-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Szoq6r0mILXJjcDPqXsqle256fpIk0idiMAUiAT5df3KRLBv8GGl0LIwvdOgt7UE EgO4eLI3GEJCb4nLHByYDA== 0000018675-97-000013.txt : 19970520 0000018675-97-000013.hdr.sgml : 19970520 ACCESSION NUMBER: 0000018675-97-000013 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CENTRAL MAINE POWER CO CENTRAL INDEX KEY: 0000018675 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 010042740 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05139 FILM NUMBER: 97607854 BUSINESS ADDRESS: STREET 1: 83 EDISON DR CITY: AUGUSTA STATE: ME ZIP: 04336 BUSINESS PHONE: 2076233521 10-Q 1 MARCH 1997 10Q 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 March 31, 1997 -------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------- ------- Commission file number 1-5139 CENTRAL MAINE POWER COMPANY (Exact name of registrant as specified in its charter) Incorporated in Maine 01-0042740 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 83 Edison Drive, Augusta, Maine 04336 (Address of principal executive offices) (Zip Code) 207-623-3521 (Registrant's telephone number including area code) (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Shares Outstanding Class as of May 12, 1997 Common Stock, $5 Par Value 32,442,752 Central Maine Power Company INDEX Page No. Part I. Financial Information Consolidated Statement of Earnings for the Three Months Ended March 31, 1997 and 1996 1 Consolidated Balance Sheet - March 31, 1997 and December 31, 1996: Assets 2 Stockholders' Investment and Liabilities 3 Consolidated Statement of Cash Flows for the Three Months Ended March 31, 1997 and 1996 4 Notes to Consolidated Financial Statements 5 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Part II. Other Information 19 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Central Maine Power Company CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) (Dollars in Thousands Except Per Share Amounts) For the Three Months Ended March 31, 1997 1996 ELECTRIC OPERATING REVENUES $268,367 $274,139 ------- ------- OPERATING EXPENSES Fuel Used for Company Generation 5,605 5,596 Purchased Power Energy 123,937 117,727 Capacity 33,140 24,469 Other Operation 43,749 42,902 Maintenance 6,317 7,296 Depreciation and Amortization 13,474 13,468 Federal and State Income Taxes 9,554 17,962 Taxes Other Than Income Taxes 6,978 6,990 ------- ------- Total Operating Expenses 242,754 236,410 ------- ------- EQUITY IN EARNINGS OF ASSOCIATED COMPANIES 1,900 1,872 ------- ------- OPERATING INCOME 27,513 39,601 ------- ------- OTHER INCOME (EXPENSE) Allowance for Equity Funds Used During Construction 246 186 Other, Net 620 1,551 Income Taxes Applicable to Other Income (Expense) (248) (600) ------- ------- Total Other Income (Expense) 618 1,137 ------- ------- INCOME BEFORE INTEREST CHARGES 28,131 40,738 ------- ------- INTEREST CHARGES Long-Term Debt 11,214 12,033 Other Interest 1,068 996 Allowance for Borrowed Funds Used During Construction (178) (148) ------- ------- Total Interest Charges 12,104 12,881 ------- ------- NET INCOME 16,027 27,857 DIVIDENDS ON PREFERRED STOCK 2,208 2,518 ------- ------- EARNINGS APPLICABLE TO COMMON STOCK $ 13,819 $ 25,339 ======= ======= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 32,442,752 32,442,752 EARNINGS PER SHARE OF COMMON STOCK $0.43 $0.78 DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $0.225 $0.225 The accompanying notes are an integral part of these financial statements. Central Maine Power Company CONSOLIDATED BALANCE SHEET (Dollars in Thousands) March 31, Dec. 31, 1997 1996 (Unaudited) ASSETS ELECTRIC PROPERTY, at Original Cost $1,647,880 $1,644,434 Less: Accumulated Depreciation 607,515 598,415 --------- ------- Electric Property in Service 1,040,365 1,046,019 Construction Work in Progress 20,330 20,007 Net Nuclear Fuel 1,157 1,157 --------- --------- Net Electric Property and Nuclear Fuel 1,061,852 1,067,183 --------- --------- INVESTMENTS IN ASSOCIATED COMPANIES, at Equity 74,366 67,809 --------- --------- Net Electric Property, Nuclear Fuel and Investments in Associated Companies 1,136,218 1,134,992 --------- --------- CURRENT ASSETS Cash and Temporary Cash Investments 33,162 8,307 Accounts Receivable, Less Allowance for Uncollectible Accounts of $2,481 in 1997 and $3,254 in 1996 Service - Billed 93,864 84,396 - Unbilled 37,594 45,721 Other Accounts Receivable 10,409 17,517 Prepaid Income Taxes 264 Inventories, at Average Cost Fuel Oil 6,395 9,256 Materials and Supplies 12,181 12,172 Funds on Deposit With Trustee 59,825 59,512 Prepayments and Other Current Assets 7,829 9,500 --------- --------- Total Current Assets 261,259 246,645 --------- --------- DEFERRED CHARGES AND OTHER ASSETS Recoverable Costs of Seabrook 1 and Abandoned Projects, Net 88,179 89,551 Regulatory Assets-Deferred Taxes 240,583 239,291 Yankee Atomic Purchase Power Contract 15,275 16,463 Connecticut Yankee Purchase Power Contract 43,186 45,769 Other Deferred Charges and Other Assets 223,914 238,203 --------- --------- Deferred Charges and Other Assets, Net 611,137 629,277 --------- --------- TOTAL ASSETS $2,008,614 $2,010,914 ========= ========= The accompanying notes are an integral part of these financial statements. Central Maine Power Company CONSOLIDATED BALANCE SHEET (Dollars in Thousands) March 31, Dec. 31, 1997 1996 (Unaudited) STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common Stock Investment $ 518,097 $ 511,578 Preferred Stock 65,571 65,571 Redeemable Preferred Stock 53,528 53,528 Long-Term Obligations 587,550 587,987 --------- --------- Total Capitalization 1,224,746 1,218,664 --------- --------- CURRENT LIABILITIES AND INTERIM FINANCING Interim Financing 25,000 32,500 Sinking-Fund Requirements 9,377 9,375 Accounts Payable 95,260 93,197 Dividends Payable 9,512 9,512 Accrued Interest 9,462 11,610 Accrued Income Taxes 9,261 Miscellaneous Current Liabilities 16,816 21,342 --------- ---------- Total Current Liabilities and Interim Financing 174,688 177,536 --------- ---------- COMMITMENTS AND CONTINGENCIES RESERVES AND DEFERRED CREDITS Accumulated Deferred Income Taxes 359,435 357,994 Unamortized Investment Tax Credits 31,621 31,988 Regulatory Liabilities-Deferred Taxes 52,623 52,616 Yankee Atomic Purchased Power Contract 15,275 16,463 Connecticut Yankee Purchased Power Contract 43,186 45,769 Other Reserves and Deferred Credits 107,040 109,884 --------- ---------- Total Reserves and Deferred Credits 609,180 614,714 --------- ---------- TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $2,008,614 $2,010,914 The accompanying notes are an integral part of these financial statements. Central Maine Power Company CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (Dollars in Thousands) (Note 1) For the Three Months Ended March 31, 1997 1996 CASH FROM OPERATIONS Net Income $16,027 $27,857 Items Not Requiring (Not Providing) Cash: Depreciation 11,000 11,020 Amortization 8,490 8,561 Deferred Income Taxes and Investment Tax Credits, Net (1,280) (1,728) Allowance for Equity Funds Used During Construction (246) (186) Changes in Certain Assets and Liabilities: Accounts Receivable 5,767 3,075 Other Current Assets 1,671 1,854 Inventories 2,852 (934) Accounts Payable 5,650 (17,858) Accrued Interest (2,148) (2,861) Accrued Income Taxes 9,525 18,675 Miscellaneous Current Liabilities (4,526) 2,011 Deferred Energy-Management Costs (141) (242) Maine Yankee Outage Accrual 2,070 2,070 Purchased-Power Contracts (75) Other, Net 3,747 1,475 ------ ------ Net Cash Provided By Operating Activities 58,458 52,714 ------ ------ INVESTING ACTIVITIES Construction Expenditures (7,145) (7,592) Investments in Associated Companies (5,495) (10) Changes in Accounts Payable - Investing Activities (3,587) (2,104) ------ ------ Net Cash Used by Investing Activities (16,227) (9,706) ------ ------ FINANCING ACTIVITIES Redemptions: Long-Term Debt (50) Revolving Credit Agreement (7,500) Funds on Deposit with Trustee (313) Dividends: Common Stock (7,305) (7,305) Preferred Stock (2,208) (2,518) ------ ------ Net Cash Used by Financing Activities (17,376) (9,823) ------ ------ Net Increase In Cash 24,855 33,185 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,307 57,677 ------ ------ CASH AND CASH EQUIVALENTS, END OF PERIOD $33,162 $90,862 ====== ====== The accompanying notes are an integral part of these financial statements. Central Maine Power Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Certain information in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. However, the disclosures herein should be read with the Annual Report on Form 10-K for the year ended December 31, 1996 (Form 10-K), and are adequate to make the information presented herein not misleading. The consolidated financial statements include the accounts of Central Maine Power Company (the Company) and its 78 percent-owned subsidiary, Maine Electric Power Company, Inc. (MEPCO). The Company accounts for its investments in associated companies not subject to consolidation using the equity method. The Company's significant accounting policies are contained in Note 1 of Notes to Consolidated Financial Statements in the Company's Form 10-K. For interim accounting periods the policies are the same. The interim financial statements reflect all adjustments that are, in the opinion of management, necessary to a fair statement of results for the interim periods presented. All such adjustments are of a normal recurring nature. The adoption of the Alternative Rate Plan (ARP), effective January 1, 1995, eliminated the reconcilable fuel clause used under traditional rate-of-return regulation to account for and collect fuel and purchased-power energy costs. Fuel revenues are now recorded as they are billed rather than deferred and reflected in revenues over time periods established by the Maine Public Utilities Commission (MPUC). The elimination of the fuel-clause results in higher revenues in the winter months. For purposes of the statement of cash flows, the Company considers all highly liquid instruments purchased having maturities of three months or less to be cash equivalents. Supplemental Cash Flow Disclosure - Cash paid for the three months ended March 31, 1997 and 1996 for interest, net of amounts capitalized, amounted to $13.4 million and $14.9 million, respectively. Income taxes paid amounted to $1.6 million for the three months ended March 31, 1997 and 1996. The Company incurred no new capital lease obligations in either period. 2. Commitments and Contingencies Maine Yankee Atomic Power Company - The Maine Yankee Plant was shut down for eleven months in 1995 for repairs to its steam generator tubes and returned to service in January 1996 at 90 percent of its operating capacity. On December 6, 1996, the Plant was shut down for inspection and repairs, and, based on the current schedule for refueling and repairs, is expected to remain out of service at least until August 1997. For a discussion of the background of the Plant outages, including being placed on the Nuclear Regulatory Commission's (NRC) "watch list" and other significant regulatory and operational issues, management changes, and investigations of Maine Yankee by the NRC and the United States Department of Justice, see the Company's Annual Report on Form 10-K for the year ended December 31, 1996, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" - "Maine Yankee Regulatory Issues." During the current outage, Maine Yankee planned to replace 92 fuel assemblies, resolve cable-separation issues and other regulatory issues, as well as any additional issues discovered during the outage, and obtain the approval of the NRC to restart the plant. In addition, Maine Yankee is making use of the outage to inspect the Plant's steam generators, commencing early April 1997, for deterioration beyond that which was repaired during the extended 1995 outage. Degradation of steam generators of the age and design of those in use in the Plant has been identified at other plants. Maine Yankee has detected relatively little tube degradation, well below the level that would affect Plant operation. If major repairs to, or replacement of, the steam generators were found to be necessary for continued operation of the Plant, Maine Yankee would further review the economics of continued operation before incurring the substantial capital expenditures that would be required. The Company is incurring significantly higher costs in 1997 over a normal level of operations and maintenance costs for its share of inspection, repairs and refueling costs at Maine Yankee and is continuing to purchase replacement power while the Plant is out of service. Maine Yankee has indicated that it expects its total 1997 operations and maintenance costs to increase by up to approximately $63 million, of which the Company's share is $24 million. In addition, the Company estimates its share of the refueling cost will amount to approximately $15 million, of which $12.4 million has been accrued as of March 31, 1997. The Company has also been incurring incremental replacement-power costs of approximately $1 million per week while the plant has been out of service and expects such costs to continue at approximately the same rate until the plant returns to service. The impact of these higher nuclear related costs on the Company will be a major obstacle to achieving satisfactory results in 1997, despite prudent control of other operating costs, and is likely to trigger the low earnings bandwidth provision of the ARP. Under the ARP, actual earnings for 1997 outside a bandwidth of 350 basis points, above or below a 10.68 percent rate of return allowance, triggers the profit sharing mechanism. A return below the low end of the range provides for additional revenue through rates equal to one-half of the difference between the actual earned rate of return and the 7.18 percent (10.68 - - 3.50) low end of the bandwidth. While the Company believes that the profit sharing mechanism