-----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, Cy+TxUJl7+rct0gqPH7RmO26Yi47wfgVsuhs5d28z94gLuJWevikSNVgfWaP7Nei Gi4VDQwdldW4MdfmbxT1Yw== 0000061611-98-000017.txt : 19981113 0000061611-98-000017.hdr.sgml : 19981113 ACCESSION NUMBER: 0000061611-98-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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: SEC FILE NUMBER: 001-03429 FILM NUMBER: 98745208 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 September 30, 1998 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 and nine months ended September 30, 1998, and for the corresponding periods of the preceding year; a consolidated balance sheet as of September 30, 1998, and as of December 31, 1997, the end of the Company's preceding fiscal year; and a statement of consolidated cash flows for the period January 1 (beginning of the fiscal year) through September 30, 1998, and for the corresponding period of the preceding year. In the opinion of management, the accompanying unaudited condensed consolidated financial statements present fairly the financial position of the Companies at September 30, 1998 and December 31, 1997, and the results of their operations for the three and nine months ended September 30, 1998 and their cash flows for the nine months ended September 30, 1998, and for the corresponding periods of the preceding year. -2- MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARY STATEMENTS OF CONSOLIDATED OPERATIONS (Unaudited) (Dollars in Thousands Except Per Share Amounts) Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Operating Revenues $12,832 $12,385 $41,672 $40,092 Operating Expenses Purchased Power 7,444 8,912 22,558 26,573 Other Operation and Maintenance 3,206 3,185 10,226 9,480 Depreciation 659 626 1,976 1,880 Amortization 402 411 1,205 1,231 Taxes Other Than Income 368 386 1,182 1,268 Provision (Benefit) for Income Taxes (20) (747) 1,003 (941) Total Operating Expenses 12,059 12,773 38,150 39,491 Operating Income 773 (388) 3,522 601 Other Income (Deductions) Equity in Income of Associated Companies 132 130 385 377 Allowance for Equity Funds Used During Construction 10 5 25 14 Other Income Taxes (4) (38) (47) (120) MY Replacement Power Carrying Charges 61 13 185 13 Other - Net (31) 43 (43) 9 Total 168 153 505 293 Income Before Interest Charges 941 (235) 4,027 894 Interest Charges Long-Term Debt and Notes Payable 1,098 897 3,064 2,637 Less Allowance for Borrowed Funds Used During Construction (6) (3) (14) (7) Total 1,092 894 3,050 2,630 Net Income (Loss) Available for Common Stock ($151) ($1,129) $977 ($1,736) Average Shares Outstanding (000's) 1,617 1,617 1,617 1,617 Basic Earnings (Loss) Per Share of Common Stock ($0.09) ($0.70) $0.60 ($1.07) Dividends Declared per Common Share $0.25 $0.25 $0.75 $0.75 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) September 30, December 31, ASSETS 1998 1997 Utility Plant Electric Plant in Service $98,642 $96,396 Less Accumulated Depreciation 51,177 47,230 Net Electric Plant in Service 47,465 49,166 Construction Work-in-Progress 2,840 699 Total 50,305 49,865 Investment in Associated Companies Maine Yankee Atomic Power Company 4,167 3,952 Maine Electric Power Company, Inc. 233 177 Total 4,400 4,129 Net Utility Plant and Investments 54,705 53,994 Current Assets Cash and Cash Equivalents 1,665 2,071 Deposits for Interest and Dividends 472 64 Accounts Receivable - Net 4,206 5,788 Unbilled Base Revenue 1,365 1,686 Deferred Fuel and Purchased Energy 661 687 Inventory 1,211 1,231 Prepayments 825 2,189 Total 10,405 13,716 Other Assets Restricted Investments 3,702 2,263 Uncollected Maine Yankee Decommissioning Costs 38,776 43,429 Recoverable Seabrook Costs 25,231 26,299 Regulatory Asset - SFAS 109 & 106 12,436 13,607 Deferred Fuel and Purchased Energy 9,119 7,135 Regulatory Asset - Power Purchase Restructuring 8,706 Other 3,735 3,038 Total 101,705 95,771 Total Assets $166,815 $163,481 CAPITALIZATION AND LIABILITIES Capitalization Common Shareholders' Equity Common Stock $13,071 $13,071 Paid-in Capital 38 38 Retained Earnings 26,667 26,903 Treasury Stock, at cost (5,714) (5,714) Total 34,062 34,298 Long-Term Debt (less current maturities) 45,915 35,650 Current Liabilities Long-Term Debt Due Within One Year 1,275 4,155 Notes Payable 10,000 7,200 Accounts Payable 3,637 5,871 Current Deferred Income Taxes 47 6 Dividends Declared 404 404 Customer Deposits 27 43 Interest and Taxes Accrued 489 880 Total 15,879 18,559 Deferred Credits Uncollected Maine Yankee Decommissioning Costs 38,776 43,429 Deferred Income Tax 25,519 25,722 Investment Tax Credits 596 648 Deferred Revenues 1,102 902 Miscellaneous 4,966 4,273 Total 70,959 74,974 Total Capitalization and Liabilities $166,815 $163,481 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) Nine Months Ended September 30, 1998 1997 Cash Flow Used For Operating Activities Net Income (Loss) $977 ($1,736) Adjustments to Reconcile Net Income (Loss) to Net Cash Used For Operations Depreciation 1,976 1,880 Amortization 169 194 Amortization of Seabrook Costs 1,064 1,064 Income on Tax Exempt Bonds-Restricted Funds (78) (136) Deferred Income Taxes 863 1,210 AFUDC (39) (21) Change in Deferred Fuel & Purchased Energy (1,984) (2,130) Change in Deferred Regulatory and Debt Issuance Costs 410 (1,098) Change in Deferred Regulatory Asset - Payment for Power Purchase Restructuring (8,706) Change in Deferred Revenues 200 204 Change in Benefit Obligation 640 590 Change in Current Assets and Liabilities 673 (2,329) Other (592) (24) Net Cash Flow Used For Operating Activities (4,427) (2,332) Cash Flow From Financing Activities Dividend Payments (1,617) (1,213) FAME Financing Costs (534) Deposit - FAME Capital Reserve Fund (2,378) Issuance of Long Term Debt 11,540 Drawdown of Tax Exempt Bonds Proceeds 1,038 1,239 Retirements of Long-Term Debt (4,155) (1,315) Short-Term Borrowings, Net 2,800 4,800 Net Cash Flow From Financing Activities 6,694 3,511 Cash Flow Used For Investing Activities Investment in Electric Plant (2,673) (1,941) Net Cash Used For Investment Activities (2,673) (1,941) Decrease in Cash and Cash Equivalents (406) (762) Cash and Cash Equivalents at Beginning of Year 2,071 1,291 Cash and Cash Equivalents at End of Period $1,665 $529 Change in Current Assets and Liabilities Providing (Utilizing) Cash From Operating Activities Accounts Receivable $1,582 $610 Unbilled Revenue 321 433 Deferred Maine Yankee Replacement Power Costs 26 Inventory 20 (60) Prepayments 1,364 (1,941) Accounts Payable & Accrued Expenses (2,624) (1,361) Other Current Liabilities (16) (10) Total Change $673 ($2,329) Supplemental Disclosure of Cash Flow Information: Cash Paid During the Period For: Interest $3,331 $2,950 Income Taxes (1998 & 1997 are net of refunds of $2,052,451 and $500,000, respectively) ($1,387) ($130) 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 1997 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 1997 Form 10-K. These statements reflect all adjustments that are, in the opinion of management, necessary to a fair statement of results for interim periods presented. All such adjustments are of a normal recurring nature. The Company's significant accounting policies are described in the Notes to Consolidated Financial Statements of the Company's Annual Report filed with the Form 10-K. For interim reporting purposes, these same accounting policies are followed. For purposes of the statements of consolidated cash flows,the Company considers all highly liquid securities with a maturity, when purchased, of three months or less to be cash equivalents. Certain reclassification have been made to the 1997 financial statement amounts in order to conform to the 1998 presentation. 2. IMPLEMENTATION OF MULTI-YEAR RATE PLAN A four-year rate plan, approved by the MPUC on November 13, 1995, provided retail rate increases of 4.4% on January 1, 1996, and 2.9% on February 1, 1997. On January 26, 1998, the MPUC approved a 3.9% rate increase effective February 1, 1998, according to terms of a stipulation agreed to by the Company and the Public Advocate and with the support of the MPUC staff. The Company has the right to receive an additional increase in retail rates of a minimum of 3.1% on February 1, 1999. With higher winter rates for our commercial and industrial customers and the elimination of the fuel clause, revenues will be higher during the winter months than during the summer months when rates charged to those customers are approximately 25% lower. -6- 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 (benefits) 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 Nine Months Ended September 30, September 30, 1998 1997 1998 1997 Current income taxes $ (337) $ (994) $ 187 $(2,031) Deferred income taxes 339 303 916 1,264 Investment credits (18) (18) (53) (54) Total income taxes $ (16) $ (709) $1,050 $ (821) Allocated to: Operating Income $ (20) $ (747) 1,003 (941) Other income 4 38 47 120 Total $ (16) $ (709) $1,050 $ (821) For the nine months ended September 30, 1998 and 1997, the effective income tax rates were 51.8% and (32.1%), respectively. The principal reason for the effective tax rates differing from the US federal income tax rate are the contribution to net income of the Company's Canadian subsidiary, flow