-----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, QfSb/+Wj0Pa0EDpD2V2GOzfzE3Xws0/lFF6FM8y8UhAnbix3biT1W4xB+VegGgdD xbI2L2NpA4lhSOBqd+taXQ== 0000061611-96-000016.txt : 19960514 0000061611-96-000016.hdr.sgml : 19960514 ACCESSION NUMBER: 0000061611-96-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960513 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAINE PUBLIC SERVICE CO CENTRAL INDEX KEY: 0000061611 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 010113635 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-03429 FILM NUMBER: 96561532 BUSINESS ADDRESS: STREET 1: 209 STATE ST CITY: PRESQUE ISLE STATE: ME ZIP: 04769-1209 BUSINESS PHONE: 2077685811 MAIL ADDRESS: STREET 1: PO BOX 1209 CITY: PRESQUE ISLE STATE: ME ZIP: 04769-1209 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 For Quarter Ended March 31, 1996 Commission File Number 1-3429 MAINE PUBLIC SERVICE COMPANY (Exact name of registrant as specified in its charter) MAINE 01-0113635 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 209 State Street, Presque Isle, Maine 04769 (address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 207-768-5811 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___. (APPLICABLE ONLY TO CORPORATE ISSUERS:) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Common Stock, $7.00 par value - 1,617,250 shares Form 10-Q PART 1. FINANCIAL INFORMATION Item 1. Financial Statements See the following exhibits - Maine Public Service Company and Subsidiary Condensed Consolidated Financial Statements, including a statement of consolidated operations for the quarter ended March 31, 1996 and for the corresponding period of the preceding year; a consolidated balance sheet as of March 31, 1996, and as of December 31, 1995, the end of the Company's preceding fiscal year; and a statement of consolidated cash flows for the period January 1 (beginning of the fiscal year) through March 31, 1996, and for the corresponding period of the preceding year. In the opinion of management, the accompanying unaudited condensed consolidated financial statements present fairly the financial position of the companies at March 31, 1996 and December 31, 1995, and the results of their operations and their cash flows for the three months ended March 31, 1996. -2- MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARY STATEMENTS OF CONSOLIDATED OPERATIONS (Unaudited) (Dollars in Thousands Except Per Share Amounts) Three Months Ended March 31, 1996 1995 Operating Revenues $15,625 $15,556 Operating Expenses Purchased Power 7,504 8,967 Other Operation and Maintenance 3,254 2,592 Depreciation and Amortization 1,030 1,070 Taxes Other Than Income 443 435 Provision for Income Taxes 1,099 737 Total Operating Expenses 13,330 13,801 Operating Income 2,295 1,755 Other Income (Deductions) Equity in Income of Associated Companies 92 88 Allowance for Equity Funds Used During Construction 2 0 Other Income Taxes (10) (21) Other - Net (6) (5) Total 78 62 Income Before Interest Charges 2,373 1,817 Interest Charges Long-Term Debt and Notes Payable 923 943 Less Allowance for Borrowed Funds Used During Construction (1) 0 Total 922 943 Net Income Available for Common Stock 1,451 874 Average Shares Outstanding (000's) 1,617 1,617 Earnings Per Share of Common Stock $0.90 $0.54 Dividends Declared per Common Share $0.46 $0.46 The accompanying notes are an integral part of these financial statements. -3- MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollars in Thousands) March 31, December 31, ASSETS 1996 1995 Utility Plant Electric Plant in Service $88,555 $88,648 Less Accumulated Depreciation 40,356 39,674 Net Electric Plant in Service 48,199 48,974 Construction Work-in-Progress 1,038 427 Total 49,237 49,401 Investment in Associated Companies Maine Yankee Atomic Power Company 3,578 3,576 Maine Electric Power Company, Inc. 65 65 Total 3,643 3,641 Net Utility Plant and Investments 52,880 53,042 Current Assets Cash and Temporary Investments 1,680 976 Deposits for Interest and Dividends 804 744 Accounts Receivable - Net 5,537 6,226 Unbilled Base Revenue 1,383 1,472 Deferred Fuel and Purchased Energy 125 125 Current Deferred Income Taxes 180 232 Inventory 1,319 1,244 Prepayments 506 543 Total 11,534 11,562 Other Assets Recoverable Seabrook Costs 28,790 29,146 Regulatory Asset - SFAS 109 & 106 13,722 13,746 Deferred Fuel and Purchased Energy 2,919 2,575 Other 3,594 4,003 Total 49,025 49,470 Total Assets $113,439 $114,074 CAPITALIZATION AND LIABILITIES Capitalization Common Shareholders' Equity Common Stock $13,071 $13,071 Paid-in Capital 38 38 Retained Earnings 32,269 31,562 Treasury Stock, at cost (5,714) (5,714) Total 39,664 38,957 Long-Term Debt (less current maturities) 26,095 36,120 Current Liabilities Long-Term Debt Due Within One Year 1,315 1,315 Notes Payable 10,000 1,400 Tax Exempt Bond Refunding Note 4,046 0 Accounts Payable 0 5,231 Dividends Declared 744 744 Customer Deposits 68 79 Interest and Taxes Accrued 1,876 1,124 Total 18,049 9,893 Deferred Credits Deferred Income Tax 24,716 24,997 Investment Tax Credits 776 795 Deferred Revenues 446 354 Miscellaneous 3,693 2,958 Total 29,631 29,104 Total Capitalization and Liabilities $113,439 $114,074 The accompanying notes are an integral part of these financial statements. -4- MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARY Statements of Consolidated Cash Flows (Unaudited) (Dollars in Thousands) Three Months Ended March 31, 1996 1995 Cash Flow From Operating Activities Net Income $1,451 $874 Adjustments to Reconcile Net Income to Net Cash Provided by Operations Depreciation and Amortization 675 643 Amortization of Seabrook Costs 355 427 Deferred Income Taxes (252) 561 AFUDC (2) 0 Change in Deferred Fuel & Purchased Energy (344) 0 Change in Deferred Regulatory & Debt Issuance Costs 391 (755) Change in Deferred Revenues 92 0 Change in Benefit Obligation 606 29 Change in Current Assets and Liabilities 295 306 Other 158 140 Net Cash Flow from Operating Activities 3,425 2,225 Cash Flow From Financing Activities Dividend Payments (744) (744) Retirements on Long-Term Debt (25) (25) Short-Term Borrowings, Net (1,400) 0 Net Cash Flow Used For Financing Activities (2,169) (769) Cash Flow Used For Investing Activities Investment in Electric Plant (552) (603) Net Cash Used For Investment Activities (552) (603) Increase (Decrease) in Cash and Temporary Investments 704 853 Cash and Temporary Investments at Beginning of Year 976 2,618 Cash and Temporary Investments at End of Period $1,680 $3,471 Change in Current Assets and Liabilities Providing Cash From Operating Activities Accounts Receivable $689 ($65) Unbilled Revenue 89 483 Inventory (76) 1 Deferred Fuel and Purchased Energy Costs 0 (733) Other Current Assets 37 141 Accounts Payable & Accrued Expenses (434) 484 Other Current Liabilities (10) (5) Total Change $295 $306 Supplemental Disclosure of Cash Flow Information: Cash Paid During the Year For: Interest $1,601 $1,611 Income Taxes $127 $149 The accompanying notes are an integral part of these financial statements. -5- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements include the accounts of the Company and its wholly-owned Canadian subsidiary, Maine and New Brunswick Electrical Power Company, Limited (the Subsidiary). The Company is subject to the regulatory authority of the Maine Public Utilities Commission (MPUC) and, with respect to wholesale rates, the Federal Energy Regulatory Commission (FERC). The accompanying unaudited consolidated financial statements should be read in conjunction with the 1995 Annual Report, an integral part of Form 10-K. Certain financial statement disclosures have been condensed or omitted but are an integral part of the 1995 Form 10-K. The Company's significant accounting policies are described in the Notes to Consolidated Financial Statements of the Company's Annual Report filed with the Form 10-K. For interim reporting purposes, these same accounting policies are followed. For purposes of the statements of consolidated cash flows,the Company considers all highly liquid securities to be cash equivalents. 2. IMPLEMENTATION OF MULTI-YEAR RATE PLAN As explained in the legal proceedings section of the Form 10-Q, item 1(b), the MPUC approved a four-year rate plan on November 13, 1995. The Company wrote off approximately $8,340,000, net of income taxes, in 1995. The write-offs consisted of $4,846,000, net of income taxes, of the Company's investment in the Seabrook nuclear power project previously allocated to the wholesale customers and $1,390,000, net of income taxes, of other wholesale plant and regulatory assets, classified as extraordinary items. In addition, $2,104,000, net of income taxes, of deferred retail fuel representing replacement power costs incurred during the 1995 Maine Yankee outage, were also charged to operations. Item 1(b) also details the significant accounting orders that became effective January 1, 1996 concerning the deferral of $902,000, net of income taxes, annually of Wheelabrator-Sherman purchases, the five year amortization of the Company's $1.3 million, net of income taxes, share of the Maine Yankee sleeving repair costs, the $638,000, net of income taxes, amortization over ten years of deferred post-retirement benefits other than pensions (SFAS 106). In addition, Item 1(b) discusses the five year amortization of the $139,000 deferral of pension expenses and $92,000 deferral of early retirement expenses, both net of income taxes, related to the lay-up of the Caribou Steam Units and the four year amortization of $300,000, net of tax, of deferred fuel from the December 31, 1995 balance. The elimination of the fuel clause reconciliation with the associated fuel revenue accounting mechanism will complicate quarter-to-quarter earnings comparisons for 1996 to 1995. The prior fuel revenue accounting mechanism smoothed the recognition of fuel expenses over the annual fuel reconciliation period. -6- The recoverable Seabrook costs represent costs to be charged to retail customers, in accordance with previous rate orders. They are as follows: Retail $ 43,136 Accumulated Amortization 14,346 Retail, Net 28,790 Wholesale 10,051 Accumulated Amortization (3,826) Write-0ff (6,225) Wholesale, Net - Total $ 28,790 3. INCOME TAXES A summary of Federal and State income taxes charged (credited) to income is presented below. For accounting and ratemaking purposes, income tax provisions included in "Operating Expenses" reflect taxes applicable to revenues and expenses allowable for ratemaking purposes. The tax effect of items not included in rate base is allocated as "Other Income (Deductions)". (Dollars in Thousands) Three Months Ended March 31, 1996 1995 Current income taxes $ 1,361 $ 197 Deferred income taxes (233) 580 Investment credits (19) (19) Total income taxes $ 1,109 $ 758 Allocated to: Operating Income $ 1,099 $ 737 Other income 10 21 Total $ 1,109 $ 758 The following summarizes accumulated deferred income taxes established on temporary differences under SFAS 109 as of March 31, 1996 and December 31, 1995. (Dollars in Thousands) March 31, December31, 1996 1995 Seabrook $16,011 $16,071 Property 8,448 8,396 Regulatory expenses 949 915 Deferred fuel and purchased energy 1,015 1,027 Investment tax credits (528) (528) Pension and postretirement benefits (492) (262) Other (687) (622) Net accumulated deferred income taxes $24,716 $24,997 -7- 4. REFINANCING On April 4, 1991, the Maine Public Utilities Financing Bank (MPUFB) issued $10 million of tax-exempt bonds on behalf of the Company. Pursuant to the long-term note issued under a loan agreement between the Company and the MPUFB, the Company agreed to make payments to the MPUFB for the principal and interest on the bonds. Concurrently, pursuant to a letter of credit and reimbursement agreement, the Company caused a Direct Pay Letter of Credit for a term of five years to be issued by Barclays Bank PLC, New York Branch (Barclays Bank) for the benefit of the holders of such bonds. To secure the Company's obligations under the reimbursement agreement, the Company issued a second mortgage bond to Barclays Bank in the amount of $10,426,563, as collateral for the Company's obligation to repay Barclays Bank the $10 million principal amount of the bonds