is likely to be triggered in 1997, it cannot predict the amount, if any, of additional revenues that may ultimately result. Higher nuclear-related costs are affecting other stockholders of Maine Yankee in varying degrees. Bangor Hydro-Electric Company, a Maine-based 7-percent stockholder, has cited its "deteriorating" financial condition and on March 19, 1997, eliminated its common-stock dividend for the quarter. Maine Public Service Company, a 5-percent stockholder, cited problems in satisfying financial covenants in loan documents and reduced its common-stock dividend substantially in early March 1997. Northeast Utilities (20-percent stock ownership through three subsidiaries), which is also adversely affected by the substantial additional costs associated with the three shut-down Millstone nuclear units and the permanently shut-down Connecticut Yankee unit, as well as an unfavorable utility deregulation plan in New Hampshire currently under appeal, announced on March 25, 1997, an indefinite suspension of its quarterly common-stock dividends, commencing with the dividend that would have been payable for the quarter ending June 30, 1997. A default by a Maine Yankee stockholder in making payments under its power contract or capital funds agreement could have a material adverse effect on Maine Yankee, depending on the magnitude of the default, and would constitute a default under Maine Yankee's bond indenture and its two major credit agreements unless cured within applicable grace periods by the defaulting stockholder or other stockholders. The Company cannot predict, however, what effect, if any, the financial difficulties being experienced by some Maine Yankee stockholders will have on Maine Yankee or the Company. Maine Yankee is continuing with the inspection and repair work necessary to return the Plant to service, while at the same time evaluating an inquiry from a large electric utility expressing preliminary interest in acquiring the Plant or ownership interests in Maine Yankee. The Company and other sponsors of Maine Yankee are also reviewing their analyses of the economics of operating the Plant, the condition of the Plant, the risks and benefits of continued operation, and other considerations relevant to the future of the Plant. The Company cannot predict when or whether the Plant will return to service or whether any form of sale of the Plant or transfer of Maine Yankee ownership interests will take place. Connecticut Yankee and Millstone - On December 4, 1996, the Board of Directors of Connecticut Yankee Atomic Power Company voted to permanently shut down the Connecticut Yankee plant, for economic reasons, and to decommission the unit, which had not operated after July 22, 1996. The Company has a 6 percent equity interest in Connecticut Yankee, totaling approximately $6.6 million at March 31, 1997. The Company incurred replacement power costs of approximately $1.2 million in the first quarter of 1997. The Company estimates its share of the cost of Connecticut Yankee's continued compliance with regulatory requirements, recovery of its plant investments, decommissioning and closing the plant to be approximately $43.2 million and has recorded a regulatory asset and a liability on its consolidated balance sheet. The Company is currently recovering through rates an amount adequate to recover these expenses. The Company has a 2.5 percent ownership interest in Millstone Unit No. 3 which is operated by Northeast Utilities. This facility has been off-line since April 1996 due to NRC concerns regarding license requirements and the Company cannot predict when it will return to service. Millstone Unit No. 3, along with two other units at the same site owned by Northeast Utilities, is on the NRC's "watch list" in "Category 3," which requires formal NRC action before a unit can be restarted. The Company estimates that it will incur approximately $300,000 to $500,000 in replacement power costs each month Millstone Unit No. 3 remains out of service. The Company incurred replacement power costs of approximately $1.3 million for the first quarter of 1997. Legal and Environmental Matters - The Company is a party in legal and administrative proceedings that arise in the normal course of business. Effective January 1, 1997, the Company adopted Statement of Position 96-1, Environmental Remediation Liabilities. The statement provides requirements and guidance on specific accounting issues that are present in the recognition, measurement, display and disclosure of environmental remediation liabilities. As discussed in Note 4 of Notes to Consolidated Financial Statements in the Company's Form 10-K, in connection with one such proceeding, the Company has been named a potentially responsible party (PRP) and has been incurring costs to determine the best method of cleaning up an Augusta, Maine, site formerly owned by a salvage company and identified by the Environmental Protection Agency (EPA) as containing soil contaminated by polychlorinated biphenyls (PCBs) from equipment originally owned by the Company. In 1995, the EPA approved a remedy to adjust the soil cleanup standard to ten parts per million. The cleanup method using solvent extraction was found to be technically infeasible. On July 30, 1996, the EPA approved the off-site disposal of the contaminated soil at an EPA licensed secure landfill. The Company believes that its share of the remaining costs of the cleanup under the approved remedy could total approximately $2.7 million to $4.2 million. This estimate is net of an agreed partial insurance recovery and the 1993 court-ordered contribution of 41 percent from Westinghouse Electric Corp., but does not reflect any possible contributions from other insurance carriers the Company has sued or from any other parties. The Company has recorded an estimated liability of $2.7 million and an equal regulatory asset, reflecting an accounting order to defer such costs and the anticipated ratemaking recovery of such costs when ultimately paid. In addition, the Company has deferred, as a regulatory asset, $5.2 million of costs incurred through March 31, 1997. The Company cannot predict with certainty the level and timing of the cleanup costs, the extent they will be covered by insurance, or their ratemaking treatment, but believes it should recover substantially all of such costs through insurance and rates. Other Environmental Sites-The Company has been notified by the Maine Department of Environmental Protection (MDEP) that it may be a potentially responsible party at a pole treatment and storage site in Yarmouth, Maine, which was operated by another potentially responsible party. The site has been designated by MDEP as an Uncontrolled Hazardous Waste Site. Remedial investigation and feasibility studies have been completed, and remediation activities are scheduled for 1997. The Company is considering several methods of remediation, including constructing an on-site cell for disposal or excavating