through items required by regulation and state income taxes. The following summarizes accumulated deferred income taxes established on temporary differences under SFAS 109 as of September 30, 1998 and December 31, 1997. (Dollars in Thousands) September 30, December 31, 1998 1997 Seabrook $14,311 $14,489 Property 8,537 9,565 Regulatory expenses 1,906 1,540 Deferred fuel 1,993 1,631 Pension and postretirement benefits (936) (847) Other (292) (656) Net accumulated deferred income taxes $25,519 $25,722 4. MAINE YANKEE The Company owns 5% of the Common Stock of Maine Yankee Atomic Power Company (Maine Yankee). As previously reported, Maine Yankee has been out of service since December 6, 1996 and on August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations. For additional information regarding Maine Yankee, reference is made to the Company's 1997 Annual Report. With the closing of Maine Yankee, a provision of the Company's rate plan allowing the deferral of 50% of the excess Maine Yankee replacement power costs went into effect on June 6, 1997. For the third quarter of 1998, the Company recovered $140,000 of these deferred expenses in accordance with the January, 1998 rate stipulation which provided for recovery of $562,000 in rates effective February 1, 1998. -7- An additional $1,105,000 would have been deferred in the third quarter of 1998, however these costs were offset by net savings of $1,106,000 from the restructured Purchase Power Agreement with Wheelabrator- Sherman, also in accordance with the rate plan stipulations. As of September 30, 1998, the Company has a net deferred replacement power cost balance of approximately $3,066,000, subject to recovery in accordance with the rate plan. On September 1, 1997, Maine Yankee estimated the sum of the future payments for the closing, decommissioning and recovery of the remaining investment in Maine Yankee to be approximately $930 million, of which the Company's 5% share would be approximately $46.5 million. Maine Yankee has indicated that it plans to further update its decommissioning cost estimate before final consideration by the Federal Energy Regulatory Commission (FERC). Legislation enacted in Maine in 1997 calling for restructuring the electric utility industry provides for recovery of decommissioning costs, to the extent allowed by federal regulation, through the rates charged by the transmission and distribution companies. Based on the Maine legislation and regulatory precedent established by the FERC in its opinion relating to the decommissioning of the Yankee Atomic nuclear plant, the Company believes that it is entitled to recover substantially all of its share of such costs from its customers and, as of September 30, 1998, is carrying on its consolidated balance sheet a regulatory asset and a corresponding liability in the amount of $38.8 million, which is the $46.5 million discussed above net of the Company's post-September 1, 1997 cost-of- service payments to Maine Yankee. On September 2, 1997, the MPUC released the report of a consultant it had retained to perform a management audit of Maine Yankee for the period January 1, 1994, to June 30, 1997. The report contained both positive and negative conclusions, the latter including: that Maine Yankee's decision in December 1996 to proceed with the steps necessary to restart the Plant was "imprudent", that Maine Yankee's May 27, 1997 decision to reduce restart expenses while exploring a possible sale of the Plant was "inappropriate", based on the consultant's finding that a more objective and comprehensive competitive analysis at that time "might have indicated a benefit for restarting" the Plant; and that those decisions resulted in Maine Yankee incurring $95.9 million in "unreasonable" costs. The Company believes the report's negative conclusions are unfounded and may be contradictory. In any event, the Company has expensed its share of these costs. On October 24, 1997, the MPUC issued a Notice of Investigation initiating an investigation of the shutdown decision and of the operation of the Plant prior to shutdown, and announced that it had directed its consultant to extend its review to include those areas. The Company believes it would have substantial constitutional and jurisdictional grounds to challenge any effort in an MPUC proceeding to alter wholesale Maine Yankee rates made effective by the FERC. The MPUC subsequently stayed its investigation pending the outcome of Maine Yankee's FERC rate case, in which the MPUC and the Maine Office of the Public Advocate (OPA) are actively participating while indicating that its consultant would continue its extended review. Based on preliminary indications, the Company expects the consultant's recommendations resulting from its extended review would call for additional disallowances. However, Maine Yankee, the Company, as well as other Maine Yankee owners have discussed proposals to resolve these rate case issues with several intervenors, including the MPUC and the OPA. -8- 5. COMPLIANCE WITH FINANCIAL COVENANTS The Company's short-term revolving credit agreement and a letter of credit supporting its 1996 revenue bonds contain interest coverage tests that the Company must satisfy to avoid default. At December 31, 1997, the Company was not in compliance with these covenants. On March 12, 1998, the Company and the Banks executed a waiver of the interest coverage tests for the fourth quarter of 1997, avoiding a default. On March 31, 1998, the Company and the Banks executed amendments to the revolving credit agreement and letter of credit and reimbursement agreement which further adjusts the interest coverage tests for the first three quarters of 1998. With these amendments, the Company has achieved its amended interest coverage tests for the first three quarters of 1998 and expects to meet the interest coverage tests for the fourth quarter of 1998 based on projected 1998 earnings. In addition, the Revolving Credit Agreement and Letter of Credit supporting the Tax Exempt Bonds due 2021 are extended by one year to October, 1999 and June, 2000, respectively. 6. RESTRUCTURING OF MAINE'S ELECTRIC UTILITY INDUSTRY On May 29, 1997, legislation titled "An Act to Restructure the State's Electric Industry" was signed into law by the Governor of Maine. The principal provisions with accounting impact on the Company are as follows: 1) Beginning on March 1, 2000, all consumers of electricity have the right to purchase generation services directly from competitive electricity suppliers who will not be subject to rate regulation. 2) By March 1, 2000, the Company, Central Maine Power Company (CMP) and Bangor Hydro-Electric Company (BHE) must divest of all generation related assets and business functions except for: a) contracts with qualifying facilities, such as the Company's power contract with Wheelabrator-Sherman (W-S) and conservation providers; b) nuclear assets, namely, the Company's investment in the Maine Yankee Atomic Power Company; c) facilities located outside the United States, i.e., the Company's hydro facility in New Brunswick, Canada; and d) assets that the MPUC determines necessary for the operation of the transmission and distribution services. The MPUC can grant an extension of the divestiture deadline if the extension will improve the selling price. For assets not divested, the utilities are required to sell the rights to the energy and capacity from these assets. The Company shall submit to the MPUC its divestiture plan no later than January 1, 1999. -9- 3) The Company, through a regulated affiliate, will continue to provide transmission and distribution services which will be subject to continued rate regulation by the MPUC. 4) Maine electric utilities will be permitted a reasonable opportunity to recover legitimate, verifiable and unmitigable costs that are otherwise unrecoverable as a result of retail competition in the electric utility industry. The MPUC shall determine these stranded costs by considering: a) the utility's regulatory assets related to generation, i.e., the Company's unrecovered Seabrook investment; b) the difference between net plant investment in generation assets compared to the market value for those assets; and c) the difference between future contract payments and the market value of the purchased power contracts, i.e., the W-S contract. By July 1, 1999, the MPUC will have estimated the stranded costs for the Company and the manner for the collection of these costs by the transmission and distribution company. Customers reducing or eliminating their consumption of electricity by switching to self-generation, conversion to alternative fuels or utilizing demand-side management measures cannot be assessed exit or entry fees. 5) The MPUC shall include in the rates charged by the transmission and distribution utility decommissioning expenses for Maine Yankee. In 2003 and every three years thereafter until the stranded costs are recovered, the MPUC shall review and adjust the stranded cost recovery amounts and related transition charges. However, the MPUC may adjust the amounts at any point in time that they deem appropriate. Since the legislation provides for our recovery of stranded costs by the transmission and distribution company, the Company will continue to recognize existing regulatory assets and plant costs as required by Emerging Issues Task Force 97-4. 