed in February 2000. The other two transactions are awaiting SEC approval. 3. Regulatory Matters and Electric-Utility Industry Restructuring -------------------------------------------------------------- Alternative Rate Plan - On September 30, 1999, Central Maine submitted to the MPUC a proposed seven-year rate plan ("ARP2000") to take effect after completion of the merger with Energy East. The formula for ARP2000 is substantially similar to that of the ARP, being based on an inflation index, with a productivity offset, qualifying facility offset, and provisions for earnings sharing and flowthrough and mandated items. However, under ARP 2000 the one-percent productivity offset of the ARP would escalate in annual increments of 0.25 percent from 1.00 percent for the 2001 price change to 1.75 percent in 2004 to 2007. The purpose of the proposed escalation is to assure that Central Maine's customers benefit from the increased savings expected from the Energy East merger. In addition, in the mandated-costs exclusion in ARP2000 only mandated costs over $50,000 would be recognized and only the excess over $3 million of accumulated mandated cost would be recoverable, not the entire $3 million non-cumulative cost recoverable under the 1995-1999 ARP. The rate of return on equity of 10.5 percent established by the MPUC for Central Maine effective March 1, 2000, would be the basis for the earnings-sharing bandwidth, and not the 11.5 percent under the ARP. ARP2000 is before the MPUC for approval. Central Maine cannot predict what features of the rate plan will be approved by the MPUC. Maine Restructuring Legislation - The Maine Legislature enacted legislation in 1997 to restructure the electric utility industry in Maine effective March 1, 2000. The principal restructuring provisions of the legislation provided for customers to have direct retail access to generation services and for deregulation of competitive electric providers, commencing March 1, 2000, with transmission-and-distribution companies such as Central Maine continuing to be regulated by the MPUC. By that date, investor-owned utilities were required to divest all generation assets and generation-related business activities, with two major exceptions: (1) non-utility generator contracts with qualifying facilities and contracts with demand-side management or conservation providers, brokers or hosts, and (2) ownership interests in nuclear power plants. As discussed below under "Sale of Generation Assets," Central Maine completed the sale of its non-nuclear generating assets on April 7, 1999. The legislation also required investor-owned utilities to sell their rights to the capacity and energy from all undivested generation assets after February 29, 2000, including nuclear generation assets and the purchased-power contracts that had not previously been divested pursuant to the legislation. On July 30, 1999, Central Maine offered its rights to the capacity and energy from its undivested generation assets and generation-related business to prospective bidders and in December 1999 contracted to sell such rights with respect to its undivested nuclear generation assets (Vermont Yankee and Millstone Unit 3) and its NUG contract entitlements for a two-year period commencing March 1, 2000. As a transmission-and-distribution utility, Central Maine is prohibited from selling electric energy to retail customers, except as may be directed by the MPUC. Any competitive electricity provider affiliated with Central Maine would be allowed to sell electricity outside Central Maine's service territory without limitation as to amount, but within Central Maine's service territory the affiliate would be limited to providing not more than 33 percent of the total kilowatt-hours sold with Central Maine's service territory, as determined by the MPUC. CMP Group currently does not intend to create such an affiliate. MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design - By order dated March 19, 1999, the MPUC completed the first phase of its proceeding contemplated by Maine's restructuring legislation to establish the recoverable amount and timing of Central Maine's stranded costs, its revenue requirements and the design of its rates effective March 1, 2000. In its Phase I order the MPUC decided the "principles" by which it would set Central Maine's transmission-and-distribution rates, but deferred actually calculating the rates until later in the proceeding because some of the necessary information was not yet available. With respect to stranded costs, the MPUC indicated that it would set the amount of recoverable stranded costs for Central Maine later in the proceeding. The restructuring statute requires the MPUC to provide transmission-and-distribution utilities a reasonable opportunity to recover such costs that is equivalent to the utility's opportunity to recover those costs prior to the commencement of retail access. The MPUC also reviewed the prescribed methodology for determining the amount of a utility's stranded costs, including among other factors the application of excess value from Central Maine's divested generation assets to offset stranded costs. In the area of revenue requirements, the Phase I order did not establish definitive amounts, but did contain the MPUC's conclusion that the appropriate cost of common equity for Central Maine as a transmission-and-distribution company was 10.50 percent, with a common-equity component of 47 percent. In dealing with rate design, the MPUC again limited itself primarily to establishing principles that would guide it in designing Central Maine's rates effective March 1, 2000. On July 1, 1999, Central Maine filed its Phase II case with the MPUC. In that filing Central Maine updated certain test-year data to reflect known and measurable changes to its revenue requirement, updated its stranded cost estimate to reflect actual data from the April 1999 closing of its generation-asset sale, and proposed its rate design based on the principles enunciated in the Phase I order. Some of the information needed to establish rates was still incomplete in that filing, however, since neither the auction of the output of Central Maine's non-divested generation resources nor the bid process for "standard-offer" service (for those customers who do not select a competitive energy supplier) had been completed. In addition, several issues raised by the Phase I MPUC order remained unresolved, including, among others, (i) whether the MPUC could require the unamortized investment tax credits and excess deferred income taxes associated with the sale of Central Maine's generation assets to be flowed through to ratepayers, and (ii) the rate treatment of the gain on the sale of Union Water's generation-related assets to FPL and employee transition costs resulting from the generation-asset sale. In an order dated December 3, 1999, in a separate but related proceeding, the MPUC approved Central Maine's plan for the sale of the output of its non-divested generation assets. In another related proceeding, by order dated October 25, 1999, the MPUC accepted a competitive energy supplier's bid to provide standard-offer service to Central Maine's residential and small commercial customers who did not select a competitive energy supplier after March 1, 2000. In the same order the MPUC rejected all of the standard-offer bids for Central Maine's medium and large commercial and industrial customers and sought a second round of bids. In the December 3 order the MPUC rejected all of the second round of standard-offer bids for Central Maine's medium and large classes and ordered that Central Maine arrange such service for those classes. On January 19, 2000, the MPUC issued its Phase II order determining Central Maine's revenue requirement as a transmission-and-distribution utility, effective March 1, 2000. In the order the MPUC disallowed approximately $8 million of the approximately $12 million revenue increase requested in Central Maine's Phase II filing, which had been based on certain known and measurable changes to its revenue requirement. A negotiated settlement approved by the MPUC on January 27, 2000, resolved the major issues remaining outstanding in the final phase of the ratemaking proceeding. The settlement confirmed that the $18.2 million of unamortized investment tax credits and excess deferred income taxes related to Central Maine's generation-asset sale would flow through to shareholders pursuant to the normalization rules of the Internal Revenue Code. In addition, Central Maine agreed not to seek judicial review of an August 2, 1999 MPUC order regarding the treatment of gains from sales of easements that required Central Maine to recognize 10 percent of the gain currently with the remaining 90 percent being amortized over 5 years, effective as of the dates of the 1998 and 1999 sale transactions. Central Maine also agreed not to seek reconsideration of other cost-of-service updates in the rate case or to challenge a $4.7 million disallowance of employee transition costs, and to withdraw its appeal of the rate treatment of the gain on Union Water's generation-related assets. The settlement also allowed Central Maine to charge off $88 million on March 1, 