and arranging for off-site disposal at a licensed facility, with estimated costs ranging from $500,000 to $3.5 million, on an undiscounted basis. The Company's share of these costs is 50 percent. As of March 31, 1997, the Company has recorded a liability of $250,000 for this site. Insurance carriers have been notified of a potential indemnity claim. However, the Company cannot predict the extent this will be covered by insurance. The Company has been notified by the MDEP that it may be a potentially responsible party at a waste oil site in Wells, Maine, at which the Company arranged for the disposal of waste. The site has been designated by MDEP as an Uncontrolled Hazardous Waste Site. The site involves 113 notified potentially responsible parties and thousands of other potentially responsible parties. The remedial investigation is expected to be completed in 1997, and the feasibility studies will follow. The MDEP has also asserted claims against the Company on three former manufactured gas plants once owned and operated by the Company as Uncontrolled Hazardous Waste Sites. No remedial investigations or feasibility studies have been completed on two of the sites, and only remedial investigation is complete on one site. Because the studies for these sites are not complete, the Company cannot reasonably estimate the total remediation costs or its related share of such obligation. The Company has recorded a liability of approximately $370,000 related to the investigation and feasibility studies anticipated at these sites. 3. Regulatory and Legislative Matters Alternative Rate Plan - The MPUC approved the Company's Alternative Rate Plan (ARP) effective January 1, 1995. Please refer to Note 3 of Notes to Consolidated Financial Statements included in the Company's Form 10-K for the year ended December 31, 1996 for a detailed description. The ARP was established in response to an order by the MPUC to develop a five-year plan containing price-cap, profit-sharing, and pricing-flexibility components. Although the ARP is a major reform, the MPUC will continue to regulate the Company's operations and prices, provide for continued recovery of deferred costs, and specify a range for its rate of return. The Company believes, as stated in the MPUC's order approving the ARP, that operation under the ARP continues to meet the criteria of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). In its order, the MPUC reaffirmed the applicability of previous accounting orders allowing the Company to reflect amounts as deferred charges and regulatory assets. As a result, the Company will continue to apply the provisions of SFAS No. 71 to its accounting transactions and in its future financial statements. The ARP contains a mechanism that provides price-caps on the Company's retail rates to increase annually on July 1, commencing July 1, 1995, by a percentage combining (1) a price index, (2) a productivity offset, (3) a sharing mechanism, and (4) flow-through items and mandated costs. The price cap applies to all of the Company's retail rates, including the Company's fuel-and-purchased power cost, which previously had been treated separately. Under the ARP, fuel expense is no longer subject to reconciliation or specific rate recovery, but is subject to the annual indexed price-cap changes. The Company believes the ARP provides the benefits of needed pricing flexibility to set prices between defined floor and ceiling levels in three service categories: (1) existing customer classes, (2) new customer classes for optional targeted services, and (3) special-rate contracts. The Company believes that the added flexibility will position it more favorably to meet the competition from other energy sources that has eroded segments of its customer base. Some price adjustments can be implemented upon 30-days' notice by the Company, while certain others are subject to expedited review by the MPUC. The Company has utilized this feature in providing new rates to approximately 19,000 customers representing approximately 40 percent of annual kilowatt-hour sales and 27 percent of service-area revenues. These reductions in rates were offered to customers after consideration of associated NUG cost reductions, savings from further NUG consolidations and other general cost reductions. The ARP also contains provisions to protect the Company and ratepayers against unforeseen adverse results from its operation. These include review by the MPUC if the Company's actual return on equity falls outside a designated range, a mid-period review of the ARP by the MPUC in 1997 (including possible modification or termination), and a "final" review by the MPUC in 1999 to determine whether or with what changes the ARP should continue after 1999. The Company submitted its 1997 compliance filing and mid-period review filing in March 1997 proposing no significant change to the ARP. The MPUC decision on the mid-period review is expected by September 30, 1997. While the ARP provides the Company with an expanded opportunity to be rewarded for efficiency, it also presents the risk of reduced rates of return if costs rise unexpectedly, like those that have resulted from the recent outages at Maine Yankee, or if revenues from sales decline or are not adequate to fund costs. The Company believes the ARP continues to be a competitive advantage for the Company. Meeting the Requirements of SFAS No. 71 The Company continues to meet the requirements of SFAS No. 71. The standard provides specialized accounting for regulated enterprises, which requires recognition of 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 provides incentive-based rates intended to recover the cost of service plus a rate of return on the Company'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. The Company 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 MPUC's Restructuring Report submitted to the Legislature in December 1996 recognizes that a reasonable opportunity to recover strandable costs is essential to a successful transition to competition, with incentives for the Company to mitigate such costs where practicable. The Company is actively pursuing securitization of regulatory assets, which would provide further assurance of their recoverability. Non-Utility Generators In April, 1997, the Company signed an agreement to restructure a purchased power contract with a 31 megawatt wood-fired power plant which could result in fuel savings of approximately $7 million over the next five years. The agreement is before the MPUC pending approval. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion contains forecast information items that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. All such forward-looking information is necessarily only estimated. There can be no assurance that actual results will not differ from expectations. Actual results have varied materially and unpredictably from expectations. Factors that could cause actual results to differ materially include, among other matters, electric utility restructuring, including the ongoing state and federal activities; future economic conditions; earnings-retention and dividend-payout policies; developments in the legislative, regulatory, and competitive environments in which the Company operates; and other circumstances that could affect anticipated revenues and costs, such as unscheduled maintenance or repair requirements at nuclear plants and other facilities and compliance with laws and regulations. Operating Results Net income was $16.0 million for the first quarter of 1997 compared to $27.9 million for the corresponding period in 1996. Earnings applicable to common stock were $13.8 million or $0.43 per share for the first three months of 1997 compared to $25.3 million or $0.78 per share for the comparable period in 1996. Net income was impacted by increases in repair costs and replacement-power expenses relating to the Maine Yankee plant and other New England nuclear units in which the Company holds interests. Operating revenues in the first quarter of 1997 totaled $268 million, a decrease of 2.1 percent from $274 million in the first quarter of 1996. The primary cause of the revenue decrease was lower non-service-territory energy sales that translated to a gross pre-tax revenue decline of $14 million. Service-area sales of electricity totaled approximately 2.44 billion kilowatt-hours in the first quarter of 1997, up 1.5 percent from the 2.41 billion kilowatt-hour level of a year ago. Service Area Kilowatt-hour Sales (Millions of KWHs) Three Months Ended March 31, 1997 1996 % Change ---- ---- -------- Residential 807.9 834.3 (3.2)% Commercial 651.7 662.0 (1.5) Industrial 925.6 856.3 8.1 Other 59.4 56.8 4.6 ------- ------- --- 2,444.6 2,409.4 1.5% ======= ======= === The changes in service area kilowatt-hour sales reflect the following: Kilowatt-hour sales to residential customers decreased in the first quarter compared to 1996. Warmer temperatures during the first quarter of 1997 versus the first quarter of 1996 were responsible for the decrease. Commercial sales decreased in the first quarter compared to 1996. The retail and wholesale trade sectors experienced increases in sales of approximately 10 percent, while most other sectors had decreases. The service sector, which comprises approximately 34 percent of the commercial sales category, decreased 2 percent. The overall decrease can be attributed to the warmer temperatures. Industrial sales increased from 1996 due primarily to increased sales to the pulp and paper industry of 8.8 percent. This sector accounts for approximately 61 percent of the industrial sales category. A major customer that was adversely affected by weak market conditions in 1996 stepped up production in 1997 and purchased 17.6 million more kilowatt-hours than in the first quarter of 1996. Another company purchased 19.4 million more kilowatt-hours than in 1996. A third company which in previous years had shut down over the Christmas holidays, did not shut down in 1996 (reflected in January 1997 billing), helping to increase sales by 21.8 million kilowatt hours. A sales increase of 7.1 percent occurred in all other industrial customers as a group. MEPCO's electric sales and transmission revenues from New England utilities other than the Company amounted to $4.2 and $1.7 million in the first quarters of 1997 and 1996. Under a Participation Agreement that terminated July 9, 1996, all of MEPCO's costs, including a return on invested capital, were paid by the participating utilities (Participants), which included the Company and most of the larger New England electric companies. The level of MEPCO's revenues and expenses changes depending upon the level of energy purchases. Effective July 9, 1996, MEPCO and the Company filed with FERC under FERC Order 888 for new pro forma tariff rates. Refer to "Industry Restructuring and Strandable Costs" below for further discussion of this matter. Purchased power-energy expense increased $6.2 million over the first quarter of 1996, reflecting increased replacement power cost due to the Maine Yankee and other nuclear outages which continued through the entire first quarter of 1997. Purchased power-other expense increased $8.7 million over the first quarter of 1996, principally due to the Maine Yankee outage throughout the first quarter of 1997, and increased maintenance expenses required by the NRC to return the Maine Yankee plant to service. Other operation expense increased by approximately $1 million compared to the first quarter of 1996. The increase is due mainly to the expense recognition of post-retirement benefits that are being collected in rates under the ARP. Maintenance decreased by $0.9 million primarily due to decreased storm activity in 1997 versus 1996. Federal and state income taxes fluctuate with the level of pre-tax earnings and the regulatory treatment of taxes by the MPUC. This expense decreased by $8.4 million as a result of lower pre-tax earnings in the first quarter of 1997, when compared to 1996. Interest on long-term debt during the first quarter of 1997 decreased by approximately $0.8 million while other interest expense remained flat compared to 1996. The decrease reflects a lower level of Medium-Term Notes outstanding than in the first quarter of 1996. Liquidity and Capital Resources Approximately $34.0 million of cash was provided during the first quarter of 1997 from net income before non-cash items, primarily depreciation and amortization. During that period, approximately $24.4 million of cash was used for fluctuations in certain assets and liabilities and from other operating activities. During the first quarter of 1997, dividends paid on common stock were $7.3 million, while preferred-stock dividends utilized $2.2 million of cash. Investing activities, primarily construction expenditures, utilized $10.7 million in cash during the first quarter of 1997 for generating projects, transmission, distribution, and general construction expenditures. An additional $5.5 million was invested in the wholly-owned subsidiary MaineCom Services. In order to accommodate existing and future loads on its electric system the Company is engaged in a continuing construction program. The Company's plans for improvements and expansions, its load forecast and its power-supply sources are under a process of continuing review. Actual construction expenditures will depend upon the availability of capital and other resources, load forecasts, customer growth and general business conditions. The ultimate nature, timing and amount of financing for the Company's total construction programs, refinancing and energy-management capital requirements will be determined in light of market conditions, earnings and other relevant factors. As discussed above, replacement power costs and increased operation, maintenance and refueling costs for Maine Yankee will have a significant negative effect on cash and liquidity in 