6) Employees, other than officers, displaced as a result of retail competition will be entitled to certain severance benefits and retraining programs. These costs will be recovered through charges collected by the regulated transmission and distribution company. The MPUC will conduct several rulemaking proceedings associated with the new restructuring law. The Company is presently reviewing its business operations and the opportunities that the new restructuring law presents. -10- In accordance with EITF 97-4 "Deregulation of the Pricing of Electricity", when the details of the restructuring plan are determined by the MPUC rulemaking, the Company will discontinue application of the Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulations", for the retail generation segment of its business jurisdiction. As a result, the Company continues to defer certain costs as regulatory assets in instances where recovery through future regulatory cash flows is anticipated. The Company cannot predict the value of the Company's stranded investment that the MPUC will determine. In a related matter, and again as required by the Legislation described above, the MPUC, on January 26, 1998, opened an investigation into the feasibility of a direct physical interconnection between the Company's service territory and the New England power grid (MPUC Docket No. 97- 586). On October 13, 1998, the MPUC issued a draft report in Docket No. 97-586, which was prepared by an independent consultant and purports not to be the product of either the MPUC or its Staff. In addition to the issue of the direct physical connection, the draft report also addresses many of the issues concerning the development of a competitive market for electricity in northern Maine. The draft report concludes that "the electricity market in northern Maine is likely to be subject to market power problems" and recommends further study into methods of resolving those problems. While the Company disagrees with the reports conclusion, it cannot predict the outcome of this proceeding. 7. INVESTIGATION OF STRANDED COSTS, TRANSMISSION AND DISTRIBUTION UTILITY REVENUE REQUIREMENTS AND RATE DESIGN On October 14, 1998, the Company filed its determination of stranded costs, transmission and distribution costs and rate design with the MPUC. The Company's testimony supports its $96.6 million estimate of stranded costs when deregulation occurs on March 1, 2000. The major components include the remaining investment in Seabrook, the above market costs of the amended power purchase agreement and recovery of fuel expense deferrals related to Wheelabrator-Sherman, the obligation for remaining operating expenses and recovery of the Company's remaining investment in Maine Yankee, and the recovery of several other regulatory assets. These stranded costs will be reduced by an estimated $19.6 million should the sale of the Company's generating assets be approved by the MPUC, discussed further in Note 9, "GENERATING ASSET DIVESTITURE, below. The Company's proposed annual revenue requirements supported in the filing would be approximately $32.6 millon; $19.3 million for transmission and distribution and $13.3 million for stranded investment. Decisions by the MPUC regarding stranded costs and the generating asset sale approval are not expected until 1999. The Company cannot predict the MPUC's ultimate decision in these matters. 8. RESTRUCTURED POWER PURCHASE AGREEMENT WITH WHEELABRATOR-SHERMAN The Company has restructured its Power Purchase Agreement (PPA) with the Wheelabrator-Sherman Energy Company (W-S) under which the Company is obligated to purchase the entire output (up to 126,582 MWH) of a 17.6 MW biomass plant owned by W-S. The original term of the PPA ran through December 31, 2000 and could be renewed by either party for an additional fifteen years at prices to be determined by mutual agreement or, absent mutual agreement, by the MPUC. -11- On October 15, 1997, the Company and W-S agreed to amend the PPA. Under the terms of this amendment, W-S agreed to reductions in the price of purchased power of approximately $10 million over the PPA's current term. The Company and W-S have agreed to renew the PPA for an additional six years at agreed-upon prices. The Company made an upfront payment to W-S of $8.7 million on May 29, 1998, with the financing provided by the Finance Authority of Maine (FAME). This payment has been reflected as a regulatory asset, and based on an MPUC order, will be included in stranded costs and will be recovered in the rates of the transmission and distribution utility. The Company believes the amended PPA will help relieve the financial pressure caused by the recent closure of Maine Yankee as well as the need for substantial increases in its retail rates, and is therefore in the best interests of the Company, its customers and shareholders. On May 29, 1998, FAME issued $11,540,000 of its Taxable Electric Rate Stabilization Revenue Notes, Series 1998A (Maine Public Service Company) (the Notes) on behalf of the Company. The Notes were issued pursuant to, and are secured under, a Trust Indenture by and between FAME and Peoples Heritage Bank, Portland, Maine, as Trustee (the Trustee), for the purpose of: (i) financing the buydown payment to W-S of approximately $8.7 million, as required under the amended purchase power agreement described above; (ii) for the Capital Reserve Fund, as required by FAME under their Electric Rate Stabilization Program; and (iii) for issuance costs. The Notes are limited obligations of FAME, payable solely out of the trust estate available under the Indenture, principally the Loan Note and Loan Agreement with the Company and the Capital Reserve Fund held by the Trustee. The Company has issued $4 million of its First Mortgage Bonds and $7.54 million of its Second Mortgage Bonds as collateral for its performance under the Loan Note issued pursuant to the Loan Agreement. The Notes will bear interest at a Floating Interest Rate, initially at 5.7% per annum, and will be adjusted weekly. On June 1, 1998, the Company purchased an interest rate cap of 7% at a cost of $172,000, to expire June, 2008, to limit its interest rate exposure to quarterly U.S. LIBOR rates. 9. GENERATING ASSET DIVESTITURE In August, 1997, as required by the electric utility industry restructuring legislation, the Company offered for sale all of its generating capacity, including its Canadian subsidiary, with a total net book value of $11.2 million as of September 30, 1998. This plan was approved by the Maine Public Utilities Commission, which has given the proceeding the Docket No. 97-670. Any final sale of the Company's generation assets must be approved by the MPUC. In its Order approving the divestiture plan, the MPUC noted a number of concerns that it would address when the final sale was brought before it for approval. These concerns included whether the sale of the assets of the Canadian subsidiary should be delayed pending the development of a retail market for electricity in Canada or until the MPUC completes its final study on the efficiency of competitive markets in northern Maine and whether any sale would create, or exacerbate, a concentration of generation market power to the detriment of MPS's customers. On July 7, 1998, the Company announced that it has agreed to sell its electric generating assets to WPS Power Development, Inc. (WPS-PDI) located in Green Bay, Wisconsin, a wholly-owned subsidiary of WPS Resources Corporation. On August 7, 1998, the Company submitted its filing to the MPUC seeking approval of the sale. -12- Both parties signed a purchase and sale agreement providing a sales price of $37.4 million for the Company's 91.8 megawatts of generating capacity, which is 3.2 times higher than the net book value of the assets. If the MPUC approves the sale by the first quarter of 1999, the Company would agree not to increase customer rates by 3.1% on February 1, 1999 now scheduled under its Rate Stability Plan. In addition, the Company is proposing that the net gain on the sale will be used to reduce stranded costs by approximately $19.6 million. In addition to the MPUC's approval, approval must be obtained from the New Brunswick Lt. Governor in Council before the sale can be consummated. Facilities being sold total 91.8 megawatts of generating capacity and include: 34.5 MW of hydroelectric and diesel generating units at the Canadian subsidiary, Maine & New Brunswick Electrical Power Co., Ltd., (Tinker Plant), as well as its transmission system and interconnection with NB Power; 31 MW of hydroelectric, oil-fired steam, and diesel generating facilities at the Caribou Generating Station; 1.4 MW at Squa Pan Hydroelectric generating station and storage dam; 4.2 MW at Flo's Inn diesel generating station; a dismantled diesel unit at Houlton; the Millinocket Lake Storage Dam; and the Company's joint ownership share equivalent to 20.7 MW of Wyman Unit No. 4, an oil-fired plant in Yarmouth, Maine. The Company's 5% ownership share in Maine Yankee was not part of the sale because the plant was permanently shut down last August and is now undergoing decommissioning. The rights to the 18.1 MW output being purchased under a power purchase agreement with Wheelabrator-Sherman were offered in the initial request for proposal, but were not included in the final sale. When retail access begins, the Company will auction the Wheelabrator-Sherman entitlement to a third party until 2006, when the agreement with W-S expires. The Company has agreed to buy back electricity from WPS-PDI at a set price to cover the period between the closing date and February 29, 2000, when retail access begins. Nineteen employees who operate and maintain the plants located in Maine and in New Brunswick will be affected by the sale. It is expected that some employees will be hired by WPS-PDI, while other positions will be eliminated. Those individuals not offered employment by the buyer will be eligible for an enhanced severance and extended benefits transition package consistent with Maine's restructuring statute. 10. ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income", which requires the separate reporting of all changes to shareholders' equity, and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information", which revises existing guidelines about the level of financial disclosure of a Company's operations. In the first quarter of 1998, the FASB issued SFAS No. 132 "Employers' Disclosure about Pension and Other Postretirement Benefits", which revises existing disclosure requirements about pension and postretirement benefits. These Statements are effective for financial statements beginning after December 15, 1997. The Company has not determined the impact of the new standards, but does not expect them to have a material impact to existing financial reporting. -13- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Forward-Looking Statements The discussion below may contain "forward-looking statements", as defined in the Private Securities Litigation Reform Act of 1995, related to expected future performance or our plans and objectives. Actual results could potentially differ materially from these statements. Therefore, there can be no assurance that actual results will not materially differ from expectations. Factors that could cause actual results to differ materially from our projections include, among other matters, electric utility restructuring; future economic conditions; changes in tax rates, interest rates or rates of inflation; developments in our legislative, regulatory, and competitive environment; and the results of safety investigations or the decommissioning cost of Maine Yankee. Results of Operations Loss per share and the net loss available for common stock for the three months ended September 30, 1998 along with the corresponding information for the previous year are as follows: Three Months Ended September 30, 1998 1997 Loss per share $(.09) $(.70) Net loss (in thousands) $(151) $(1,129) For the third quarter of 1998 compared to the same quarter last year, the increase in consolidated earnings per share (EPS) of $.61 is attributable to the following: -14- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) EPS Increase (Decrease) Decrease in operating expenses resulting from the closure of Maine Yankee and changes in net replacement power costs: Capacity Expenses $ .53 Replacement Power Costs (.09) .44 Increase in retail rates of 3.9% effective 2/1/98 and a 4.5% sales increase, partially offset by load retention discounts .29 Other fuel expense - increased prices (.08) Increase in interest expense due to increased long-term and short-term borrowings (.07) Change in other operation & maintenance expenses .04 Other ( .01) Total $ .61 The net increase in Maine Yankee replacement power costs under the rate plan, compared to the third quarter of 1997, decreased earnings by $.09 per share in the third quarter of 1998. The rate plan is discussed in detail in item 3(f) of the Legal Proceedings section. Additional capacity expenses to address restart and closing issues during the second quarter of 1997 were eliminated by the closure of Maine Yankee, increasing earnings by $.53 per share. The rate increase under the Company's rate plan effective February 1, 1998, and a 4.5% increase in retail sales, partially offset by load retention contract discounts to several large customers, resulted in a net $.29 increase in earnings per share. -15- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) An increase in other fuel expenses due to price increases reduced earnings by $.08 per share. Interest expense decreased earnings by $.07 per share due to an increase in short-term borrowings and the issuance of the FAME note on May 29, 1998. A reduction in wheeling expenses due to the termination of the transmission agreement with NB Power for Maine Yankee and Wyman wheeling, offset by increases in other operation and maintenance expenses, resulted in a net increase in earnings of $.04 per share. Changes in other operating revenues not described above decreased earnings by $.01 per share. Consolidated operating revenues for the quarters ended September 30, 1998 and 1997, are as follows: 1998 1997 (Dollars in Thousands) $ MWH $ MWH Retail 11,314 117,635 10,536 112,557 Sales for Resale 420 11,058 474 10,859 Total Primary Sales 11,734 128,693 11,010 123,416 Secondary Sales 521 14,706 774 19,799 Other Revenues/Rev. Adjust. 577 - 601 - Total Operating Revenues 12,832 143,399 12,385 143,215 Primary sales in the third quarter of 1998 were 128,693 MWH, an increase of 5,277 MWH (4.3%) from sales in the third quarter of 1997. Secondary sales decreased by 5,093 MWH, reflecting a decrease in power marketing sales. Retail revenues for the third quarter of 1998 were $11,314,000 compared to $10,536,000 for the same period of 1997. The increase in revenues reflects the 3.9% increase in retail rates effective February 1, 1998 allowed under the Company's rate plan and the 4.5% increase in retail sales, partially offset by load retention discounts to certain large industrial customers that were approved by the Maine Public Utilities Commission (MPUC). -16- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) For the third quarters ended September 30, 1998 and 1997, total operating expenses were $12,059,000 and $12,773,000, respectively. The changes in operating expenses and energy sources are as follows: Increase/(Decrease) (Dollars in Thousands) $ MWH Purchased Power Expenses Maine Yankee (1,512) - Wheelabrator-Sherman (1,332) (2,277) NB Power (1,585) (62,060) Northeast Empire 2,294 67,968 Other Purchases (365) ( 9,078) Deferred Fuel - MY Replacement 1,031 - (1,469) ( 5,447) Generating Expenses 35 7,638 Other Operation & Maint. Expenses (13) Depreciation 33 Amortization ( 9) Income Taxes 727 Taxes Other than Income (18) Total (714) 2,191 To meet the Company's energy requirements with the closing of Maine Yankee, the Company in late 1997 solicited bids for its energy requirements. Purchases from Northeast Empire, the successful bidder, increased 67,968 MWH, substituting energy previously purchased from NB Power in 1997 to replace Maine Yankee energy. With the closing of Maine Yankee, the Company's share of Maine Yankee capacity expenses to address restart and closing issues during the third quarter of 1997 were eliminated resulting in a net decrease in purchased power expenses of $1,512,000. Wheelabrator-Sherman purchased power expenses decreased by $1,332,000, due to decreased production of 2,277 MWH and to the reduced price under the amended Power Purchase Agreement (PPA), as discussed in Note 8 of the Notes to Consolidated Financial Statements, "Restructured Power Purchase Agreement with Wheelabrator-Sherman". Deferred fuel expense increased $1,031,000 as a result of the deferral of Maine Yankee replacement power costs in the third quarter of 1997. There was no net deferral of Maine Yankee replacement power in the third quarter of 1998, as a result of the application of the Wheelabrator-Sherman savings mentioned above, in accordance with the January, 1998 rate stipulation discussed further in Note 4 of the Notes to Consolidated Financial Statements, "Maine Yankee". -17- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) Hydro production was 96.7% and 65.1% of normal in the third quarters of 1998 and 1997, respectively, reflecting an increase of 6,116 MWH. Generating expenses increased by $35,000 because of increased operation at Wyman No. 4. Maine Yankee Closure The Company owns 5% of the Common Stock of Maine Yankee Atomic Power Company (Maine Yankee). As previously reported, Maine Yankee has been out of service since December 6, 1996 and on August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations. For additional information regarding Maine Yankee, reference is made to the Company's 1997 Annual Report. The Plant provided reliable and low-cost power from the time it commenced operations in late 1972 to 1995. Beginning in early 1995, however, Maine Yankee encountered various operational and regulatory difficulties with the Plant. In 1995, the Plant was shut down for almost the entire year to repair a large number of steam generator tubes that were exhibiting defects. Shortly before the Plant was to go back on-line in December 1995, a group with a history of opposing nuclear power