2000, representing its entire remaining investment in the Millstone 3 nuclear unit in Connecticut, against the regulatory Asset Sale Gain Account created in the ratemaking proceeding to recognize the above-book value realized through Central Maine's generation-asset sale. This provision reflected the resolution of Central Maine's arbitration and litigation claims against the lead owners of the jointly-owned Millstone Unit 3, in which Central Maine owns a 2.5-percent interest. As part of the settlement Central Maine also agreed to a one-time earnings cap for 1999. Earnings above the cap were deferred in 1999 and will be used to offset rate increases that would otherwise be required to mitigate stranded costs and increases in operating expenses through 2001. Amortization from this account for the first half of 2000 provided recovery of expenses in the amount of $2.5 million. The rate settlement established Central Maine's rates as a transmission-and-distribution utility effective March 1, 2000. A separate order fixed the standard-offer prices for Central Maine's medium and large commercial and industrial customers at levels intended to reflect current market pricing and to avoid under-collection of Central Maine's costs. The asset-sale gain account was drawn down on March 1, 2000, by Central Maine's writing off $161.8 million of deferred regulatory assets relating to non-utility power-contract restructurings and other assets, $65.2 million of Central Maine's interest in Millstone Unit 3 and $75.4 million in regulatory assets related to deferred taxes. The last step in the restructuring process began in March 2000 with the jurisdictional separation of Central Maine's $415 million overall revenue requirement between the federal and state jurisdictions. Transmission service pricing, accounting for approximately 11 percent of the total revenue requirement, falls under the federal jurisdiction while distribution and stranded cost recovery pricing, representing approximately 89 percent of the revenue requirement, is a state responsibility. The MPUC approved in August 2000 the distribution and stranded cost recovery portion of the overall revenue requirement that was effective March 1, 2000. The Company has filed with FERC new transmission rates to be effective September 1, 2000. The impact of the new transmission rates, if approved, will increase revenue requirements by approximately $10 million, with approximately $5 million of the proposed increase associated with the incremental costs of transmission congestion in New England. These federally mandated charges include the costs of upgrading transmission circuits to accommodate merchant power plants, and are being assessed on all New England utilities. The remainder of the rate increase reflects updated transmission costs based on 1999 activity versus the 1996 test period used previously. Sale of Generation Assets - On April 7, 1999, Central Maine completed the sale of all of its hydro, fossil and biomass power plants with a combined generating capacity of 1,185 megawatts for $846 million in cash, including approximately $18 million for assets of Union Water, to affiliates of Florida-based FPL Group. The related book value for these assets was approximately $217.3 million. In addition, as part of its agreement with FPL Group, Central Maine entered into energy buy-back agreements to assist in fulfilling its obligation to supply its customers with power until March 1, 2000. Subsequently, an agreement was reached to sell related storage facilities to FPL Group for an additional $4.6 million ($1.5 million for the assets and $3.1 million estimated for lease revenue associated with the properties that Central Maine retained), including $2.0 million for Union Water assets. The related book value of these assets was approximately $11.4 million. As required by the MPUC, Central Maine recorded a pre-tax deferred gain of $518.8 million net of selling costs and certain non-normalized income tax impacts from the sale of generation assets by establishing a regulatory liability in 1999, which eliminated most income recognition. Central Maine did record an income impact from the sale amounting to $18 million associated with the related unamortized investment credits and excess deferred tax reserves as required by the IRS regulations. Central Maine also recorded curtailment and special termination deferred charges of $4.1 million associated with pension and postretirement benefit costs of employees leaving the company as a result of the generation-asset sale. These deferred charges are being amortized over a three-year period beginning March 1, 2000, as required by the MPUC. The regulatory liability for the asset sale gain, including interest, amounted to approximately $548 million at December 31, 1999, and after consideration of the previously described writedown on March 1, 2000, is being amortized over an 8.5 year period beginning March 1, 2000. The amortization will vary from year to year. Amortization for the first half of year 2000 was $8 million. On August 7, 2000, the owners of Millstone Unit 3, including Central Maine, entered into agreements to sell the unit with the other two Millstone units, to Dominion Resources, Inc., in an auction of those units supervised by the Connecticut DPUC. Completion of the sale, which is expected in 2001 after regulatory approvals are obtained and other customary closing conditions are satisfied, will have no significant effect on Central Maine, since the sale was anticipated in the terms of the settlement of Central Maine's Millstone-related arbitration and litigation claims against Northeast Utilities and its affiliates. FERC Order on Merchant Plant Interconnection Costs - On June 28, 2000 FERC issued an order regarding the funding responsibility for transmission network upgrades to accommodate the direct interconnection with new merchant generating plants. Central Maine has required the merchant plant developers to fund all interconnection and network upgrades in advance. Based on FERC's latest ruling, certain generation projects entered into prior to October 29, 1998 would require a 50 percent sharing of interconnection and upgrade costs between the developer and the utility. Certain generation projects entered into after October 29, 1998 but before June 22, 1999 would limit the utility's funding responsibility to a maximum of $2 million based on at least $5 million in total interconnection and upgrade costs. In all other cases the developer would be responsible for 100 percent of the interconnection and upgrade costs. Based on this ruling, Central Maine will have to refund to developers in the range of $18 to $30 million over the next two years. Any amounts refunded to developers will be capitalized on Central Maine's books and recovered over time as transmission costs via the regional or local open access tariff, as appropriate. Meeting the Requirements of SFAS No. 71 --------------------------------------- Central Maine continues to meet the requirements of SFAS No. 71 for transmission and distribution. The standard provides specialized accounting for regulated enterprises, which requires recognition of "regulatory" assets and liabilities that enterprises in general could not record. Examples of regulatory assets include deferred income taxes associated with previously flowed through items, NUG buyout costs, losses on abandoned plants, deferral of postemployment benefit costs, and losses on debt refinancing. If an entity no longer meets the requirements of SFAS No. 71, then regulatory assets and liabilities must be written off. The ARP provided incentive-based rates intended to recover the cost of service plus a rate of return on Central Maine's investment together with a sharing of the costs or earnings between ratepayers and the shareholders should the earnings be less than or exceed a target rate of return. Central Maine has received recognition from the MPUC that the rates implemented as a result of the ARP continue to provide specific recovery of costs deferred in prior periods. The 1997 legislation enacted in Maine providing for industry restructuring addressed the issue of cost recovery of regulatory assets stranded as a result of industry restructuring. Specifically, the legislation requires the MPUC to provide a "reasonable opportunity" for the recovery of stranded costs through the rates of the transmission-and-distribution company, comparable to the utility's opportunity to recover stranded costs before the implementation of retail access under the legislation. As provided for in EITF 97-4, "Deregulation of the Pricing of Electricity," Central Maine will continue to record regulatory assets in a manner consistent with SFAS No. 71 as long as future recovery is probable, since the MPUC stranded costs, revenue requirements and rate design orders provide for the recovery of regulatory assets including stranded costs through the rates of the transmission-and-distribution company. Central Maine discontinued SFAS No. 71 for any remaining generation segment of its business in 1999, based on current generally accepted accounting principles. Management believes that SFAS No. 71 will continue to apply to the regulated distribution and transmission segments of its business. Future regulatory rules or other circumstances could cause the application of SFAS No. 71 to be discontinued, which could result in a non-cash write-off of previously established regulatory assets. 