-----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, IyD7OgX6akeVOqxAKjOlTK/SbEh+YJ4xFfWKtqB3XiQ1qEEfdP+Wi1ihrL2a6/Ry fIP4gq9amsEXuwBgIZxCxQ== 0000009548-98-000006.txt : 19980330 0000009548-98-000006.hdr.sgml : 19980330 ACCESSION NUMBER: 0000009548-98-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANGOR HYDRO ELECTRIC CO CENTRAL INDEX KEY: 0000009548 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 010024370 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10922 FILM NUMBER: 98576676 BUSINESS ADDRESS: STREET 1: 33 STATE ST CITY: BANGOR STATE: ME ZIP: 04401 BUSINESS PHONE: 2079455621 MAIL ADDRESS: STREET 1: PO BOX 932 CITY: BANGOR STATE: ME ZIP: 04401 10-K 1 1997 FORM 10-K FOR BANGOR HYDRO-ELECTRIC COMPANY FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal year ended DECEMBER 31, 1997 Commission File No. 0-505 ----------------- ----- BANGOR HYDRO-ELECTRIC COMPANY ------------------------------------------------------------------------ (Exact Name of Registrant as specified in its charter) MAINE 01-0024370 ----------------------- ----------------------- (State of Incorporation) (I.R.S. Employer ID No.) 33 STATE STREET, BANGOR, MAINE 04401 -------------------------------------- --------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 207-945-5621 ------------ Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of exchange on which registered COMMON STOCK, $5 PAR VALUE NEW YORK STOCK EXCHANGE - -------------------------- ----------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $5 Par value (7,363,424 shares outstanding at March 20, 1998) ----------------------------------------------- 7% Preferred Stock, $100 Par Value ---------------------------------- 4 1/4% Preferred Stock, $100 Par Value -------------------------------------- 4% Preferred Stock Series A, $100 Par Value ------------------------------------------- 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 ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value on March 20, 1998 of the voting stock held by non-affiliates of the registrant was $66.1 million. The information required by Part III Items 10, 11, 12 and 13 is incorporated by reference from the registrant's proxy statement which will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant's fiscal year ended December 31, 1997. FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 PAGE ---- Cover Page 1 Index 2 PART I: Items 1 through 2 - Business; Properties 5 - General 5 - Certain Issues Facing the Company 7 - Construction Program 7 - Rates and Regulation 7 - Seabrook 11 - Joint Ventures 11 - Employees 13 - Power Supply Sources 13 - Company-owned Generation 13 - Power Purchase Contracts 14 - Maine Yankee 16 - Environmental Matters 22 - Executive Officers of the Company 23 Item 3: Legal Proceedings 24 Item 4: Submission of Matters to a Vote of Security Holders 24 PART II: Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 24 Item 6: Selected Financial Data 26 Item 7: Management's Discussion and Analysis of Results of Operations and Financial Condition 28 Item 8: Financial Statements & Supplementary Data 43 - Consolidated Statements of Income 43 - Consolidated Balance Sheets 44 - Consolidated Statements of Capitalization 46 - Consolidated Statements of Cash Flows 47 - Consolidated Statements of Common Stock Investment 48 - Notes to Consolidated Financial Statements 49 1) Nature of Operations and Summary of Significant Accounting Policies 49 2) Income Taxes 51 3) Common and Preferred Stock 53 4) Lending Agreements and Monetization of Power Sale Contract 54 5) Postretirement Benefits 56 6) Jointly Owned Facilities and Power Supply Commitments 59 7) Recovery of Seabrook Investment and Sale of Seabrook Interest 65 8) Unaudited Quarterly Financial Data 66 9) Contingencies 66 10) Fair Value of Financial Instruments 67 11) Industry Restructuring and Rate Regulation 67 12) Derivative Financial Instruments 70 13) Subsequent Events 71 14) New Accounting Pronouncements 72 Report of Independent Accountants 73 Item 9: Changes in and Disagreements with Audit Firms on Financial Disclosures 74 PART III: Item 10: Directors and Executive Officers of the Registrant 74 Item 11: Executive Compensation 74 Item 12: Security Ownership of Certain Beneficial Owners and Management 74 Item 13: Certain Relationships and Related Transactions 74 PART IV: Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K 75 Signatures 76 Report of Independent Accountants 77 Schedule VIII - Reserves for Doubtful Accounts and Insurance 78 EXHIBIT INDEX: Exhibits Filed Herewith 79 Exhibits Incorporated Herein by Reference 80 FORWARD LOOKING INFORMATION - In addition to the historical information contained herein, this report contains a number of statements that are "forward-looking" as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Readers should not place undue reliance on forward-looking statements, which reflect management s view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Factors that might cause such differences include, but are not limited to, future economic conditions, relationship with lenders, earnings retention and dividend payout policies, electric utility restructuring, developments in the legislative, regulatory and competitive environments in which the Company operates, and other circumstances that could affect revenues and costs. PART I - -------- ITEMS 1 THROUGH 2 BUSINESS; PROPERTIES - -------------------------------------------------------------- GENERAL -------- The Company is a public utility engaged in the generation, purchase, transmission, distribution and sale of electric energy, with a service area of approximately 5,275 square miles having a population of approximately 191,000 people. The Company serves approximately 105,000 customers in portions of the counties of Penobscot, Hancock, Washington, Waldo, Piscataquis and Aroostook. The Company also sells energy to other utilities for resale. The Company has three material wholly-owned subsidiaries. Penobscot Hydro Co., Inc. ("PHC") was incorporated in 1986 to own the Company's 50% interest in a joint venture, Bangor-Pacific Hydro Associates ("Bangor-Pacific"), which redeveloped the West Enfield hydroelectric project (the "West Enfield Project"). Bangor Var Co., Inc. ("Bangor Var Co.") was incorporated in 1990 to hold the Company's 50% interest in a partnership which owns certain facilities used in the Hydro-Quebec Phase II transmission project ("HQ-II") in which the Company is a participant. For a further discussion of Penobscot