1997. The Company has been incurring incremental replacement-power costs of approximately $1 million per week while the plant has been out of service and expects such costs to continue at approximately the same rate until the plant returns to service. Maine Yankee has indicated that it expects its total 1997 operations and maintenance costs to increase by up to approximately $63 million, of which the Company's share is $24 million. In addition, the Company estimates its share of the refueling costs will amount to approximately $15 million. Internally generated funds from operating activities will not be sufficient to meet these demands. The Company also plans to utilize its Medium-Term Note program and revolving credit facilities, as described below, for these cash requirements. The total of cash on deposit with the Trustee under the Company's General and Refunding Mortgage Indenture as of March 31, 1997, was approximately $59.8 million. Under the Indenture such cash may be applied, at any time at the direction of the Company, to the redemption of bonds outstanding under the Indenture at a price equal to the principal amount of the bonds being redeemed, without premium, plus accrued interest to the date fixed for redemption on the principal amount of the bonds being redeemed. Such cash may also be withdrawn by the Company by substitution of allocated property additions or available bonds. On April 29, 1997, the Company withdrew approximately $27.9 million against allocated property additions and deposited approximately $29.8 million, substantially all of which represented its renewal and replacement fund obligation under the Indenture for the twelve months ended February 28, 1997, which resulted in a new balance of approximately $61.7 million on deposit with the Trustee. The Company's $150-million Medium-Term Note program was implemented to provide flexibility to meet financing needs and provide access to a broad range of debt maturities. As of March 31, 1997, $68 million of Medium-Term Notes were outstanding which, under the terms of the program, permits issuance of an additional $82 million of such notes. The Company is seeking the consent of its preferred stockholders to increase the capacity of the Medium-Term Note program from $150 million to $500 million at its annual meeting of stockholders on May 15, 1997, in order to increase its financing flexibility in anticipation of restructuring and increased competition. The Company cannot predict whether such consent will be obtained. To support its short-term capital requirements, on October 23, 1996, the Company entered into a $125 million revolving credit facility with several banks, with The First National Bank of Boston and The Bank of New York acting as agents for the lenders. The credit facility has two tranches: a $75 million, 364-day revolving credit facility that matures on October 22, 1997, and a $50-million, 3-year revolving credit facility that matures on October 23, 1999. Both credit facilities require annual fees on the unused portion of the credit lines. The fees are based on the Company's credit ratings and allow for various borrowing options including LIBOR-priced, base-rate-priced and competitive-bid-priced loans. Access to commercial paper markets has been substantially reduced, if not precluded, as a result of downgrading of the Company's credit ratings. The amount of outstanding short-term borrowing will fluctuate with day-to-day operational needs, the timing of long-term financing, and market conditions. The Company had no borrowings outstanding as of March 31, 1997 under this agreement. Rating Agency Actions On May 1, 1997, Moody's Investors Service announced that it had downgraded the Company's credit ratings. The ratings downgraded were: General and Refunding Mortgage Bonds to "Baa3" from "Baa2"; unsecured medium-term notes, unsecured pollution-control revenue bonds, and counterparty rating to "Ba1" from "Baa3"; shelf registration for General and Refunding Mortgage Bonds to "(P)Baa3" from "(P)Baa2"; and preferred stock to "ba1" from "baa3". The Company's short-term rating for commercial paper was also downgraded to "Prime-3" from "Prime-2". Moody's said the downgrades reflected "adverse financial pressures linked to prolonged nuclear plant outages, especially at the Maine Yankee plant." Industry Restructuring and Strandable Costs As discussed fully in the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's 1996 Form 10-K, the enactment by Congress of the Energy Policy Act of 1992 accelerated planning by electric utilities, including the Company, for transition to a more competitive industry. The functional areas in which competition will take place, the regulatory changes that will be implemented, and the resulting structure of both the industry and the Company are all uncertain, but regulatory steps have already been taken toward competition in generation and non-discriminatory transmission access. A departure from traditional regulation, however, could have substantial impacts on the value of utility assets and on electric utilities' abilities to recover their costs through rates. In the absence of full recovery, utilities would find their above-market costs to be "stranded," or unrecoverable, in the new competitive setting. In December 1996, the MPUC issued its Report and Recommended Plan for Electric Utility Restructuring in Maine, which was incorporated into proposed legislation filed with the Maine Legislature. The Company proposed three enhancements to this legislation in another bill filed with the Maine Legislature. The first involved expanding consumers' options by permitting their local utility to arrange energy purchases on their behalf. The second enhancement would authorize utilities to securitize their regulatory assets. The third enhancement was a mechanism to ensure that large customers who decide to leave the utility's system could not shift their share of system costs to other customers. The legislative committee considering the restructuring bills has been developing a compromise bill that contains a limited incorporation of the Company's first enhancement above, recommends deferring consideration of securitization by the Legislature until the next legislative session, omits the third enhancement, provides for a reasonable opportunity to recover prudent and unmitigable stranded costs, and otherwise contains many of the MPUC's recommendations. The Company cannot predict the final form of any utility restructuring legislation that may be enacted by the Maine Legislature. The Company has substantial exposure to cost stranding relative to its size. In its January 1996 filing, the Company estimated its net-present-value strandable costs could be approximately $2 billion as of January 1, 1996. These costs represented the excess costs of purchased-power obligations and the Company's own generating costs over the market value of the power, and the costs of deferred charges and other regulatory