4. Income Taxes ------------ The effective tax rates of 61 percent for CMP Group and 74 percent for Central Maine are significantly higher than the statutory rate of 40.8 percent through June 2000. This difference is due primarily to the write-off of $161.8 million in regulatory assets and the investment in Millstone Unit 3 of $65.2 million as ordered in the MPUC rate case settlement. Past regulatory treatment of the tax timing differences related to these assets created a non-provided deferred tax that was reflected on the balance sheet. This write-off created a deferred tax expense of $75.4 million. The MPUC allows an offsetting amount to be included in other income through the amortization of the asset sale gain account. Although the effect to net income was zero, the effective tax rate was increased. Concurrently, the effective tax rate was decreased by the gross-up of carrying costs on the deferred costs associated with the asset sale gain account, the 1998 ice storm, and hazardous waste clean-up costs. Previously, these carrying costs were recorded at an after-tax rate. Deferred tax expense was decreased by a net amount of $9.5 million, which was offset in other interest expense. Deferred taxes will be provided on all the tax timing differences created by the carrying costs in the future. Additionally, Central Maine flowed through $4 million of unamortized investment tax credits and excess tax reserves associated with the sale of Cape Station and the write-off of Millstone Unit 3. This is consistent with a Private Letter Ruling obtained from the IRS by Central Maine at the request of the MPUC and affirmed by the MPUC in its approval of the negotiated rate case settlement on January 27, 2000. In the second quarter of 2000, MaineCom recorded an after-tax gain of $33 million on the sale of 1.725 million shares of a portion of it's investment in NEON stock. Taxes related to the sale amounted to $17.5 million, which were recorded as income tax expense. MaineCom also reversed a valuation allowance related to NEON of $6.5 million. The $6.5 million lowered the effective tax rate for CMP Group in the second quarter of 2000. 5. Transactions with Affiliated Companies -------------------------------------- Central Maine provides certain services to CMP Group and its subsidiaries, including administrative support services and pension and employee benefit arrangements. Charges related to those services have been determined based on a combination of direct charges and allocations designed to recover Central Maine's cost. These assessments are reflected as an offset to Central Maine's expenses and totaled approximately $4.4 million for the six months ended June 30, 2000. CMP Group provides certain managerial services to its subsidiaries. Charges related to those services have been determined based on a combination of direct charges and allocations in order to recover the majority of their expenses. These assessments are reflected as an offset to CMP Group's expenses and totaled approximately $5.1 million for the six months ended June 30, 2000. In addition, a subsidiary of CMP Group provides certain real estate services charged to Central Maine at cost and utility locator and construction services based on a contracted rate. These expenses amounted to $1.6 million for the six months ended June 30, 2000. As of June 30, 2000, Central Maine's accounts receivable and accounts payable included the following: (Dollars in thousands) Accounts Accounts Receivable Payable ---------- -------- CMP Group $2,984 $1,347 CNEX 24 14 MaineCom 33 - Union Water 322 352 New England Gas 1 - ----- ----- $3,364 $1,713 ===== ===== Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations of CMP Group and Central Maine Power Company This is a combined Quarterly Report on Form 10-Q of CMP Group and Central Maine. Therefore, our Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) applies to both CMP Group and Central Maine. CMP Group's consolidated financial statements include the accounts of CMP Group and its wholly owned and controlled subsidiaries, including Central Maine (collectively, the CMP Group System). Central Maine's consolidated financial statements include its accounts as well as those of its wholly owned and controlled subsidiaries. The MD&A should be read in conjunction with the consolidated financial statements included herein. Note re Forward-Looking Statements ---------------------------------- This Report on Form 10-Q contains forecast information items that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. CMP Group and Central Maine undertake no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are urged to carefully review and consider the factors in the succeeding paragraph. Factors that could cause actual results to differ materially include, among other matters, the results of the pending merger with Energy East, electric utility industry restructuring, including the ongoing state and federal activities that will determine Central Maine's ability to recover its stranded costs and the cost of upgrades of transmission facilities to accommodate new merchant generating plants; future economic conditions, earnings-retention and dividend-payout policies; developments in the legislative, regulatory, and competitive environments in which CMP Group and Central Maine operate; investments in unregulated businesses; and other circumstances that could affect anticipated revenues and costs, such as unscheduled maintenance and repairs of transmission and distribution facilities, unanticipated environmental cleanups and compliance with new or re-interpreted laws and regulations affecting the operation of the business. Formation of Holding Company and Proposed Merger ------------------------------------------------ CMP Group is a holding company organized effective September 1, 1998, which owns all of the common stock of Central Maine and the former non-utility subsidiaries of Central Maine. As part of the reorganization, all of the shares of Central Maine's common stock were converted into an equal number of shares of CMP Group common stock, which are listed on the New York Stock Exchange under the symbol CTP. The reorganization was approved by Central Maine's shareholders on May 21, 1998, and on various dates in 1998 by the appropriate state and federal regulatory agencies. On June 14, 1999, CMP Group, Energy East and EE Merger Corp., a Maine corporation that is a wholly-owned subsidiary of Energy East, entered into an Agreement and Plan of Merger providing for a merger transaction among CMP Group, Energy East and EE Merger Corp. Energy East is an energy delivery, products and services holding company doing business in New York, Massachusetts, Maine, New Hampshire and New Jersey, which delivers electricity and natural gas to retail customers and provides electricity, natural gas and energy management and other services to retail and wholesale customers in the Northeast. Pursuant to the merger agreement, EE Merger Corp. will merge with and into CMP Group with CMP Group being the surviving corporation and becoming a wholly-owned subsidiary of Energy East. We expect the merger, which was unanimously approved by the respective boards of directors of CMP Group, Energy East and EE Merger Corp., to occur shortly after all of the conditions to the consummation of the merger, including the receipt of required regulatory approvals, are satisfied. Under the terms of the merger agreement, each outstanding share of CMP Group common stock, $5.00 par value per share, other than any treasury shares or shares owned by Energy East or any subsidiary of CMP Group or Energy East, will be converted into the right to receive $29.50 in cash. Pursuant to the merger agreement, approximately $957 million in cash will be paid to holders of shares of CMP Group Common Stock, with additional payments being made to holders of stock options and performance shares awarded under CMP Group's performance incentive plans. The merger is subject to certain customary closing conditions, including without limitation the receipt of all necessary governmental approvals and the making of all necessary governmental filings. CMP Group's shareholders approved the merger at a special meeting on October 7, 1999. The MPUC, the U.S. Department of Justice, the Federal Trade Commission, Federal Communications Commission, the NRC, the Connecticut DPUC and the FERC have approved the merger. The final regulatory approval is pending from the SEC. If the SEC approval is granted, we estimate that the merger could be completed during the third quarter of 2000. Operating Results ----------------- CMP Group Central Maine ----- ------------- (dollars in millions) Net income Six months ended: June 30, 1999 $37.3 $1.15/share $40.9 June 30, 2000 56.2 $1.73/share 28.2 ---- ---- Increase (Decrease) $18.9 $(12.7) Earnings applicable to common stock Six months ended: June 30, 1999 N/A $39.1 $1.25/share June 30, 2000 N/A $27.1 $.87/share Effective March 1, 2000, Central Maine no