plus 195 days of interest on the bonds. The bonds had a coupon rate of 7.875% and, after considering the enhancement fees and other costs, the annual cost to the Company was approximately 8.725%. Barclays Bank notified the Company that it would not renew the Direct Pay Letter of Credit for this issue. With the expiration of the Direct Pay Letter of Credit on April 4, 1996, the entire $10 million principal amount of the bonds was redeemed at par on April 1, 1996 in accordance with the indenture. To meet its reimbursement obligation that resulted from the draw on the Barclays Direct Pay Letter of Credit prior to its expiration, the Company borrowed $10,000,000 under a refunding note from Fleet Bank of Maine. The note expires on June 30, 1996 with interest at LIBOR plus .75% and a facility fee of $25,000 for the term of the loan. For the first month, the effective interest rate was 7.1875%. The MPUFB has approved the Company's request to issue a new series of the tax exempt bonds on behalf of the Company in an amount not to exceed $16,000,000. The proceeds of the new series will be used for the refinancing of the 1991 series through the payment of the refunding note and for the acquisition of qualifying electric property. 5. DISCONTINUANCE OF SFAS 71 FOR WHOLESALE BUSINESS SEGMENT The wholesale market for electric power is now competitive, as evidenced by the Company's loss of a major wholesale customer, Houlton Water Company. The rates that the Company is now charging its remaining wholesale customers are based on market pricing and not rate base/rate of return regulatory formulas. For this reason, the Company has discontinued the application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation," for its wholesale business jurisdiction. These write- offs were classified as extraordinary items associated with the discontinuance. 6. EARLY RETIREMENT PROGRAM In March 1996, the Company offered an early retirement program to selected employees. All eligible employees will participate in the program. As a result, in accordance with Statement of Financial Accounting Standards No. 88 (SFAS 88), "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the Company recognized a first quarter charge of $258,000, net of taxes. -8- Item 2. Management's Analysis of Quarterly Income Form 10-Q Statements Results of Operations Earnings per share and net income available for common stock for the three months ended March 31, 1996 along with the corresponding information for the previous year are as follows: Three Months Ended March 31 1996 1995 Earnings per share $ .90 $ .54 Net income available for Common Stock - in Thousands $1,451 $ 874 For the first quarter of 1996 compared to the same quarter last year, the increase in consolidated earnings per share of $.36 is attributable to the following: Increase (Decrease) Increase in retail revenues due to rate increases effective April 1, 1995 and January 1, 1996 and increase in sales $ .39 Increases in secondary sales and other revenues .10 Decrease in fuel expenses .18 Decrease due to loss of Houlton Water Company (.17) 1996 early retirement program (.16) Other .02 Total $ .36 Earnings per share for the first quarter of 1996 were $.36 per share more than for the same period in 1995. The elimination of the fuel clause reconciliation with the associated fuel revenue accounting mechanism will complicate quarter-to-quarter earnings comparisons for 1996 to 1995. The prior fuel accounting mechanism smoothed the recognition of fuel expenses over the annual fuel reconciliation period. Rate increases effective on April 1, 1995 and January 1, 1996 as well as a 1% increase in retail sales resulted in an increase of $.39 per share. The -9- Form 10-Q Part 1. Financial Statements Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) January 1, 1996 increase in retail rates was approved by the Maine Public Utilities Commission (MPUC) under the terms of a four-year rate plan. The rate plan also eliminated the fuel clause during the rate plan period with the exception of the annual deferral of $902,000, net of income taxes, of the costs of its purchases from Wheelabrator-Sherman, an independent power producer. Retail fuel expenses for the first quarter of 1996 were $.18 per share less than for the same quarter in 1995. Increases in secondary sales and wheeling revenues also resulted in an increase of $.10 per share. Partially offsetting these increases were a $.17 per share decrease due to the loss of Houlton Water Company as a wholesale customer due to competitive bidding, and a one-time charge of $.16 per share, due to several employees accepting an early retirement program in March 1996. Consolidated operating revenues for the quarter ended March 31, 1996 and 1995, are as follows: 1996 1995 (Dollars in Thousands) $ MWH $ MWH Retail 14,360 131,690 13,596 130,515 Sales for Resale 611 18,101 1,898 36,234 Total Primary Sales 14,971 149,791 15,494 166,749 Secondary Sales 396 22,051 130 4,426 Other Revenues/Rev. Adjust. 258 (68) Total Operating Revenues 15,625 171,842 15,556 171,175 -10- Form 10-Q Part 1. Financial Statements Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) Primary sales in the first quarter of 1996 were 149,791 MWH, a decrease of 16,958 MWH from the same period last year. Sales for resale decreased 18,133 MWH due to the loss of the Company's largest wholesale customer, Houlton Water Company (HWC). HWC began purchasing their energy from Central Maine Power on January 1, 1996, resulting from HWC's solicitation for competitive prices in late 1994. In 1995, HWC represented 11.1% of the Company's consolidated MWH sales and 8.4% of consolidated operating revenues. Sales to public authorities decreased 1,007 MWH because of the closure of Loring Air Force Base. Partially offsetting these decreases were increased residential sales of 1,236 MWH and commercial and industrial sales of 947 MWH. Secondary sales increased by 17,625 MWH, reflecting on the availability of Maine Yankee during the first quarter of 1996 while the Plant was out of service during the same quarter in 1995. Retail revenues for the first quarter