released an undated, unsigned, anonymous letter alleging that in 1988 Yankee Atomic (then an affiliated consultant of Maine Yankee) and Maine Yankee had used the results of a faulty computer code as a basis to apply to the Nuclear Regulatory Commission (NRC) for an increase in the Plant's power output. In response to the allegation, on January 3, 1996, the NRC issued a Confirmatory Order that restricted the Plant to 90 percent of its licensed thermal operation level, which restriction was still in effect when the Plant was permanently shut down. As a result of the controversy associated with the allegations, the NRC, at the request of the Governor of Maine, conducted an intensive Independent Safety Assessment (ISA) of the Plant in the Summer and Fall of 1996. On October 7, 1996, the NRC issued its ISA report, which found that while the Plant had been operated safely and could continue to operate, there were weaknesses that needed to be addressed, which would require substantial additional spending by Maine Yankee. On December 10, 1996, Maine Yankee responded to the ISA report, acknowledged many of the weaknesses, and committed to revising its operations and procedures to address the NRC's criticisms. -18- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) Another result of the controversy associated with the allegations was an investigation of Maine Yankee initiated by the NRC's Office of Investigations (OI), which, in turn, referred certain issues to the United States Department of Justice (DOJ) for possible criminal prosecution. Subsequently, on September 24, 1997, the DOJ, through the United States Attorney for Maine, announced that its review had revealed insufficient grounds for criminal prosecution. On October 8, 1998, the NRC issued a notice of violation for the pre-shutdown violations, but announced that it was not imposing civil penalties for those violations. With the closing of Maine Yankee, a provision of the Company's rate plan allowing the deferral of 50% of the Maine Yankee replacement power costs went into effect on June 6, 1997. For the third quarter of 1998, the Company recovered $140,000 of these deferred expenses in accordance with the January, 1998 rate stipulation which provided for recovery of $562,000 in rates effective February 1, 1998. An additional $1,105,000 would have been deferred in the third quarter of 1998, however these costs were offset by net savings of $1,106,000 from the restructured Purchase Power Agreement with Wheelabrator- Sherman, also in accordance with the rate plan stipulation. As of September 30, 1998, the Company has a net deferred replacement power cost balance of approximately $3,066,000, subject to recovery in accordance with the rate plan. On September 1, 1997, Maine Yankee estimated the sum of the future payments for the closing, decommissioning and recovery of the remaining investment in Maine Yankee to be approximately $930 million, of which the Company's 5% share would be approximately $46.5 million. Maine Yankee has indicated that it plans to further update its decommissioning cost estimate before final consideration by the Federal Energy Regulatory Commission (FERC). Legislation enacted in Maine in 1997 calling for restructuring the electric utility industry provides for recovery of decommissioning costs, to the extent allowed by federal regulation, through the rates charged by the transmission and distribution companies. Based on the Maine legislation and regulatory precedent established by the FERC in its opinion relating to the decommissioning of the Yankee Atomic nuclear plant, the Company believes that it is entitled to recover substantially all of its share of such -19- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) costs from its customers and, as of September 30, 1998, is carrying on its consolidated balance sheet a regulatory asset and a corresponding liability in the amount of $38.8 million, which is the $46.5 million discussed above net of the Company's post-September 1, 1997 cost-of-service payments to Maine Yankee. On September 2, 1997, the MPUC released the report of a consultant it had retained to perform a management audit of Maine Yankee for the period January 1, 1994, to June 30, 1997. The report contained both positive and negative conclusions, the latter including: that Maine Yankee's decision in December 1996 to proceed with the steps necessary to restart the Plant was "imprudent", that Maine Yankee's May 27, 1997 decision to reduce restart expenses while exploring a possible sale of the Plant was "inappropriate", based on the consultant's finding that a more objective and comprehensive competitive analysis at that time "might have indicated a benefit for restarting" the Plant; and that those decisions resulted in Maine Yankee incurring $95.9 million in "unreasonable" costs. The Company believes the report's negative conclusions are unfounded and may be contradictory. In any event, the Company has expensed its share of these costs. On October 24, 1997, the MPUC issued a Notice of Investigation initiating an investigation of the shutdown decision and of the operation of the Plant prior to shutdown, and announced that it had directed its consultant to extend its review to include those areas. The Company believes it would have substantial constitutional and jurisdictional grounds to challenge any effort in an MPUC proceeding to alter wholesale Maine Yankee rates made effective by the FERC. The MPUC subsequently stayed its investigation pending the outcome of Maine Yankee's FERC rate case, in which the MPUC and the Maine Office of the Public Advocate (OPA) are actively participating, while indicating that its consultant would continue its extended review. Based on preliminary indications, the Company expects the consultant's recommendations resulting from its extended review would call for additional disallowances. However, Maine Yankee, the Company, as well as other Maine Yankee owners, have discussed proposals to resolve these rate case issues with several intervenors, including the MPUC and the OPA. -20- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) On January 15, 1998, Maine Yankee, its former bondholders and lender banks revised the Standstill agreements and extended their term to April 15, 1998. On April 7, 1998, Maine Yankee refunded all of its mortgage bonds and bank debt by means of a three-year revolving credit facility with two major banks, which may be extended by agreement of the parties, and a $48 million term loan due in 2006 from a major institutional investor, and discharged its First Mortgage Indenture. The banks' revolving credit commitments are scheduled to be reduced through planned prepayments, structured to conform to Maine Yankee's projected cash flows, in two decrements from their initial level of $80 million to a working-capital level of $20 million on March 31, 2000 and were reduced to $50 million in June, 1998. The new debt obligations are secured by a security interest in Maine Yankee's rights in its Power Contracts, Additional Power Contracts and Capital Funds Agreements with its Sponsors and its rights to certain expected third-party payments. The new debt facilities also contain restrictions on the payment of common-stock dividends based on Maine Yankee's cash position and a debt service coverage test. See Item 3(f) of the "Legal Proceedings and Regulatory Matters" section of this Form 10-Q for further discussion. Financial Condition Net cash flows from operating activities were negative $4,427,000 for the first nine months of 1998, reflecting the $8,706,000 up-front payment to W-S for the amended PPA. The Company received $11,540,000 from the issuance of FAME's Taxable Electric Rate Stabilization Revenue Notes. The proceeds were used for the W-S payment discussed above, a $2,378,000 deposit to a Capital Reserve Fund and bond issuance costs. For 1998, the receipt of $2,052,000 of tax refunds associated with the 1997 net operating loss carryback improved operating cash flows. The Company drew down $1,038,000 from the trustee of the tax-exempt revenue board proceeds based on qualifying property, which partially offset construction requirements. For the period, $2,673,000 was invested in electric plant, $1,617,000 was paid in dividends and $4,155,000 was used to reduce long-term debt including the May 1, 1998 final sinking fund payment of $2,880,000 on the 7- 1/8% First Mortgage and Collateral Trust Bonds. Short-term borrowings increased by $2,800,000 for the additional Maine Yankee replacement power costs. -21- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) For the first nine months of 1997, net cash flows from operating activities were negative $2,332,000. The Company drew down $1,239,000 from the trustee of the tax-exempt revenue bond proceeds. For the period, $1,941,000 was invested in electric plant, $1,213,000 was paid in dividends and $1,315,000 was used to reduce other long-term debt. Short-term borrowings were increased by $4,800,000 for working capital and construction requirements. Amendments of Interest Coverage Tests in Financial Instruments The Company's short-term revolving credit agreement and a letter of credit supporting its 1996 tax-exempt revenue bonds contain interest