longer sells electric energy to its residential and small business customers. Central Maine is the default energy provider for medium and large customers who choose not to select a competitive energy provider and this service is provided at cost. Central Maine provides transmission and distribution services for electricity for all its customers, the rates for which are tariffed. As a result of this change, when comparing post-March 1, 2000 results, to the same period in 1999, revenues and related energy costs are lower as is operating and net income. The primary reason that operating income for the period ended June 2000 is $32.8 million lower than the same period in 1999 is due to the state mandated divestiture of the generation related business. Partially offsetting this operating income decrease, which post tax equates to approximately $19.4 million, is a one-time tax benefit of $4 million associated with the unamortized investment tax credits related to the Millstone investment. Also, interest costs are lower during the first six months of 2000 when compared to the same period in 1999 by $2.4 million post tax due to lower average debt. CMP Group net income for the six months ended June 30, 2000 includes a gain of approximately $33 million from the sale of 1,725,000 shares of NEON common stock, a telecommunication company of which MaineCom, a 100 percent-owned subsidiary of CMP Group, owned approximately 38 percent through a separate subsidiary. As a result of the sale, MaineCom ownership dropped to approximately 27 percent of NEON. CMP Group net income increased by $6.5 million associated with the reversal of a valuation allowance associated with NEON. The six months ended June 30, 1999 includes approximately $7.2 million in net income associated with the sale of Union Water's generation-related assets to FPL and CMP's sale of easements, negatively impacting the year-over-year gain in net income. Revenues also decreased as a result of a Central Maine price reduction effective March 1, 2000, resulting in total-bill savings averaging approximately 10 percent for residential and small business customers. Service Area Kwh Sales - Central Maine's service area sales of electricity totaled approximately 2.32 billion kilowatt-hours in the second quarter of 2000, up 7.3 percent from the 2.16 billion kilowatt-hour level of a year ago, as detailed below: Service Area Kilowatt-hour Sales (Millions of KWHs) Period Ended June 30, Three Months Six Months ------------------------------------- --------------------------------------- 2000 1999 % Change 2000 1999 % Change ---- ---- -------- ---- ---- -------- Residential 679.5 621.5 9.3% 1,500.1 1,411.7 6.3% Commercial 677.9 631.4 7.4 1,367.0 1,275.5 7.2 Industrial 950.1 888.4 6.9 1,783.8 1,719.4 3.7 Other 8.7 17.6 (50.6) 17.5 65.1 (73.1) ------- ------- ------- ------- 2,316.2 2,158.9 7.3% 4,668.4 4,471.7 4.4% ======= ======= ======= =======
Kilowatt-hour sales to residential customers increased by 9.3 percent in the second quarter of 2000, and 6.3 percent when compared to the same six-month period in 1999. The increase for the quarter related primarily to June 2000 having 1.4 more meter-reading days than June 1999. In addition, residential customers increased 1.4 percent from June 1999 and usage per residential customer was up slightly during the first six months of 2000. Commercial kilowatt-hour sales increased by 7.4 percent in the second quarter and by 7.2 percent for the six months ended June 30, 2000. The increased sales in the retail trade and service sectors, which comprise the largest percentage of commercial sales, were due to a strong economy which resulted in an increase in non-manufacturing jobs of 3.7 percent since May 1999. Sales to gas pipelines and to generating facilities now owned by FPL helped to boost the utilities sector. Industrial kilowatt-hour sales increased by 6.9 percent in the second quarter and 3.7 percent for the six months ended June 30, 2000 as compared to the same periods in 1999. Paper industry kilowatt-hour sales were up 1.9 percent over 1999 levels due to greater production at several paper mills. Other sections showing strong growth were food processing, lumber and wood, printing and publishing, and electrical machinery. The pulp-and-paper sector accounts for approximately 54 percent of the industrial sales category. Wholesale kilowatt-hour sales, which is included under "Other" in the chart above, decreased by 47.6 million kwh through June 2000 compared to 1999 due to the termination of wholesale contracts when Central Maine sold its generating assets in April 1999. Operating Expenses ------------------ Central Maine's fuel used for company generation decreased by approximately $9.7 million in the first half of 2000 compared to 1999 due to the sale of Central Maine's generating assets in April 1999. Central Maine's purchased power-energy expense increased by $15.9 million in the first half of 2000, compared to 1999. The increase was due primarily to purchases from FPL and higher sales volume. Central Maine's purchased power-capacity expense increased $3.1 million in the first half compared to 1999. Capacity charges were up $10.4 million associated with the standard offer energy provider partially offset with lower operating costs at Maine Yankee by $4 million and lower charges related to contracts with major utilities of $3 million. Central Maine's maintenance expense increased $2.1 million for the six months ended June 30, 2000 compared to 1999. This increase was due primarily to the amortization of $4.2 million of ice storm costs. Lower expenses due to the asset sale partially offset the increase. Operating expenses were $3.2 million higher for the six months ended June 30, 2000 than the same period in 1999. Central Maine's results include $9 million of increased expenses related to ISO and congestion uplift charges related to transmission service. These expenses were offset by decreases related to the sale of generation assets in April 1999, and the termination of some NUG contract costs. Federal and state income taxes fluctuate with the level of pre-tax earnings and the regulatory treatment of taxes by the MPUC. This expense increased by $62 million for the six-month period ended June 30, 2000 compared to 1999 for CMP Group. The variance is primarily attributable to the $75.4 million of non-provided deferred taxes on regulatory assets written off on March 1, 2000 as part of the rate case settlement. This charge was directly offset in other income through the amortization of the generation asset sale gain account, and therefore had no effect on net income. Tax expense was decreased by the gross-up of carrying costs to a pre-tax rate. During the second quarter, the sale of NEON stock generated $11 million in tax expense, after a reversal of a valuation allowance of $6.5 million. See Note 4, "Income Taxes." Other Income and Expense ------------------------ Equity in Earnings of Associated Companies for CMP Group decreased by $1 million in the first half of 2000 compared to 1999. Amortization of gains on the sale of easements related to MEPCO increased equity earnings by $0.8 million. As part of the January 2000 rate case settlement, Central Maine deferred these gains and is amortizing them over five years. NEON, which is a 27-percent owned indirect subsidiary of MaineCom, had losses $0.4 million greater than the same period in 1999. Equity earnings for six months ended June 30, 1999 included $2.3 million related to subsidiaries that were sold as part of the generation asset sale. Interest income decreased $3.6 million year to date and $5.1 million for the quarter due to the fact that proceeds of the generation-asset sale that were invested in the first half of 1999 were utilized to pay down debt in the second half of 1999. Other income, net, increased $3.6 million year to date from 1999. The increase relates to carrying costs on deferred costs associated with the 1998 ice storm, hazardous waste clean-up, and demand-side management. Other income included $75.4 million of income associated with non-provided deferred taxes on assets written off per the rate case settlement. A corresponding charge to income tax expense resulted in no impact to net income. See Note 4, "Income Taxes," for more details. The decrease in gain on sale of investments and properties is due primarily to the sale of transmission line right-of-way access to a gas-pipeline project in 1999. Interest on long-term debt decreased by $4.2 million for the second quarter and $11.2 million year to date when compared to the same periods in 1999. This is due to the redemption of mortgage bonds in the second half of 1999. Other interest expense decreased for the second quarter by $10.9 million. The quarterly variance is due to a $5.6 million decrease in carrying costs on the asset sale gain account and deferred power supply costs on which amortization started March 1, 2000. Also, the 1999 period includes interest associated with an IRS settlement of $4.5 million. Other Interest Expense increased by $6.9 million during the first half of 2000 as compared to 1999. The increase was due to the recording of $13.8 million to gross-up carrying costs on the asset sale gain account to a