of 1996 were $14,360,000 compared to $13,596,000 for the same period of 1995, reflecting the new retail rates effective April 1, 1995 and January 1, 1996, and a 1,175 MWH increase in retail sales. For 1995, an element of revenues were determined using seasonal fuel revenue accounting associated with the prior fuel clause, eliminated with the rate plan, which smoothed the recognition of fuel expenses and the element of revenues over the reconciliation period. Sales for resale revenues decreased in 1996 due to the loss of HWC as discussed above. During the first quarter of 1996, secondary sales of the Company's Wyman Unit No. 4 and Maine Yankee entitlements for varying lengths of time were made at prevailing market rates. Since Maine Yankee was not available for the same period in 1995, secondary sales for the quarter were limited to Wyman No. 4 entitlements. -11- Form 10-Q Part 1. Financial Statements Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) For the first quarters ended March 31, 1996 and 1995, total operating expenses were $13,330,000 and $13,801,000, respectively. The changes in operating expenses and energy sources are as follows: Increase/(Decrease) (Dollars in Thousands) $ MWH Purchased Power Expenses Maine Yankee 152 54,668 Wheelabrator-Sherman (56) (2,238) NB Power (1,598) (64,401) System Purchases 39 335 (1,463) (11,636) Deferred Fuel 253 Generating Expenses (158) 11,558 Other Operation & Maint. Expenses 567 Depreciation and Amortization Expenses (40) Income Taxes 362 Taxes Other than Income 8 Total (471) ( 78) Maine Yankee was out of service for most of the first quarter of 1995, while it returned to 90-percent level of operation on January 22, 1996. Reference is made to the Company's 1995 Annual Report, "Analysis of Financial Condition and Review of Operations - 1995, Maine Yankee", for further discussion of the 12-month outage for sleeving repairs to the plant's steam generator tubes. The 54,668 MWH increase in Maine Yankee production and an 11,151 MWH increase in hydro generation in 1996 allowed the Company to reduce purchases from NB Power by 64,401 MWH. The change in deferred fuel expenses reflects the elimination for 1996 of the fuel revenue accounting associated with the prior fuel clause, as discussed in the "Legal Proceedings" section of this Form 10-Q, item 1(b). Under the same rate plan, the Company has deferred $375,000 ($1.5 million annually) of its Wheelabrator-Sherman purchased power costs. Generating expenses decreased by $158,000, primarily due to the Steam Units at Caribou being placed on inactive status on January 1, 1996. See "Caribou Units Inactivated" -12- Form 10-Q Part 1. Financial Statements Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) below for further discussion. Other operation and maintenance expenses increased by $567,000 due to the recognition of $429,000 for an early retirement program offered to selected employees in March, 1996 and a $91,000 increase in distribution expenses due to increased overhead line maintenance in 1996. Caribou Units Inactivated Reference is made to the Company's Form 8-K dated July 13, 1995 in which the Company reported that, at a regular meeting on July 7, 1995, the Board of Directors authorized placing on inactive status Steam Units 1 and 2 of the Company's Caribou Generating Facility in Caribou, Maine. The Company inactivated the Units on January 1, 1996 and expects that they will remain inactive for five years or longer. These two units, which represent 23 MW of capacity, have become surplus to the Company's needs due to the closure of Loring Air Force Base and the loss in 1996 of the Company's largest customer, the Houlton Water Company. During the Units' inactive period, the plant equipment will be protected and maintained by the installation of a dehumidification system that will permit the Plant to return to service in approximately six months. Placing Steam Units 1 and 2 on inactive status will save the Company approximately $3.5 million over the next five years. These savings result primarily from a savings in operation and maintenance expense. The Company eliminated 12 positions at the plant and conducted a voluntary early retirement program that avoided involuntary termination of employees whose positions at the units have been eliminated. The expenses of the voluntary early retirement plan of approximately $231,000, net of income taxes, as well as the expenses to lay-up the Steam Units will be amortized over five years in accordance with the rate plan. The rate plan allows the Company to continue rate base treatment for unrecovered plant costs and depreciation on the Caribou Steam Units, which had a net book value of approximately $718,000 as of January 1, 1996. Steam Unit No. 1 went into operation in the early 1950s and Unit No. 2, in the mid 1950s. The Company still has a diesel generation station of approximately 7 MW and a hydro facility -13- Form 10-Q Part 1. Financial Statements Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) of approximately 1 MW and will continue to employ 11 employees at the Caribou facility. Financial Condition The accompanying Statements of Consolidated Cash Flows reflect the Company's liquidity and the net cash flows generated by or required for operating, financing and investing activities. For purposes of the Statements of Consolidated Cash Flows, the Company considers all highly liquid securities to be cash equivalents. Net cash flows from operating activities were $3,425,000 for the first three months of 1996. For the period, $552,000 was invested in electric plant, $744,000 was paid in dividends and $25,000 was used to reduce long-term debt. $1,400,000 was used to pay off short-term borrowings. For the three months ended March 31, 1995, net cash flows from operating activities were $2,225,000. For the first three months of 1995, the Company invested $603,000 in electric plant, paid $744,000 in dividends, and reduced long term debt by $25,000. Cash flows for 1995 were impacted by the reduction in earnings and the previously mentioned replacement power purchases during the Maine Yankee outage. See "Legal Proceedings", paragraph 1(b) of this Form 10-Q for a description of the multi-year rate plan approved by the Maine Public Utilities Commission in November, 1995, effective January 1, 1996. The rate plan will assist the Company in dealing with the economic uncertainties that lay ahead with the loss of Loring and Houlton. The Plan provides stable, predictable rates for our customers, economic development rates to encourage investment in our service territory, and competitive returns for our shareholders. On April 4, 1991, the Maine Public Utilities Financing Bank (MPUFB) issued $10 million of tax-exempt bonds on behalf of the Company. Pursuant to the long-term note issued under a loan agreement between the Company and the MPUFB, the Company agreed to make payments to the MPUFB for the principal and -14- Form 10-Q Part 1. Financial Statements Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) interest on the bonds. Concurrently, pursuant to a letter of credit and reimbursement agreement, the Company caused a Direct Pay Letter of Credit for a term of five years to be issued by Barclays Bank PLC, New York Branch (Barclays Bank) for the benefit of the holders of such bonds. To secure the Company's obligations under the reimbursement agreement, the Company issued a second mortgage bond to Barclays Bank in the amount of $10,426,563, as collateral for the Company's obligation to repay Barclays Bank the $10 million principal amount of the bonds plus 195 days of interest on the bonds. The bonds had a coupon rate of 7.875% and, after considering the enhancement fees and other costs, the annual cost to the Company was approximately 8.725%. Barclays Bank notified the Company that it would not renew the Direct Pay Letter of Credit for this issue. With the expiration of the Direct Pay Letter of Credit on April 4, 1996, the entire $10 million principal amount of the bonds was redeemed at par on April 1, 1996 in accordance with the indenture. To meet its reimbursement obligation that resulted from the draw on the Barclays Direct Pay Letter of Credit prior to its expiration, the Company borrowed $10,000,000 under a refunding note from Fleet Bank of Maine. The note expires on June 30, 1996 with interest at LIBOR plus .75% and a facility fee of $25,000 for the term of the loan. For the first month, the effective interest rate was 7.1875%. The MPUFB has approved the Company's request to issue a new series of the tax exempt bonds on behalf of the Company in an amount not to exceed $16,000,000. The proceeds of the new series will be used for the refinancing of the 1991 series through the payment of the refunding note and for the acquisition of qualifying electric property. -15- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (a) Maine Public Utilities Commission, Re: Electric Utility Industry Restructuring Study, Docket No. 95-462. In 1995, the Maine Legislature passed Resolve 89 "To Require a Study of Retail Competition in the Electric Utility Industry" (the "Resolve"), to begin a process for developing recommendations on the future structure of the electric utility industry in Maine. The process included the appointment of a Work Group on Electric Utility Restructuring to develop a plan for the orderly transition to a competitive market for retail purchases and sales of electricity. The Company participated in this Work Group, which was unable to reach a consensus on a recommended plan by its reporting deadline. The Resolve also directed the MPUC to conduct a study to develop at least two plans for the orderly transition to retail competition in the electric utility industry in Maine and to submit a report of its findings by January 1, 1997. One plan would be designed to achieve "... full retail market competition for purchases and sales of electric energy by the year 2000" and the other to achieve a more limited form of competition. The Resolve also stated that the MPUC's findings would have no legal effect, but would "... provide the Legislature with information in order to allow the Legislature to make informal decisions when it evaluates these plans." On December 12, 1995, the MPUC issued a Notice of Inquiry (the "Notice") initiating its study. In the Notice, the MPUC solicited detailed proposals and plans for achieving retail competition in Maine by the year 2000 and requested the proposals include specific plans for an orderly transition to a more competitive market. The Notice required that plans and proposals be filed with the MPUC by interested parties no later than January 31, 1996, and outlined a schedule calling for submittal of a final report to the Legislature in December, 1996. On January 30, 1996, the Company filed its restructuring proposal with the MPUC. The major elements of this proposal are: -16- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (Continued) (a) The separation of the Company's generation assets (including contracts and entitlements) from its transmission and distribution assets. The Company suggested this separation could be accomplished by either a functional separation of generation from distribution and transmission within the Company's existing corporate structure or by separating generation, on the one hand, and distribution and transmission, on the other, into two wholly-owned subsidiaries. The Company strongly opposes any recommendation that it be required to divest itself of its generation assets. (b) The economic and resource planning regulation of generation would cease. The FERC would continue to regulate transmission, and distribution would remain a franchised monopoly subject to continued regulation by the MPUC. The owner of the distribution system would be obligated to connect all willing customers. (c) If certain necessary changes in the operation and management of the regional transmission grid are in place, all retail customers in Maine would, by the year 2000, be entitled to purchase electric energy directly from any entity that wished to supply it to them. (d) The Company would be entitled to full recovery of all its stranded costs. This recovery would be accomplished by a charge on the