assets. Of the $2 billion, approximately $1.3 billion was related to above-market costs of purchased-power obligations, approximately $200 million was related to estimated net above-market cost of the Company's own generation, and the remaining $500 million was related to deferred regulatory assets. The MPUC also provided estimates of strandable costs for the Company, which they found to be within a wide range of a negative $445 million to a positive $965 million. These estimates were prepared using assumptions that differ from those used by the Company, particularly a starting date for measurement of January 1, 2000 versus the measurement starting date of January 1, 1996 utilized by the Company. The MPUC concluded that there is a high degree of uncertainty that surrounds stranded costs estimates, resulting from having to rely on projections and assumptions about future conditions. Given the inherent uncertainty and volatility of these projections, the Company believes that an annual estimation of stranded costs could serve to prevent significant over or under-collection beginning in the year 2000. Estimated strandable costs are highly dependent on estimates of the future market for power. Higher market rates lower stranded cost exposure, while lower market rates increase it. In addition to market-related impacts, any estimate of the ultimate level of strandable costs depends on state and federal regulations; the extent, timing and form that competition for electric service will take; the ongoing level of the Company's costs of operations; regional and national economic conditions; growth of the Company's sales; timing of any changes that may occur from state and federal initiatives on restructuring; and the extent to which regulatory policies ultimately address recovery of strandable costs. The estimated market rate for power is based on anticipated regional market conditions and future costs of producing power. The present value of future purchased-power obligations and the Company's generating costs reflects the underlying costs of those sources of generation in place today, with reductions for contract expirations and continuing depreciation. Deferred regulatory asset totals include the current uncollected balances and existing amortization schedules for purchased-power contract restructuring and buyouts negotiated by the Company to lessen the impact of these obligations, energy management costs, financing costs, and other regulatory promises. The Company expects its strandable-cost exposure to decline over time as the market price of power increases, NUG contracts expire, and regulatory assets are recovered. Major cost stranding would have a material adverse effect on the Company's financial position. The Company believes it is entitled to recover substantially all of its potential strandable costs, but cannot yet predict when or if open electric energy competition will occur in its service territory, or how much it might ultimately be allowed to recover through state or federal regulation, the future market price of electricity, or the timing or implementation of any formal recommendations in any regulatory or legislative proceedings dealing with such issues. The Company believes there are many uncertainties associated with any major restructuring of the electric utility industry in Maine. Among them are: the positions that will ultimately be taken by the Maine Legislature and the MPUC; the role and policies of the FERC in any restructuring involving the Company, the extent and effect of Congressional involvement; whether political consensus is attained; and the extent to which the Company will be permitted to recover its strandable costs. The Company is pursuing efforts to mitigate its exposure to stranded costs. One method of mitigation it is actively pursuing through proposed legislation mentioned above is securitization of stranded costs including regulatory assets, above-market NUG costs, and above-market company-owned generation costs. If the required legislation is adopted, and subject to determination by the MPUC, a portion of existing revenues related to stranded costs would be assigned by the Company for repayment of these costs. The right created by this assignment could be used as security by a trust to sell bonds, the proceeds of which could be used by the Company to refinance existing obligations. Similarly, a portion of existing revenues could also be dedicated directly to payment of above-market non-utility power contract obligations, reducing the risks for the suppliers as well as for the Company. Mitigation from this mechanism would result from lower cost financing of stranded costs, enhanced creditworthiness of the utility, which should further reduce the Company's costs, and from increased availability of low-cost funds to finance additional purchased power contract restructuring efforts. Any mitigation achieved would be passed on to residential and small commercial customers through lower rates. The Company cannot predict whether the Maine Legislature will support the securitization concept. Reorganization and Divestiture The Company announced a major internal reorganization which became effective May 1, 1997, in anticipation of industry-wide open competition. The new structure is organized into four lines of business. The "Energy Services" and "Distribution Services" groups will operate as strategic business units. A "Related Business Group" includes the Company's subsidiaries - MaineCom Services, Union Water-Power Company, TeleSmart, and CMP International Consultants. The "Operations Support Division" will include most of the departments that provide support services to the other three lines of business. The reorganization is expected to better position the Company to succeed in a competitive marketplace, and is consistent with the restructuring legislation currently pending. On April 28, 1997, the Company announced a plan to seek proposals to purchase its generation assets, including its interests in nuclear plants and rights to power under NUG contracts, within the next several weeks. Consummating the sale will take considerably longer and is subject to regulatory approvals. The Company believes that current market conditions may offer advantages to seeking proposals before divestiture is required by legislation. Several other utilities, including New England Electric System in Massachusetts, have begun the divestiture process, with a large number of prospective purchasers expressing interest in acquiring the facilities. The Company does not intend to sell its generation assets if terms satisfactory to the Company cannot be arranged. The Company cannot predict whether such a sale will occur, whether it will receive satisfactory proposals, or whether the necessary approvals will be obtained. Open-Access Transmission Service Rule On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued Order No. 888, which requires all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to