coverage tests that the Company must satisfy to avoid default. On March 28, 1997, the Company and the Banks agreed on amendments to the revolving credit agreement and letter of credit and reimbursement agreement which adjust the interest coverage tests to exclude Maine Yankee incremental replacement power costs through September 30, 1997. Under the amendment to the revolving credit agreement, the Company was obligated to issue a first mortgage bond of $11 million as collateral for the maximum amount of the Company's obligations under the revolving credit agreement. Both amendments required the issuance of the first mortgage bonds on or before May 15, 1997. On April 28, 1997 the Maine Public Utilities Commission approved the issuance of the first mortgage bonds, and the Company issued the bonds on May 5, 1997. Without these amendments, the Company would have been in violation of its interest coverage tests through September 30, 1997 and would have been in default on these instruments. At December 31, 1997, the Company was not in compliance with these covenants. On March 12, 1998, the Company and the Banks executed a waiver of the interest coverage tests for the fourth quarter of 1997, avoiding a default. On March 31, 1998, the Company and the Banks executed amendments to the revolving credit agreement and letter of credit and reimbursement agreement which further adjusts the interest coverage tests for the first three quarters of 1998. With these amendments, the Company has achieved its interest coverage tests for the first three quarters of 1998 and expects to meet the interest coverage tests for the fourth quarter of 1998 based on projected earnings. In addition, the Revolving Credit Agreement and Letter of Credit supporting the Tax Exempt Bonds due 2021 are extended by one year to October, 1999 and June, 2000, respectively. -22- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) Year 2000 Issues The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have date-sensitive software using two digits would recognize a date using "00" as the year 1900 rather than the year 2000, resulting in system failure or miscalculations. The Company has been conducting an on-going assessment of its computer systems, including embedded chip technology, to determine the potential technical and economic impact which the Year 2000 issues might have on the Company, its systems and its business operations. As part of this process, the Company has reviewed the computer application systems responsible for its billing, customer information system and accounting transactions and has identified modifications necessary for those systems. These modifications are principally being made to comply with the electric industry restructuring requirements but have incorporated changes that achieve Year 2000 compliance. The Company is also reviewing its other mission critical systems in order to identify Year 2000 remediation or renovation measures needed for those systems and intends to complete necessary modifications, renovations and testing of all mission critical systems by July 1, 1999. The compliance plans and implementation and testing milestones are based on the Company's best estimates, which were derived from numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other known factors. In addition to the review of internal systems, the Company is requesting assurances of Year 2000 compliance from third parties upon whom the Company relies. The responses are being reviewed and concerns of non- compliance are being pursued. The Company is attempting to obtain responses and prepare contingency plans, where necessary, no later than July 1, 1999. To date, the Company's review and testing has not revealed material system modifications necessary to obtain Year 2000 compliance for mission critical systems, other than the changes necessary for electric industry restructuring discussed above. However, $50,000 has been budgeted in 1999 for external expenditures for unforeseen modifications to achieve Year 2000 compliance for mission critical technology. -23- Form 10-Q PART 1. FINANCIAL INFORMATION Item 2. Management's Analysis of Quarterly Income Statements Results of Operations (Continued) The Company expects to finish the assessment phase of the Year 2000 compliance project by December 31, 1998, and will then identify risks and most reasonable likely worse case scenarios specific to Year 2000 noncompliance by the Company and third party sources. The Company will develop appropriate contingency plans for these risks no later than July 1, 1999. Although all reasonable and available efforts will be made, the Company cannot predict the ultimate achievement of Year 2000 compliance due to its reliance on systems and third parties outside of the Company's control. -24- Form 10-Q PART II. OTHER INFORMATION Item 3. Legal Proceedings and Regulatory Matters (a) Restructuring of Maine's Electric Utility Industry. In the Company's Form 10-K for December 31, 1997, the Company described electric utility restructuring efforts in Maine, including the Maine Public Utilities Commission's (MPUC) recommendation to the legislature. After months of hearings and deliberations, the Maine legislature passed L.D. 1804, "An Act to Restructure the State's Electric Industry", which the Governor signed into law on May 29, 1997. The principal provisions of the new law are as follows: 1) Beginning on March 1, 2000, all consumers of electricity have the right to purchase generation services directly from competitive electricity suppliers who will not be subject to rate regulation. 2) By March 1, 2000, the Company, Central Maine Power Company (CMP) and Bangor Hydro-Electric Company (BHE) must divest of all generation related assets and business functions except for: (a) contracts with qualifying facilities, such as the Company's power contract with Wheelabrator-Sherman (W-S), and conservation providers; (b) nuclear assets, namely, the Company's investment in the Maine Yankee Atomic Power Company, however, the MPUC may require divestiture on or after January 1, 2009; (c) facilities located outside the United States, i.e., the Company's hydro facility in New Brunswick, Canada; and (d) assets that the MPUC determines necessary for the operation of the transmission and distribution services. The MPUC can grant an extension of the divestiture deadline if the extension will improve the selling price. For assets not divested, the utilities are required to sell the rights to the energy and capacity from these assets. See item (b) below regarding the divestiture of the Company's generating assets. 3) Billing and metering services will be subject to competition beginning March 1, 2002, but permits the MPUC to establish an earlier date, no sooner than March 1, 2000. -25- Form 10-Q PART II. OTHER INFORMATION Item 3. Legal Proceedings and Regulatory Matters - Continued 4) The Company, through an unregulated affiliate, may market and sell electricity both within and outside its current service territory, without limitation. Both CMP and BHE are limited to 33% of the load within their respective service territories, but may sell an unlimited amount outside their service territories. Consumer-owned utilities are allowed to market and sell within their service territories, but the MPUC can limit or prohibit competition in their service territory, if the tax-exempt status of the consumer-owned utility is threatened. 5) The Company, through a regulated affiliate, will continue to provide transmission and distribution services which will be subject to continued regulation by the MPUC. 6) Maine electric utilities will be permitted a reasonable opportunity to recover legitimate, verifiable and unmitigable costs that are otherwise unrecoverable as a result of retail competition in the electric utility industry. The MPUC shall determine these stranded costs by considering: a) the utility's regulatory assets related to generation, i.e., the Company's unrecovered Seabrook investment; b) the difference between net plant investment in generation assets compared to the market value for those assets; and c) the difference between future contract payments and the market value of the purchased power contracts, i.e., the W-S contract. By July 1, 1999, the MPUC will have estimated the stranded costs for the Company and the manner for the collection of these costs by the transmission and distribution company. Customers reducing or eliminating their consumption of electricity by switching to self-generation, conversion to alternative fuels or utilizing demand-side management measures cannot be assessed exit or entry fees. The Company estimated its stranded costs to be approximately $96.6 million, based on its October 14, 1998 filing, which included the remaining investment in Seabrook, the above market costs of the amended power purchase agreement and recovery of fuel expense deferrals related to Wheelabrator-Sherman, the obligation for remaining operating expenses and recovery of the Company's remaining investment in Maine Yankee, and the recovery of -26- Form 10-Q PART II. OTHER INFORMATION Item 3. Legal Proceedings and Regulatory Matters - Continued several other regulatory assets, but does not include any benefits from the Company's sale of generating assets. The MPUC shall include in the rates charged by the transmission and distribution utility decommissioning expenses for Maine Yankee. In 2003 and every three years thereafter until the stranded costs are recovered, the MPUC shall review and revaluate the stranded cost recovery. 