pre-tax level with an offsetting decrease in deferred tax expense. The year-to-date variance also includes the interest associated with an IRS tax settlement of $4.5 million, and $1.4 million more in carrying costs on the asset sale gain account than in 2000. Interest on short-term debt was $0.9 million less than last year. For the six-month period ended June 30, 2000, Central Maine reduced preferred-stock dividends by $720 thousand as a result of the redemption of 180,000 shares of 7.99% Series Preferred Stock in 1999. Liquidity and Capital Resources ------------------------------- From 1995 through 1999 increases in Central Maine's retail rates were limited by Central Maine's ARP. On September 30, 1999, Central Maine submitted to the MPUC a proposed seven year rate plan ("ARP 2000") to take effect after the completion of the merger with Energy East. A price decrease took effect March 1, 2000, for most residential and small business customers. For a discussion of the proposed new rate plan and the price decrease, see Note 3, "Regulatory Matters and Electric-Utility Industry Restructuring" - "Alternative Rate Plan." Approximately $61.5 million and $40.5 million of cash was provided during the six months ended June 30, 2000, for CMP Group and Central Maine, respectively, from net income before non-cash items, primarily depreciation, amortization and deferred income taxes. During that period approximately $58.8 million and $36.0 million of cash was provided due to fluctuations in certain assets and liabilities and from other operating activities for CMP Group and Central Maine, respectively. In addition $9.6 million of incremental power costs was recovered through amortization that had been deferred at the time of the sale of generation assets. During the second quarter, New England Business Trust, a wholly-owned indirect subsidiary of MaineCom, sold 1.725 million shares of its 6.181-million-share common-stock holding in NEON through an underwritten public offering. CMP Group's net proceeds realized through the offering was $54.4 million, with a pretax gain of $51.1 million. CMP Group's investing activities provided approximately $38.1 million of cash for the six months ended June 30, 2000. Central Maine received $22.7 million in deposits from customers relating to pending merchant generating plant activity. On June 28, 2000 FERC issued an order regarding the funding responsibility for transmission network upgrades to accommodate the direct interconnection with new merchant plants. Central Maine has required the merchant plant developers to fund all interconnection and network upgrades in advance. Based on FERC's latest ruling, certain generation projects entered into prior to October 29, 1998 would require a 50 percent sharing of interconnection and upgrade costs between the developer and the utility. Certain generation projects entered into after October 29, 1998 but before June 22, 1999 would limit the utility's funding responsibility to a maximum of $2 million based on at least $5 million in total interconnection and upgrade costs. In all other cases the developer would be responsible for 100 percent of the interconnection and upgrade costs. Based on this ruling, Central Maine will have to refund to developers in the range of $18 to $30 million over the next two years. Any amounts refunded to developers will be capitalized on Central Maine's books and recovered over time as transmission costs via the regional or local open access tariff, as appropriate. Central Maine is also engaged in a continuing construction program to accommodate existing and future loads on its electric system. Central Maine's plans for improvements and expansions, its load forecasts and its power-supply sources are under a process of continuing review. Actual construction expenditures depend upon the availability of capital and other resources, load forecasts, customer growth, the number of merchant plants constructed in Central Maine territory, and general business conditions. The ultimate nature, timing and amount of financing for Central Maine's total construction programs, refinancing, and energy-management capital requirements will be determined in light of market conditions, earnings and other relevant factors. During the six months ended June 30, 2000, CMP Group paid dividends on common stock of $14.6 million, while preferred-stock dividends paid by Central Maine utilized $1.2 million of cash. Central Maine's Articles of Incorporation limit certain unsecured indebtedness that may be outstanding to 20 percent of capitalization, as defined, without the consent of the holders of Central Maine's preferred stock; 20 percent of defined capitalization amounted to $120 million as of June 30, 2000. Outstanding unsecured indebtedness amounted to $57 million as of June 30, 2000. Central Maine's $500 million medium-term note program, having received the consent of Central Maine's preferred stockholders in May 1997, is not included in "unsecured indebtedness" for purposes of the 20-percent limitation. Central Maine had $85 million of medium-term notes outstanding at June 30, 2000. On December 31, 1999, Central Maine entered into a $75 million three-year secured revolving-credit facility with three banks, with The Bank of New York acting as administrative agent. The facility provides for LIBOR-priced and base-rate-priced loans, which are secured by a security interest in Central Maine's accounts receivable. The arrangement also requires the payment of customary fees, based in large part on Central Maine's credit ratings. The amount of Central Maine's short-term borrowing will fluctuate with day-to-day operational needs, the timing of long-term financing, and market conditions. No loans were outstanding under the new facility at June 30, 2000. In August 1998, the MPUC approved Central Maine's application to purchase up to 11 million shares of its outstanding common stock over a three-year period, with a limitation of three million shares that may be repurchased prior to the closing of the sale of Central Maine's generating assets. The amount of any stock purchases and their timing by Central Maine or CMP Group will depend on the need for equity in the respective Company's capital structure, investment opportunities and other considerations. Upon completion of the merger of CMP Group and Energy East, Central Maine intends to conform its capital structure to the 47-percent common-equity ratio required by the MPUC. This process may include repurchases of common stock by Central Maine and CMP Group and would reduce Central Maine's liquidity and increase its financing requirements. Permanent Shutdown of Maine Yankee Plant ---------------------------------------- On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at its nuclear generating plant at Wiscasset, Maine (the "Plant") and to begin decommissioning the Plant. The Plant had 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 NRC was scheduled to expire in 2008. FERC Rate Case - On November 6, 1997, Maine Yankee submitted to FERC for filing certain amendments to the Power Contracts (the "Amendatory Agreements") and revised rates to reflect the decision to shut down the Plant and to request approval of an increase in the decommissioning component of its formula rates. Maine Yankee's submittal also requested certain other rate changes, including recovery of unamortized investment (including fuel) and certain changes to its billing formula, consistent with the non-operating status of the Plant. By Order dated January 14, 1998, the FERC accepted Maine Yankee's new rates for filing, subject to refund after a minimum suspension period, and set for hearing Maine Yankee's Amendatory Agreements, rates, and issues concerning the prudence of the Plant-shutdown decision that had been raised by intervenors. During 1998 and early 1999 the active intervenors, including among others the MPUC Staff, the Maine Office of the Public Advocate ("OPA"), Central Maine and other owners, municipal and cooperative purchasers of Maine Yankee power (the "Secondary Purchasers"), and a Maine environmental group (together, the "Settling Parties"), engaged in extensive discovery and negotiations, which resulted in the filing of a settlement agreement with the FERC on January 19, 1999. A separately negotiated settlement filed with the FERC on February 5, 1999, resolved the issues raised by the Secondary Purchasers by limiting the amounts they will pay for decommissioning the Plant and by settling other points of contention affecting individual Secondary Purchasers. Both settlements were found to be in the public interest and approved by the FERC on June 1, 1999. The settlements constitute full settlement of all issues raised in the FERC proceeding, including decommissioning-cost issues and issues pertaining to the prudence of the management, operation, and decision to permanently cease operation of the Plant. The primary settlement provided for Maine Yankee to collect $33.1 million in the aggregate annually, effective August 1, 1999, including both decommissioning costs and costs related to Maine Yankee's planned on-site independent spent fuel storage installation ("ISFSI"). The 1997 FERC filing had called for an aggregate