distribution system that would apply to all retail customers. In its filing, the Company estimates that its stranded costs could be as high as $68 million. This amount consists primarily of the above-market costs of the Company's contract with Wheelabrator-Sherman, a non-utility generator, estimated at $44 million and deferred regulatory assets, such as its Seabrook investment of $24 million. The Company's proposal, however, was only one of over a dozen received by the MPUC in response to its Notice, some of which take positions on these matters that vary substantially from the Company's. The Company cannot predict the results of its filing with the MPUC, what form of restructuring, if any, the electric utility industry in Maine will take, or what effect that restructuring will have on the Company's business operations or financial results. -17- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (Continued) (b) Multi-year Rate Plan is Approved for the Company by the MPUC in Maine Public Service Company Re: Proposed Increase in Retail Rates, MPUC Docket No. 95-052 On May 1, 1995, Maine Public Service Company filed with the Maine Public Utilities Commission a proposed increase in the rates it charges its retail customers. The Company at the same time filed a five-year rate plan requesting new rates beginning in January, 1996 as detailed below. Reference is made to the Company's Form 10-Q for the quarter ended June 30, 1995 for a complete description of the Company's filed rate plan. In general, the Company's five-year rate plan provided for total annual average increases in retail rates, including fuel, in accordance with the following schedule: 1996 - 4.5% $2.2 million 1997 - 4.5% 2.3 million 1998 - 3.5% 1.9 million 1999 - 3.0% 1.7 million 2000 - 3.0% 1.7 million As part of its plan, the Company proposed to eliminate the annual fuel adjustment clause except for the cost of power purchased from the Wheelabrator-Sherman Energy Company (W/S). The Company's plan included deferrals of up to $3 million annually of its W/S power costs and the deferral of any uncollected fuel costs under the present fuel clause as approved in Docket 95-001 estimated to be approximately $6 million. The Company proposed to begin collecting the deferred costs, in an amount of up to $21 million, in 2001. The Company also proposed to write off and not recover in rates approximately $4.9 million, net of income taxes, of its remaining investment in the Seabrook project previously supported by rates to its wholesale customers, principally the Houlton Water Company, which began purchasing its full requirements from another supplier in January 1, 1996. In its rebuttal filing on September 22, 1995, the Company further proposed a sharing mechanism based on an allowed -18- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (Continued) return on equity (ROE) of 11.75%. Under this profit- sharing mechanism, earnings in excess of the proposed ROE were to be shared equally by stockholders and customers via rate reductions or reductions in the W/S deferral. If earnings were less than 300 basis points below the proposed ROE, that loss was to be borne by shareholders; if earnings were less than 300 basis points above the ROE, the excess would be retained by shareholders and half would be used to reduce the W/S deferral. If earnings were more than 300 basis points below the proposed ROE, shareholders and customers would bear the loss equally; similarly, earnings of more than 300 basis points in excess of the ROE would be shared equally. The Company's rate plan was vigorously opposed by both the MPUC Staff and the Maine Public Advocate. Both these parties took the position that no expenses or investment previously associated with any of the Company's sales to its wholesale customers should be borne by its retail customers. As a result, the MPUC Staff, for example, proposed an increase of 4.4% in 1996, but only 2.2% for each year of the plan thereafter. Moreover, neither the MPUC Staff nor the Public Advocate proposed allowing any deferral of the W/S expenses or deferred fuel. After extensive negotiations, the Company, the MPUC Staff and the Public Advocate filed a Stipulation with the Commission on November 6, 1995, which established a four- year rate plan for the Company. The one remaining party to this proceeding, McCain Foods, Inc., opposed this Stipulation. After a hearing on November 13, 1995, the MPUC approved this Stipulation over the objection of McCain Foods, Inc. Under the terms of the Stipulation, the Company has the right to receive the following increases: January 1, 1996 4.4% $2.1 million February 1, 1997 2.9% 1.4 million February 1, 1998 2.75% 1.4 million February 1, 1999 2.75% 1.4 million These increases will be subject to increases or decreases resulting from the operation of the profit-sharing mechanism, as well as the mandated costs and plant outage -19- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (Continued) provisions described below. The Company agreed that it will seek no other increases, for either base or fuel rates, except as provided under the terms of the rate plan. There will be no fuel clause adjustments during the term of the plan. The Company also agreed to write off, in 1995, and not collect in retail rates the following amounts: (a) $4,845,812, net of income taxes, of its investment in Seabrook previously allocated to wholesale sales. (b) $1,390,000, net of income taxes, in other plant investment, i.e. rate base, except transmission plant, previously associated with the wholesale customers. (c) $3,500,000 ($2,104,000, net of income taxes) in deferred fuel. The total amount of the write-offs, net of income taxes, in 1995 are approximately $8,340,000, or approximately $5.16 per share of common stock. As a condition of the Stipulation, the Company requested waivers for interest coverage tests under its revolving credit arrangement and the Letter of Credit supporting the public utility revenue bonds, 1991 series. Unless these write-offs were considered extraordinary for purposes of the interest coverage tests, the Company would have been in