7) All competitive providers of retail electricity must be licensed and registered with the MPUC and meet certain financial standards, comply with customer notification requirements, adhere to customer solicitation requirements and are subject to unfair trade practice laws. Competitive electricity providers must have at least 30% renewable resources in their energy portfolios, including hydro-electric generation. 8) A standard-offer service will be available, ensuring access for all customers to reasonably priced electric power. Unregulated affiliates of CMP and BHE providing retail electric power are prohibited from providing more than 20% of the load within their respective service territories under the standard offer service, while any unregulated affiliate of the Company does not have a similar restriction. 9) Unregulated affiliates of CMP and BHE marketing and selling retail electric power must adhere to specific codes of conduct, including, among others: a) employees of the unregulated affiliate providing retail electric power must be physically separated from the regulated distribution affiliate and cannot be shared; b) the regulated distribution affiliate must provide equal access to customer information; c) the regulated distribution company cannot participate in joint advertising or marketing programs with the unregulated affiliate providing retail electric power; d) the distribution company and its unregulated affiliated provider of retail electric power must keep separate books of accounts and records; and -27- Form 10-Q PART II. OTHER INFORMATION Item 3. Legal Proceedings and Regulatory Matters - Continued (e) the distribution company cannot condition or tie the provision of any regulated service to the provision of any service provided by the unregulated affiliated provider of electricity. The MPUC shall determine the extent of separation required in the case of the Company to avoid cross- subsidization and shall consider all similar relevant issues as well as the Company's small size. 10) Employees, other than officers, displaced as a result of retail competition will be entitled to certain severance benefits and retraining programs. These costs will be recovered through charges collected by the regulated distribution company. 11) Other provisions of the new law include provisions for: a) consumer education; b) continuation of low-income programs and demand side management activities; c) consumer protection provisions; d) new enforcement authority for the MPUC to protect consumers. The MPUC will conduct several rulemaking proceedings associated with the new restructuring law. The Company is presently reviewing its business operations and the opportunities that the new restructuring law presents. (b) Maine Public Service Company, Request for Approval of Sale of Generating Assets, Docket No. 98-584 Reference is made to the Company's Form 8-K for July 7, 1998 in which the Company reported that it had agreed to sell all of its generating assets to WPS Power Development, Inc. (WPD- PDI) for $37.4 million. On August 7, 1998, the Company filed with the MPUC for approval of this sale. This proceeding was assigned the MPUC Docket No. 98-584. The Public Advocate and Houlton Water Company have intervened in the proceeding. As reported in the Company's Form 10-Q for the quarter ended June 30, 1998, the MPUC, in its Order approving the Company's divestiture plan on MPUC Docket No. 97-670, noted a number of concerns that it would address in Docket No. 98-584. These concerns include -28- Form 10-Q PART II. OTHER INFORMATION Item 3. Legal Proceedings and Regulatory Matters - Continued whether the sale of the Canadian subsidiary should be delayed pending the development of a retail market for electricity in Canada or until the MPUC completes its final study on the efficiency of competitive markets in northern Maine (see item (c) below). The Company addressed this concern in its August 7th filing and believes the market for electricity in northern Maine is sufficiently competitive to justify the sale of the Company's Canadian assets. The Company cannot at this time predict the MPUC's ultimate conclusions on this issue or whether it will approve the sale of the Company's generation assets. (c) Interim Report by the Maine Public Utilities Commission and the Maine Attorney General Regarding Market Power Issues Raised by the Prospect of Retail Competition in the Electric Industry, MPUC Docket No. 97-877 The Legislation described in item (a) above required the Maine Department of the Attorney General and the MPUC to jointly conduct a study of the various market power issues presented by the introduction of retail competition into Maine's electric utility industry. A final report in this matter is due by December 31, 1998. On February 2, 1998, the MPUC and the Attorney General issued its interim report in this matter. This interim report did not reach any final conclusion or make any recommendations, but did note certain areas of concern. Among the principal areas of concern are: - whether the proposed regulation of transactions between a utility and its marketing affiliate will be sufficient to prevent market dominance by the affiliate or whether an outright ban on affiliate marketing is preferable. - that "special circumstances" in the Company's service territory (such as its direct physical isolation from the New England power grid) indicates that it may be subject to a high degree of market power. Accordingly, the interim report noted, without further elaboration, that the Final Report would "evaluate several possible legislative adjustments". In a related matter, and again as required by the Legislation described in item (a), the MPUC, on January 26, 1998, opened an investigation into the feasibility of a direct physical interconnection between the Company's service territory and the New England power grid (MPUC Docket No. 97-586). On -29- Form 10-Q PART II. OTHER INFORMATION Item 3. Legal Proceedings and Regulatory Matters - Continued October 13, 1998, the MPUC issued a draft report in Docket No. 97-586, which was prepared by an independent consultant and purports not to be the product of either the MPUC or its Staff. In addition to the issue of the direct physical connection, the draft report also addresses many of the issues concerning the development of a competitive market for electricity in northern Maine. The draft report concludes that "the electricity market in northern Maine is likely to be subject to market power problems" and recommends further study into methods of resolving those problems. The draft report does not flatly conclude that northern Maine should not be opened up to retail competition in electricity, but states its belief that customers in northern Maine "are likely to pay higher prices that are significantly higher than those available from a competitive electricity market". On October 26, 1998, the Company submitted to the MPUC comments in which it stated its very substantial disagreement with this report's conclusions. Moreover, the Commission has stated that this report, when final, will be allowed into the record in Docket No. 98-584 (see (b) above) and the report's authors will be subject to discovery and questioning during the hearing in that Docket. The Company expects to vigorously challenge the analysis of this report. The Company cannot at this time predict either the ultimate conclusions of the studies described above or the effect of these studies upon the proposed sale of the Company's generation assets in Docket No. 98-584 or the prospect of retail competition in the Company's service territory. (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. On May 31, 1996, the FERC issued Order 888, a final rule on open transmission access and stranded cost recovery. As a result the Company has refiled its tariff to -30- Form 10-Q PART II. OTHER INFORMATION Item 3. Legal Proceedings and Regulatory Matters - Continued comply with the Order. A decision by the FERC regarding the fees under the Company's tariff is not expected until later in 1998. The Company cannot predict the FERC's ultimate decision in this matter. (e) Maine Public Utilities Commission Investigation of the Operation and Shutdown of Maine Yankee Atomic Power Company Generating Facility in Wiscasset, Maine, MPUC Docket No. 97- 781 On October 24, 1997, the MPUC issued a Notice of Investigation regarding the August, 1997 shutdown of the Maine Yankee Power Plant (see Item 1. "Subsidiaries and Affiliated Companies", above). The MPUC stated that the "permanent shutdown of the plant presents significant ratemaking issues" such as replacement power costs and stranded cost issues, for all three of Maine Yankee's Maine owners. The announced scope of the investigation is therefore intended to focus on "two separate generic prudence questions .... presented in determining the reasonableness of increased purchased power costs and reasonableness of the recovery of the unamortized Maine Yankee investment: 1. Was the decision to shut down the Maine Yankee Plant prudent? 