annual collection rate of $36.4 million for decommissioning and the ISFSI, based on a 1997 estimate. Pursuant to the approved settlement the amount collected annually was reduced to approximately $25.6 million, effective October 1, 1999, as a result of 1999 Maine legislation allowing Maine Yankee to (1) use for construction of the ISFSI funds held in trust under Maine law for spent-fuel disposal, and (2) access approximately $6.8 million held by the State of Maine for eventual payment to the State of Texas pursuant to a compact for low-level nuclear waste disposal, the future of which is in question after rejection of the selected disposal site in west Texas by a Texas regulatory agency. The settlement also provides for recovery of the unamortized investment (including fuel) in the Plant, together with a return on equity of 6.50 percent, effective January 15, 1998, on equity balances up to maximum allowed equity amounts, which resulted in a pro-rata refund of $9.3 million (including tax impacts) to the sponsors on July 15, 1999. The Settling Parties also agreed not to contest the effectiveness of the Amendatory Agreements submitted to FERC as part of the original filing, subject to certain limitations including the right to challenge any accelerated recovery of unamortized investment under the terms of the Amendatory Agreements after a required informational filing with the FERC by Maine Yankee. In addition, the settlement contains incentives for Maine Yankee to achieve further savings in its decommissioning and ISFSI-related costs and resolves issues concerning restoration and future use of the Plant site and environmental matters of concern to certain of the intervenors in the proceeding. As a separate part of the settlement, Central Maine, the other two Maine utilities which own interests in Maine Yankee, the MPUC Staff, and the OPA entered into a further agreement resolving retail rate issues and other issues specific to the Maine parties, including those that had been raised concerning the prudence of the operation and shutdown of the Plant (the "Maine Agreement"). Under the Maine Agreement Central Maine is recovering its Maine Yankee costs in accordance with its most recent rate order from the MPUC. Finally, the Maine Agreement requires Central Maine and the other two Maine Utilities, 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. Central Maine's share of that amount would be $31.2 million for the period. Based on the results of the two year entitlement auction already completed, the Company will not incur any liability for this provision in year 2000 and does not believe that it will incur any liability in 2001. CMP Group and Central Maine believe that the approved settlement, including the Maine Agreement, constitutes a reasonable resolution of the issues raised in the Maine Yankee FERC proceeding, which eliminated significant uncertainties concerning CMP Group's and Central Maine's future financial performance. Termination of Decommissioning Operations Contract - As previously reported, on May 4, 2000, Maine Yankee notified its decommissioning operations contractor, Stone & Webster Engineering Corp. ("Stone & Webster"), that it was terminating its decommissioning operations contract pursuant to the terms of the contract. Stone & Webster subsequently notified Maine Yankee that it was disputing Maine Yankee's grounds for terminating the contract. On May 8, 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 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 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. As previously reported, on May 10, 2000, Maine Yankee entered into an interim agreement with Stone & Webster in order to allow decommissioning work to continue and avoid the adverse consequences of an abrupt or inefficient demobilization from the Plant site. After obtaining assignments of several subcontracts from Stone & Webster and upon termination of the interim agreement on July 1, Maine Yankee at least temporarily assumed the general contractor role, utilizing a reduced number of Stone & Webster personnel under a revised interim agreement that expires September 30, 2000. The decommissioning of the Plant site is progressing, with major emphasis being directed to maintaining the schedule on critical-path projects such as 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 Judgment against Maine Yankee in the United States Bankruptcy Court for the District of Delaware. The Complaint alleges that Maine Yankee improperly terminated the decommissioning operations contract with Stone & Webster and failed to give proper notice of the termination to Federal under the contract, and that Federal therefore had no further obligations under the bonds. Maine Yankee believes that its termination of the decommissioning operations contract was proper, but cannot predict the outcome of the litigation. Maine Yankee is evaluating all available long-term alternatives for safely and efficiently completing the decommissioning of the Plant site, including the possibilities of contracting with a new decommissioning operations contractor or assuming that function itself on a long-term basis. However, we 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. Regulation ---------- General - Central Maine and its public utility affiliates are subject to the regulatory authority of the MPUC as to retail rates, accounting, service standards, territory served, the issuance of securities maturing more than one year after the date of issuance, certification of transmission projects and various other matters. Central Maine is also subject to the jurisdiction of the FERC under the Federal Power Act for some phases of its business, including accounting, rates relating to wholesale sales and to interstate transmission and sales of energy and certain other matters. The Maine Yankee Plant and the other nuclear generating facilities in which Central Maine has an interest are subject to regulation by the NRC. The NRC is empowered to authorize the siting, construction, operation and decommissioning of nuclear reactors after consideration of public health, safety, environmental and antitrust matters. The United States EPA administers programs which affect Central Maine's remaining generating facilities. The EPA has broad authority in administering these programs, including the ability to require installation of pollution-control and mitigation devices. CMP Group and Central Maine are also subject to regulation by various state, local and other federal authorities with regard to land use and other environmental matters. For further discussion of environmental considerations as they affect CMP Group and Central Maine, see "Environmental Matters", below, and Note 2, "Legal and Environmental Matters." Other activities of CMP Group and Central Maine from time to time are subject to the jurisdiction of various other state and federal regulatory agencies, including the SEC with respect to the issuance of securities and related matters. Electric-Utility Industry Restructuring --------------------------------------- Maine Restructuring Legislation - The Maine Legislature enacted legislation in 1997 to restructure the electric utility industry in Maine effective March 1, 2000. The principal restructuring provisions of the legislation provided for customers to have direct retail access to generation services and for deregulation of competitive electric providers, commencing March 1, 2000, with transmission-and-distribution companies such as Central Maine continuing to be regulated by the MPUC. By that date, investor-owned utilities were required to divest all generation assets and generation-related business activities, with two major exceptions: (1) non-utility generator contracts with qualifying facilities and contracts with demand-side management or conservation providers, brokers or hosts, and (2) ownership interests in nuclear power plants. As discussed below under "Sale of Generation Assets," Central Maine completed the sale of its non-nuclear generating assets on April 7, 1999. The legislation also required investor-owned utilities to sell their rights to the capacity and energy from all undivested generation assets after February 29, 2000, including nuclear generation assets and the purchased-power contracts that had not previously been divested pursuant to the legislation. On July 30, 1999, Central Maine offered its rights to the capacity and energy from its undivested generation assets and generation-related business to prospective bidders and in December 1999 contracted to sell such rights with respect to its undivested nuclear generation assets (Vermont Yankee and Millstone Unit 3) and its NUG contract entitlements for a two-year period commencing March 1, 2000. As a transmission-and-distribution utility since March 1, 2000, Central Maine is prohibited from selling electric energy to retail customers, except as may be directed by the MPUC. Any competitive electricity provider affiliated with Central Maine would be allowed to sell electricity outside Central Maine's service territory without limitation as to amount, but within Central Maine's service territory the affiliate would be limited to providing not more than 33 