violation of these interest coverage tests. The waivers were received from the various lenders prior to the MPUC's issuance of its order in this proceeding. The Company will also be permitted to defer an amount of $1.5 million annually of the costs of the W/S purchases over the term of the rate plan. The approved rate plan provides that the Company can seek recovery of this deferred amount (up to a total of $6 million) in rates beginning in the year 2001, after the current term of the W/S contract has expired. The Company will further amortize over the four years of the rate plan, $300,000, net of income taxes, in deferred fuel with the remainder, -20- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (Continued) approximately $1.3 million, net of income taxes, being deferred until the year 2000. The approved rate plan further provides for the following treatment of the Maine Yankee steam generator sleeving costs: the Company will amortize its share of these costs in equal amounts over a five-year period beginning on January 1, 1996. At the expiration of the rate plan, the remaining one-fifth of the costs will be amortized in 2000 subject to rate treatment at that time. The approved rate plan contains a profit-sharing mechanism based upon a target return of equity (ROE) of 11%, calculated according to retail ratemaking mechanisms. This profit-sharing mechanism will apply only to the last two rate increases scheduled to occur on February 1, 1998 and February 1, 1999. As part of this review process, the target ROE will be subject to adjustment based on an index by averaging over a twelve- month period the dividend yields on Moody's group of 24 electric utilities and Moody's utility bond yields. The profit-sharing mechanism works as follows: If the Company's ROE exceeds the target ROE by less than 300 basis points, this gain accrues entirely to shareholders. Similarly, any deficiency of up to 300 basis points below the target ROE is borne entirely by the shareholders. All deficiencies of 300 or more basis points below the target ROE will be shared equally by shareholders and customers. All earnings of 300 or more basis points above the target ROE must first be applied to reduce any of deferred W/S costs described above. Any remaining excess earnings will be shared equally by customers and shareholders. The plan also allows the Company to terminate the rate plan and file for rate increases under traditional rate application procedures if its earnings fall 500 or more basis points below the target ROE during any twelve-month period during the term of the plan. The method agreed to by the parties for measuring earned ROE for the purpose of the profit-sharing mechanism and -21- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (Continued) rate termination provision described above, allocates various revenues and expenses between the wholesale and retail jurisdictions using allocators that, in part, reflect the Company's 1994 allocations. With the loss of sales to Houlton Water Company in 1996, the Company estimates that the use of the agreed-upon allocators will produce a calculation of earnings for the profit-sharing and termination mechanisms that could be as much as 400 basis points above the Company's actual financial ROE. Because of this disparity, the Stipulation provides that the agreed-upon allocation methodology will not apply if the use of those allocators will require the Company to write off any additional assets in accordance with Generally Accepted Accounting Principles (GAAP). In that event, the parties have agreed to develop a different method for calculating profit-sharing and termination that will not require the Company to write off any additional assets. The plan also provides that if either Maine Yankee or Wheelabrator-Sherman cease operation for more than six months, the Company shall be allowed to adjust its allowed rate increases by 50% of the net costs or net savings resulting from the outage, together with any carrying costs on the balance deferred. Any net costs or net savings during the first six months of the outage would accrue entirely to shareholders. The plan further contains a mechanism for allocating the savings resulting from any restructuring of the W/S contract during the term of the plan. Any savings would be allocated first to the W/S deferred costs accumulating at $1.5 million annually, then to the deferred fuel balance as of December 31, 1995 being deferred until 2000, next to eliminate any on-going W/S deferrals and finally, any savings that remain will be allocated 95% to customers and 5% to shareholders. The plan provides that the Company can flow through to customers at the time of the scheduled rate increases, increases or decreases resulting from certain mandated costs, such as tax or accounting changes, but not costs resulting from natural disasters. To qualify, a mandated cost must receive MPUC approval, must be beyond the control of the Company's management, must effect the -22- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (Continued) Company specifically or the electric utility generally and must exceed $300,000 in annual revenue requirements. The Stipulation also provides for a number of accounting orders. Among these are orders: permitting the Company to amortize deferred post-retirement benefits other than pension (SFAS 106) expenses in equal amounts over a ten- year period beginning January 1, 1996, along with the recovery of current year SFAS 106 costs; permitting the Company to continue rate base treatment for unrecovered plant costs and depreciation on the Caribou Steam Units as well as the deferral and amortization over five years of the reduction in force expenses (including pension expenses under SFAS 88) resulting from the closing of those units; and continued deferral and amortization of replacement power and capacity costs associated with Maine Yankee scheduled outages. Finally, the Stipulation clarifies that the rate plan is not deregulation for accounting purposes and provides for the continuing recovery in rates of certain "regulatory assets", such as the retail portion