file open access non-discriminatory transmission tariffs that offer both load-based, network and contract-based, point-to-point service, including ancillary service to eligible customers containing minimum terms and conditions of non-discriminatory service. This service must be comparable to the service they provide themselves at the wholesale level; in fact, these utilities must take wholesale transmission service they provide themselves under the filed tariffs. The order also permits public utilities and transmitting utilities the opportunity to recover legitimate, prudent and verifiable wholesale stranded costs associated with providing open access and certain other transmission services. It further requires public utilities to functionally separate transmission from generation marketing functions and communications. The intent of this order is to promote the transition of the electric utility industry to open competition. Order No. 888 also clarifies federal and state jurisdiction over transmission in interstate commerce and local distribution and provides for deference of certain issues to state recommendations. On July 9, 1996, the Company and MEPCO submitted compliance filings to meet the new pro forma tariff non-price minimum terms and conditions of non-discriminatory transmission. Since July 9, 1996, the Company and MEPCO have been transmitting energy pursuant to their filed tariffs, subject to refund. FERC subsequently issued Order No. 888-A which generally reaffirms Order No. 888 and clarifies certain terms. Also on April 24, 1996, FERC issued Order No. 889 which requires public utilities to functionally separate their wholesale power marketing and transmission operation functions and to obtain information about their transmission system for their own wholesale power transactions in the same way their competitors do through the Open Access Same-time Information System (OASIS). The rule also prescribed standards of conduct and protocols for obtaining the information. The standards of conduct are designed to prevent employees of a public utility engaged in marketing functions from obtaining preferential information. The Company participated in efforts to develop a regional OASIS, which was operational January 3, 1997. FERC subsequently approved a New England Power Pool-wide Open Access Tariff, subject to refund and issuance of further orders. The Company also participated in revising the New England Power Pool Agreement, which is pending FERC approval. On April 23, 1997, a representative of Kennebunk Light & Power District and Fox Islands Electric Cooperative, two wholesale customers of the Company, notified the Company that the two customers were terminating their power supply contracts with the Company, effective May 1, 1999, and would begin purchasing power from another supplier on that date. The two customers currently account for less than 0.5 percent of the Company's annual revenues. PART II - OTHER INFORMATION Item 1. Legal Proceedings Regulatory Matters. For a discussion of certain significant regulatory matters affecting the Company, including the status of the off-line Maine Yankee nuclear generating plant, electric-utility restructuring, and stranded costs, see Note 2, "Commitments and Contingencies" - "Maine Yankee Atomic Power Company," and Item 2 of Part I, "Management's Discussion and Analysis of Financial Condition and Results of Operation" - "Industry Restructuring and Strandable Costs," which are incorporated herein by reference. Environmental Matters. For a discussion of administrative and judicial proceedings concerning cleanup of a site containing soil contaminated by PCB's from equipment originally owned by the Company, 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. On April 28, 1997, the Company announced a plan to seek proposals to purchase its generation assets, including its interests in nuclear plants and rights to power under NUG contracts, within the next several weeks. Consummating the sale will take considerably longer and is subject to regulatory approvals. The Company believes that current market conditions may offer advantages to seeking proposals before divestiture is required by legislation. Several other utilities, including New England Electric System in Massachusetts, have begun the divestiture process, with a large number of prospective purchasers expressing interest in acquiring the facilities. The Company does not intend to sell its generation assets if terms satisfactory to the Company cannot be arranged. The Company cannot predict whether a sale will occur, whether it will receive satisfactory proposals, or whether the necessary approvals will be obtained. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits. None. (b) Reports on Form 8-K. The Company filed the following reports on Form 8-K during the first quarter of 1997 and thereafter to date: Date of Report Items Reported December 31, 1996 Item 5 a) The Company reported that on December 31, 1996, the MPUC issued its Report and Recommended Plan on Electric Utility Industry Restructuring. b) The Company reported the inspection of fuel assemblies and resolution of the cable-separation and associated issues at the Maine Yankee Atomic Power Company nuclear generating plant and that Maine Yankee and Entergy Corporation, a Louisiana-based utility holding company and nuclear plant operator, announced the signing of a memorandum of understanding for Entergy to provide management services to Maine Yankee. Date of Report Items Reported January 29, 1997 Item 5 (a) On January 29, 1997, the NRC announced that it had placed the Maine Yankee Plant on its "watch list," in "Category 2," which includes plants that display "weaknesses that warrant increased NRC attention," but which are not severe enough to warrant a shut-down order. (b) The Company reported on a Maine-based group which had announced its intention to start gathering signatures aimed at a new referendum to force a permanent shutdown of the Maine Yankee. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTRAL MAINE POWER COMPANY (Registrant) Date: May 15, 1997 By --------------------------------------- Michael W. Caron, Comptroller (Chief Accounting Officer) By --------------------------------------- David E. Marsh, Chief Financial Officer (Principal Financial Officer and duly authorized officer) EX-27 2 FDS --
UT This schedule contains summary financial information extracted from Central Maine Power Company's Consolidated Statement of Earnings, Consolidated Balance Sheet and Consolidated Statement of Cash Flows and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1996 MAR-31-1997 PER-BOOK 1,061,852 74,366 261,259 611,137 0 2,008,614 162,214 276,892 78,991 518,097 65,571 53,528 551,698 0 0 0 25,200 7,000 35,852 2,177 749,491 2,008,614 268,367 9,554 233,200 242,754 27,513 618 28,131 12,104 16,027 2,208 13,819 7,305 7,446 58,458 .43 .43
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