percent of the total kilowatt-hours sold with Central Maine's service territory, as determined by the MPUC. CMP Group currently does not intend to create such an affiliate. MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design - By order dated March 19, 1999, the MPUC completed the first phase of its proceeding contemplated by Maine's restructuring legislation to establish the recoverable amount and timing of Central Maine's stranded costs, its revenue requirements and the design of its rates effective March 1, 2000. In its Phase I order the MPUC decided the "principles" by which it would set Central Maine's transmission-and-distribution rates, but deferred actually calculating the rates until later in the proceeding because some of the necessary information was not yet available. With respect to stranded costs, the MPUC indicated that it would set the amount of recoverable stranded costs for Central Maine later in the proceeding. The restructuring statute requires the MPUC to provide transmission-and-distribution utilities a reasonable opportunity to recover such costs that is equivalent to the utility's opportunity to recover those costs prior to the commencement of retail access. The MPUC also reviewed the prescribed methodology for determining the amount of a utility's stranded costs, including among other factors the application of excess value from Central Maine's divested generation assets to offset stranded costs. In the area of revenue requirements, the Phase I order did not establish definitive amounts, but did contain the MPUC's conclusion that the appropriate cost of common equity for Central Maine as a transmission-and-distribution company was 10.50 percent, with a common-equity component of 47 percent. In dealing with rate design, the MPUC again limited itself primarily to establishing principles that would guide it in designing Central Maine's rates effective March 1, 2000. On July 1, 1999, Central Maine filed its Phase II case with the MPUC. In that filing Central Maine updated certain test-year data to reflect known and measurable changes to its revenue requirement, updated its stranded cost estimate to reflect actual data from the April 1999 closing of its generation-asset sale, and proposed its rate design based on the principles enunciated in the Phase I order. Some of the information needed to establish rates was still incomplete in that filing, however, since neither the auction of the output of Central Maine's non-divested generation resources nor the bid process for "standard-offer" service (for those customers who do not select a competitive energy supplier) had been completed. In addition, several issues raised by the Phase I MPUC order remained unresolved, including, among others, (i) whether the MPUC could require the unamortized investment tax credits and excess deferred income taxes associated with the sale of Central Maine's generation assets to be flowed through to ratepayers, and (ii) the rate treatment of the gain on the sale of Union Water's generation-related assets to FPL and employee transition costs resulting from the generation-asset sale. In an order dated December 3, 1999, in a separate but related proceeding, the MPUC approved Central Maine's plan for the sale of the output of its non-divested generation assets. In another related proceeding, by order dated October 25, 1999, the MPUC accepted a competitive energy supplier's bid to provide standard-offer service to Central Maine's residential and small commercial customers who did not select a competitive energy supplier after March 1, 2000. In the same order the MPUC rejected all of the standard-offer bids for Central Maine's medium and large commercial and industrial customers and sought a second round of bids. In the December 3 order the MPUC rejected all of the second round of standard-offer bids for Central Maine's medium and large classes and ordered that Central Maine arrange such service for those classes. On January 19, 2000, the MPUC issued its Phase II order determining Central Maine's revenue requirement as a transmission-and-distribution utility, effective March 1, 2000. In the order the MPUC disallowed approximately $8 million of the approximately $12 million revenue increase requested in Central Maine's Phase II filing, which had been based on certain known and measurable changes to its revenue requirement. A negotiated settlement approved by the MPUC on January 27, 2000, resolved the major issues remaining outstanding in the final phase of the ratemaking proceeding. The settlement confirmed that the $18.2 million of unamortized investment tax credits and excess deferred income taxes related to Central Maine's generation-asset sale would flow through to shareholders pursuant to the normalization rules of the Internal Revenue Code. In addition, Central Maine agreed not to seek judicial review of an August 2, 1999 MPUC order regarding the treatment of gains from sales of easements that required Central Maine to recognize 10 percent of the gain currently with the remaining 90 percent being amortized over 5 years, effective as of the dates of the 1998 and 1999 sale transactions. Central Maine also agreed not to seek reconsideration of other cost-of-service updates in the rate case or to challenge an $4.7 million disallowance of employee transition costs, and to withdraw its appeal of the rate treatment of the gain on Union Water's generation-related assets. The settlement also allowed Central Maine to charge off $88 million on March 1, 2000, representing its entire remaining investment in the Millstone 3 nuclear unit in Connecticut, against the regulatory Asset Sale Gain Account created in the ratemaking proceeding to recognize the above-book value realized through Central Maine's generation-asset sale. This provision reflected the resolution of Central Maine's arbitration and litigation claims against the lead owners of the jointly-owned Millstone Unit 3, in which Central Maine owns a 2.5-percent interest. As part of the settlement Central Maine also agreed to a one-time earnings cap for 1999. Earnings above the cap were deferred in 1999 and will be used to offset rate increases that would otherwise be required to mitigate stranded costs and increases in operating expenses through 2001. The rate settlement established Central Maine's rates as a transmission-and-distribution utility effective March 1, 2000. A separate order fixed the standard-offer prices for Central Maine's medium and large commercial and industrial customers at levels intended to reflect current market pricing and to avoid under-collection of Central Maine's costs. The combined after-tax effect of the provisions of the ratemaking settlement, including the earnings cap, was to reduce CMP Group's net income for 1999 by $11 million. Central Maine estimates that customers on its standard residential rate and small commercial customers are saving an average of nine to ten percent on their total electric bills after March 1, 2000, compared to earlier bills for the same kwh usage. Central Maine believes that its medium and large commercial and industrial customers can realize savings ranging from minimal to almost fifteen percent, with the greater savings going to customers who select a competitive energy supplier rather than taking the standard-offer service. The last step in the restructuring process began in March 2000 with the jurisdictional separation of the $415 million overall revenue requirement between the federal and state jurisdictions. Transmission service pricing, accounting for approximately 11 percent of the total revenue requirement, falls under the federal jurisdiction while distribution and stranded cost recovery pricing, representing approximately 89 percent of the revenue requirement, is a state responsibility. The MPUC approved in August 2000 the distribution and stranded cost recovery portion of the overall revenue requirement that was effective March 1, 2000. The Company has filed with FERC new transmission rates to be effective September 1, 2000. The impact of the new transmission rates, if approved, will increase revenue requirements by approximately $10 million with approximately $5 million of the proposed increase associated with the incremental costs of transmission congestion in New England. These federally mandated charges include the costs of upgrading transmission circuits to accommodate merchant power plants, and are being assessed on all New England utilities. The remainder of the rate increase reflects updated transmission costs based on 1999 activity versus the 1996 test period used previously. Other Lines of Business ----------------------- General - CMP Group has been pursuing its business opportunities through investments that capitalize on core competencies. The Union Water-Power Company, a wholly owned subsidiary of CMP Group, provides utility construction and support services (On Target division); energy efficiency performance contracting and energy use and management services (Combined Energies division); and real estate development services (UnionLand Services division). Two other subsidiary operations, TeleSmart and CMP International Consultants (d/b/a CNEX) have been closed by CMP Group in 2000. Natural