of the Company's Seabrook investment, previously allowed by the MPUC. On January 2, 1996, McCain Foods, Inc., which had objected to the Stipulation, appealed the MPUC's approval of the rate plan to the Maine Supreme Judicial Court. This action was docketed as PUC 96-13. The Company does not believe this appeal has any merit and intends to oppose it vigorously, but cannot predict its ultimate outcome. On March 20, 1996, the Company and McCain Foods filed with the Commission a Power Purchase Agreement under which McCain agrees to purchase all its electrical requirements from the Company through 2000. If the Agreement is approved by the MPUC, McCain has agreed to dismiss its appeal. The Company cannot predict whether the MPUC will approve the Agreement. In addition to the four-year rate plan, the MPUC, under this docket, also approved the Company's proposal to develop flexible rates to retain or attract new customers. On October 23, 1995, the Company implemented a reduced Rate AH for residential electric space heat. Customers who have a permanent electric space heat system that supplies at least 50% of their heating requirements -23- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (Continued) have been offered a discount up to 40% from October to April. On November 27, 1995, the MPUC approved two new rates that became effective December 1, 1995. The first, Rate F, provides farmers with a discounted price for electricity used in storage facilities, reducing their winter electric rate ten percent from November through March. The second, Rate EDR, an economic development rate, provides a multi-year discount in the cost of electric service for large commercial and industrial customers who create new electrical load. This reduced rate should encourage development in our electrical service territory by providing an incentive rate while a new business gets established or an existing business, meeting certain criteria, completes expansion. Depending on eligibility, the discount offered will range from 20% the first year to 5% in the fourth year. After the four- year period, EDR customers will be billed under the Company's standard electric rates. (c) Peoples Heritage Bank v. Maine Public Service Company U.S. District Court (D. ME) Civil Action No. 95-0180-B On September 18, 1995, Peoples Heritage Bank filed against the Company a civil action for declaratory and monetary relief seeking recovery for response costs, damages and attorneys fees incurred because of the release of hazardous substance at a site in Presque Isle, Maine. In 1992, Peoples Heritage purchased the property and shortly thereafter discovered that the soil at the site was contaminated with polychlorinated biphenyls (PCBs) which it now alleges originated with two electrical transformers placed on the site by the Company. Peoples Heritage claims to have spent in excess of $250,000 to remove the PCB contaminated soil and seeks reimbursement of this amount. The suit is brought pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), the Federal Declaratory Judgment Act and under common law grounds of strict liability for abnormally dangerous activities, negligence and trespass. -24- FORM 10-Q PART II. OTHER INFORMATION Item 1. Legal Proceedings (Continued) The Company has denied liability in this matter but cannot predict the outcome of this action. (d) Maine Public Service Company, Request For Open Access Transmission Tariff, FERC Docket No. ER 95-836-000. On March 31, 1995, the Company filed an open access transmission tariff with the Federal Energy Regulatory Commission (FERC). This tariff provides fees for various types and levels of transmission and transmission-related services that are required by transmission customers. The tariff, as filed, substantially increases some of the fees for transmission services and provides separate fees for various transmission-related services. On May 31, 1995, the FERC approved the filed tariff, subject to refund. The filing has been vigorously contested by the Company's wholesale customers and a decision by the FERC is not expected until later in 1996. The Company cannot predict FERC's ultimate decision in this matter. (e) Maine Public Service Company, Proposed Increase in Rates (Rate Design), MPUC Docket No. 95-052. On June 15, 1995, the MPUC issued an order bifurcating the Company's request for rate design from the revenue requirement portion of this docket (see item (b) above). Based upon marginal cost of service principles, the Company has proposed a substantial redesign of its current rates. For example, under the Company's proposed rates for transmission customers would decrease from their current level by nearly 8%, while rates for residential customers would increase by over 8%. The Company's proposals have been vigorously contested by the MPUC Staff and the Public Advocate, who propose only a small decline for large industrial customers and a very minor increase for residential. Hearings were held on this matter before the MPUC on March 14 and 15, 1996. The Commission's decision on the Company's proposal is expected by late May, 1996. The Company cannot predict the outcome of this proceeding. -25- FORM 10-Q PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits - none. (b) Reports on Form 8-K. A Form 8-K was filed on January 23, 1996, under Item 5, Other Material Events, and on March 8, 1996, under Item 4, Change in the Company's Certifying Accountant, and Item 5, Other Material Events. A Form 8-K/A was filed on March 14, 1996 under Item 4, Change in the Company's Certifying Accountant. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MAINE PUBLIC SERVICE COMPANY (Registrant) Date: May 13, 1996 Larry E. LaPlante Larry E. LaPlante, Vice President Finance and Treasurer -26- EX-27 2 FINANCIAL DATA SCHEDULE FOR THREE MONTHS ENDED MARCH 31, 1996
UT 1,000 3-MOS DEC-31-1996 MAR-31-1996 PER-BOOK 49,237 3,643 11,534 49,025 0 113,439 7,357 38 32,269 39,664 0 0 36,095 0 0 0 1,315 0 0 0 36,365 113,439 15,625 1,099 12,231 13,330 2,295 78 2,373 922 1,451 0 1,451 744 858 3,425 .90 .90
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