2. Was the plant prematurely shut down because the plant had been operated or was operating imprudently?" As an owner of Maine Yankee, the Company was made a party to this investigation. The Company believes the MPUC's jurisdiction over Maine Yankee costs and prudence issues is preempted by the Federal Power Act and FERC jurisdiction. If, however, the MPUC should successfully assert jurisdiction over these issues and, if it disallowed substantial amounts of the Maine Yankee-related expenses in retail rates, the effect on the Company's financial condition would be material and adverse. On November 7, 1997, Central Maine Power and Maine Yankee initiated legal challenges to the MPUC investigation in the Maine Supreme Judicial Court alleging that such an investigation falls exclusively within the jurisdiction of the FERC, and that the MPUC's investigation is therefore barred on constitutional grounds. The Company joined that appeal on November 13, 1997. -31- Form 10-Q PART II. OTHER INFORMATION Item 3. Legal Proceedings and Regulatory Matters - Continued On December 2, 1997, the MPUC issued an Order staying the investigation. The MPUC noted that Maine Yankee had begun a rate proceeding before the FERC on November 6, 1997, which could address the prudence issues raised in the MPUC's own investigation. The MPUC therefore stayed its investigation in order "to avoid unnecessary duplicative efforts by all parties involved". The MPUC reserved the right to reopen the investigation particularly if FERC declines to address the prudence issues of concern to the MPUC "if we feel it necessary to investigate those matters after the FERC proceeding ends." The Company cannot therefore predict whether the MPUC will reopen its investigation once the FERC proceeding is concluded. As a result, the Maine Supreme Judicial Court, on December 15, 1997, upon motion by Maine Yankee and its Maine owners, stayed all proceedings in the appeal until the first to occur of either December 31, 1998 or the 30th day after the conclusion of the FERC's investigation. (f) Maine Public Utilities Commission Approves Rate Increase Pursuant to Previously Approved Rate Plan, MPUC Docket No. 97-830. Reference is made to the Company's Form 10-K for December 31, 1997 where the Company's rate stabilization plan approved by the Maine Public Utilities Commission (MPUC) (Docket No. 95- 052) in November, 1995 is described. On November 13, 1997, the Company filed with the MPUC its annual rate increase pursuant to the Company's rate plan. The filing supported an annual increase in retail rates of 7.6% effective February 1, 1998 consisting of the following: - 2.75% specified annual increase provided in the rate plan; - 2.22% increase for 50% of the Maine Yankee replacement power costs in accordance with the Maine Yankee plant outage provisions of the rate plan; and - 2.63% increase in accordance with the profit-sharing mechanism of the rate plan since earnings for the review period, i.e. the twelve months ended September 30, 1997, were more than 300 basis points below the target return on equity. Additional capacity payments to restart Maine Yankee and incremental replacement power costs have adversely impacted the Company's 1997 earnings and triggered the rate plan profit-sharing mechanism noted above. The Company's ability to increase its rates for the profit-sharing and for 50% of -32- Form 10-Q PART II. OTHER INFORMATION Item 3. Legal Proceedings and Regulatory Matters - Continued Maine Yankee replacement power costs is subject to the MPUC's pending review of the prudency of the decision to close Maine Yankee (see item (e) above). In addition, the Company had amended its November, 1997 filing requesting that the savings from the restructured Wheelabrator-Sherman (W-S) Contract, as approved by the MPUC on December 22, 1997 (see item (e) above) be used to offset future Maine Yankee replacement power costs. However, this treatment was again subject to the results of the MPUC's review of the prudency of closing Maine Yankee. The restructuring of the W-S Contract required an up-front payment of approximately $8.7 million, which the Company financed from funds obtained from the Finance Authority of Maine (FAME), under its rate stabilization program. On January 15, 1998, the Public Advocate and the Company, with the support of the MPUC Staff, reached an agreement on the rate increase for February 1, 1998. The principal elements of the stipulation are as follows: - the rate increase effective February 1, 1998 was 3.9%, consisting of the specified increase of 2.75% and approximately $562,000 of the 1997 recoverable Maine Yankee replacement power costs (1.15%); - the minimum rate increase effective February 1, 1999 will be 3.1%, consisting of a specified increase of 2% and the remaining recoverable 1997 Maine Yankee replacement power costs of $523,000; - Maine Yankee replacement power costs for the period October 1, 1997 through September 30, 1998 will be offset by the 1998 savings under the restructured W-S contract, with the recovery of any incremental Maine Yankee replacement power costs subject to a final order by the MPUC in its previously mentioned review of the prudency of closing Maine Yankee; - the Company wrote off in 1997 unamortized Maine Yankee refueling outage costs of approximately $1,458,000; - the Company waives its right to collect additional revenues for the profit-sharing review period, i.e. the twelve months ended September 30, 1997, since the earnings deficiency was the result of the closing of Maine Yankee and, based on the 3.9% increase granted by the MPUC, the Company expects to earn a reasonable rate of return in 1998 without these additional revenues; -33- PART II. OTHER INFORMATION Form 10-Q Item 3. Legal Proceedings and Regulatory Matters - Continued - a customer service and reliability standards penalty will be suspended pending review of these standards during the rate plan's mid-term review in September of 1998. This agreement was approved by the MPUC on January 26, 1998. The Company was not able to attain its interest coverage tests for the fourth quarter of 1997. On March 12, 1998, the Company and the Banks executed a waiver of the interest coverage tests for the fourth quarter of 1997, avoiding a default. On March 31, 1998, the Company and the Banks executed amendments to the revolving credit agreement and letter of credit and reimbursement agreement, which further adjusts the interest coverage tests for the first three quarters of 1998. The Company met the new interest coverage tests for the first three quarters of 1998. The Company believes that its rate plan deals effectively with the closing of Maine Yankee, with customers and shareholders sharing the burden equally. However, the Company cannot predict what the MPUC's decisions will be concerning the prudency of closing Maine Yankee. If the Company is adversely impacted by the MPUC prudency decision, the Company may be required to seek an emergency rate increase and will review all cash expenditures, including the level of dividends. (g) Maine Public Service Company Investigation of Stranded Costs, Transmission and Distribution Utility Revenue Requirements and Rate Design, Docket No. 98-577 On October 14, 1998, the Company filed its determination of stranded costs, transmission and distribution costs and rate design with the MPUC. The Company's testimony supports its $96.6 million estimate of stranded costs when deregulation occurs on March 1, 2000. The major components include the remaining investment in Seabrook, the above market costs of the amended power purchase agreement and recovery of fuel expense deferrals related to Wheelabrator-Sherman, the obligation for remaining operating expenses and recovery of the Company's remaining investment in Maine Yankee, and the recovery of several other regulatory assets. These stranded costs will be reduced by an estimated $19.6 million should the sale of the Company's generating assets be approved by the MPUC, discussed further in item (b) above. The Company's proposed annual revenue requirements supported in the filing would be approximately $32.6 million; $19.3 million for transmission and distribution and $13.3 million for stranded investment. Decisions by the MPUC regarding stranded costs and the generating asset sale approval are not expected until 1999. The Company cannot predict the MPUC's ultimate decision in these matters. -34- PART II. OTHER INFORMATION Form 10-Q 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 - None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MAINE PUBLIC SERVICE COMPANY (Registrant) Date: November 12, 1998 /s/ Larry E. LaPlante Larry E. LaPlante, Vice President Finance, Administration and Treasurer -35- \TEXT> /DOCUMENT> EX-27 2 FINANCIAL DATA SCHEDULE FOR NINE MONTHS ENDED SEPTEMBER 30, 1998
UT 1,000 9-MOS DEC-31-1998 SEP-30-1998 PER-BOOK 50305 4400 10405 101705 0 166815 7357 38 26667 34062 0 0 45915 10000 0 0 1275 0 0 0 75563 166815 41672 1003 37147 38150 3522 505 4027 3050 977 0 977 1213 2365 (4406) .60 .60
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