Gas Distribution - New England Gas Development Corporation ("New England Gas"), which is a wholly owned subsidiary of CMP Group, holds approximately a 12 percent interest at June 30, 2000 in CMP Natural Gas, L.L.C., now called Maine Natural Gas, L.L.C. ("Maine Natural Gas"). Maine Natural Gas is a joint venture of New England Gas and Energy East Enterprises, a wholly owned subsidiary of Energy East, and is subject to regulation as a public utility by the MPUC. Maine Natural Gas was formed to construct, own and operate a natural gas distribution system to serve certain areas of Maine that did not have gas service, utilizing natural gas delivered to Maine through new interstate pipeline facilities. Maine Natural Gas began construction of its first local distribution system in Windham, Maine, in early 1999 and began serving its first customer in May. On July 8, 1999, Maine Natural Gas and Calpine Corporation, a California-based independent power company, announced the signing of a 20-year contract for Maine Natural Gas to provide natural gas delivery service to Calpine's 540-megawatt natural gas-fired power plant under construction in Westbrook, Maine. Maine Natural Gas expects to commence service to the plant in the summer of 2000, after construction of a two-mile lateral pipeline along an existing Central Maine transmission corridor. If the merger of CMP Group and Energy East is completed, Maine Natural Gas will become a wholly owned subsidiary of Energy East Enterprises, and New England Gas will cease to exist. During 1999 Energy East also agreed to business combinations with two established natural gas distribution companies in Connecticut and one in western Massachusetts, subject to customary closing conditions, including shareholder votes and regulatory approvals. One of the Connecticut acquisitions was completed in February 2000. The other two transactions are awaiting SEC approval. Telecommunications Investment - MaineCom Services, which is wholly owned by CMP Group, provides telecommunications services, including point-to-point connections, private networking, consulting, private voice and data transport, carrier services, and long-haul transport. MaineCom Services also holds, through wholly owned New England Business Trust, an approximately 27-percent interest in NorthEast Optic Network, Inc. ("NEON"), a facilities-based provider of technologically advanced, high-bandwidth, fiber optic transmission capacity for communications carriers on local loop, inter-city, and interstate facilities. NEON owns and operates and is expanding a fiber optic network in New England and New York, utilizing primarily electric utility rights of way, including some of Central Maine's and some owned by other electric utilities including Northeast Utilities, another substantial minority stockholder. CMP Group reduced its indirect interest in NEON through its secondary sale of 1.5 million shares of common stock in NEON on May 30, 2000 and 225,000 shares on June 4, 2000. CMP Group realized an after-tax gain of $33 million from the sales. On November 23, 1999, NEON announced two major agreements, one with Consolidated Edison Communications, Inc. ("CEC"), a wholly owned subsidiary of Consolidated Edison, Inc., and the other with Excelon, a wholly owned subsidiary of PECO Energy, Inc. The agreements effectively expanded the reach of the network to include the Philadelphia, Baltimore and Washington, D.C., areas. As the agreements are implemented, CEC will obtain an approximately ten-percent interest in NEON and Excelon an interest of approximately nine percent. On July 26, 2000, Progress Telecom, a subsidiary of Florida Progress Corporation, announced the creation of a strategic relationship with NEON that will extend the reach of the network to South Florida. CMP Group believes that although NEON operated at a loss since its inception, there is a need for the fiber optic network it is constructing and extending in the eastern United States. CMP Group, however, cannot predict the future results of NEON's operations. Environmental Matters --------------------- Federal, state and local environmental laws and regulations cover air and water quality, land use, power plant and transmission line siting, noise and aesthetics, solid and hazardous waste and other environmental matters. Compliance with these laws and regulations impacts the manner and cost of electric service by requiring, among other things, changes in the design and operation of existing facilities and changes or delays in the location, design, construction and operation of new facilities. In the past, these environmental regulations most significantly affected Central Maine's electric power generating facilities, which were sold to FPL Group in April 1999, as discussed above. In addition, Central Maine is subject to environmental proceedings under federal and state hazardous substance and hazardous waste regulations (such as the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and the Resource Conservation and Recovery Act ("RCRA") and similar state statutes). Central Maine estimates that its capital expenditures for improvements needed to comply with environmental laws and regulations were approximately $9.9 million for the five years from 1995 through 1999. Item 3: Quantitative and Qualitative Disclosures About Market Risk CMP Group is exposed to interest rate risk through the use of fixed-rate and variable-rate debt and preferred stock as sources of capital. As of June 30, 2000, Central Maine had $85 million of medium-term notes outstanding, $10 million of which bear floating, LIBOR-based rates. Variable Long Term Fixed Long Term ------------------ --------------- (dollars in thousands) Weighted Average Rates 9.29% 7.19% Balance at June 30, 2000 $34,158 $210,245 Maturity Period 2001 - 2019 2002 - 2021 PART II - OTHER INFORMATION Item 1. Legal Proceedings Regulatory Matters - For a discussion of certain significant regulatory matters affecting CMP Group and Central Maine, including those related to the proposed merger with Energy East, and an MPUC proceeding that determined Central Maine's stranded costs, revenue requirements and related matters, see Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations of CMP Group and Central Maine Power Company," "Formation of Holding Company and Proposed Merger," and "MPUC Proceeding on Stranded Costs, Revenue Requirements and Rate Design," which are incorporated herein by reference. Maine Yankee - For a discussion of the termination by Maine Yankee of its decommissioning operations contract with Stone & Webster and related matters, see Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operations of CMP Group and Central Maine Power Company," - "Permanent Shutdown of Maine Yankee Plant," - "Termination of Decommissioning Operations Contract," which are incorporated herein by reference. Arbitration Claim - For a discussion of an arbitration claim by the minority owners of the Wyman Unit No. 4 generating unit against Central Maine seeking a share of the proceeds from Central Maine's generating-asset sale, see Note 2, "Commitments and Contingencies" - "Wyman No. 4 Arbitration," which is incorporated herein by reference. Environmental Matters - For a discussion of administrative and judicial proceedings concerning cleanup of hazardous waste sites, see Note 2, "Commitments and Contingencies," "Legal and Environmental Matters," which is incorporated herein by reference. Item 2. through Item 4. Not applicable Item 5. Other Information. Change in Annual Meeting Date and Deadline for Shareholder Proposals - On February 17, 2000, CMP Group announced a change in its annual shareholders meeting date from May 18, 2000, to October 31, 2000. For a shareholder proposal to be considered for inclusion in the proxy statement and form of proxy for the 2000 annual meeting of shareholders of CMP Group, it must have been received by Anne M. Pare, Secretary, CMP Group, Inc., 83 Edison Drive, Augusta, Maine 04336, on or before May 22, 2000. Under the articles of incorporation of CMP Group, a shareholder who wishes to nominate a candidate for election to the board of directors of CMP Group at the 2000 annual meeting of shareholders of CMP Group or bring any matter before that meeting (other than matters included in CMP Group's proxy materials) must submit the nomination or the matter to the Secretary of CMP Group no earlier than August 2, 2000 and no later than September 1, 2000. The notice must also meet other requirements set forth in the articles of incorporation. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. None. (b) Reports on Form 8-K. None. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their respective behalfs by the undersigned thereunto duly authorized. CMP GROUP, INC. Date: August 11, 2000 By /s/ Arthur W. Adelberg --------------- --------------------------------------------- Arthur W. Adelberg, Executive Vice President and Chief Financial Officer (Principal Financial Officer and duly authorized officer) CENTRAL MAINE POWER COMPANY Date: August 11, 2000 By /s/ Michael W. Caron --------------- --------------------------------------------- Michael W. Caron, Comptroller (Chief Accounting Officer and duly authorized officer)