Hydro Co. and Bangor Var Co., see "Joint Ventures." Finally, Bangor Energy Resale, Inc. was formed in 1997 as a special purpose vehicle to permit Bangor Hydro's use of a power sales agreement as collateral for a bank loan. For a further discussion of this transaction, see Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition - Recent Events Affecting The Electric Utility Industry And The Company - Existing Lending Agreements and Monetization of Power Sale Contract". In 1997, 30.5% of the Company's kilowatt hour ("KWH") sales were to residential customers, 29.5% were to commercial customers, 39.3% were to industrial customers and 0.7% were to other customers. For additional information concerning the Company's sales, see Item 6, "Selected Financial Data", below. The Company's KWH sales are generally higher during the winter months, with the winter peak electric demand usually 15% higher than the summer peak. The maximum peak electric demand that the Company's system experienced during the 1997-1998 winter, as of March 20, 1998, was approximately 277.06 megawatts ("MW") on December 15, 1997. At that time the Company had approximately 338.44 MW of generating capacity and firm purchased power, comprised of 104 MW from Company-owned generating units, 9.6 MW from Hydro Quebec, 54.8 MW from non-utility power producers, and 170.0 MW from short term economy purchases. The Company owns 7% of the common stock of Maine Yankee Atomic Power Company, which owns and, prior to its permanent closure in 1997, operated an 880 MW nuclear generating plant in Wiscasset, Maine. Maine Yankee, which had commenced commercial operation on January 1, 1973, is the only nuclear facility in which the Company has an ownership interest. The Company s equity ownership in the plant had entitled the Company to about 7% of the output pursuant to a cost-based power contract. Pursuant to a contract with Maine Yankee, the Company is obligated to pay its pro rata share of Maine Yankee's operating expenses, including decommissioning costs. In addition, under a Capital Funds Agreement entered into by the Company and the other sponsor utilities, the Company may be required to make its pro rata share of future capital contributions to Maine Yankee if needed to finance capital expenditures. See "Maine Yankee" and Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition - Recent Events Affecting The Electric Utility Industry And The Company - Maine Yankee". The Company, along with the major investor-owned utilities of New England, has been a party to the New England Power Pool Agreement ("NEPOOL") since 1971. NEPOOL provides for joint planning and operation of generating and transmission facilities in New England, and governs generating capacity reserve obligations and provisions regarding the use of major transmission lines. The Company, as a member of NEPOOL, has a capability responsibility which involves carrying an allocated share of a New England capacity requirement which is determined for each period based on certain regional reliability criteria. On December 1, 1996, the members of NEPOOL, including the Company, entered into the 33rd Amendment to the NEPOOL Agreement which provided for a substantial restructuring of NEPOOL. This revised agreement, together with NEPOOL's Open Access Transmission Tariff were filed with the Federal Energy Regulatory Commission on December 31, 1996 and were subsequently approved. Pursuant to this restructuring, effective July 1, 1997 an independent system operator, ISO-New England, assumed oversight of the operations and integration of the NEPOOL transmission and generation with respect to reliability and market operations. The intent of these changes in NEPOOL is to increase competition in the market for electric generation. The Company is subject to the regulatory authority of the Maine Public Utilities Commission ("MPUC") as to retail rates, accounting, service standards, territory served, the issuance of securities and various other matters. The Company is also subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC") as to certain matters, including licensing of its hydroelectric stations and rates for wholesale purchases and sales of energy and capacity and transmission services. Maine Yankee is subject to extensive regulation by the Nuclear Regulatory Commission ("NRC"). See "Rates and Regulation." The principal executive offices of the Company are located at 33 State Street, Bangor, Maine 04401; telephone (207) 945-5621. CERTAIN ISSUES FACING THE COMPANY --------------------------------- CHANGES IN THE ELECTRIC UTILITY INDUSTRY AND IN REGULATION - See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition - Recent Events Affecting The Electric Utility Industry And The Company" for a discussion of the effect of competition and related events on future sales, earnings and dividend policy. That discussion includes a description of the legislation enacted by the State of Maine to restructure the electric industry within the state to implement retail competition. SIGNIFICANT CUSTOMER - Pursuant to a special rate contract approved by the MPUC, the rate for service provided by the Company to HoltraChem Manufacturing Company, L.L.C. ("HMC"), a significant customer, is based in part on a "revenue sharing" arrangement whereby the revenues for service vary depending on the price and volume of product sold by HMC to its customers. During 1995, 1996 and 1997, revenue sharing payments from HMC totaled approximately $4.1 million, $3.5 million and $0.4 million, respectively. HMC's principal business is selling chlorine and caustic soda, primarily to the paper industry in the State of Maine. The Company is unable to predict future market conditions for HMC s products. OTHER ISSUES - See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition - Recent Events Affecting The Electric Utility Industry And The Company" for a discussion of the effect of other significant issues and events on the Company. CONSTRUCTION PROGRAM -------------------- The Company's construction program consists of extensions and improvements of its transmission and distribution facilities, construction of new generating stations or capital improvements to existing generating stations, capital improvements to the Company's internal computer and information systems and other general projects within the Company's service area. The Company projects that capital expenditures will aggregate approximately $45-55 million in the period 1998 through 2000, the majority of which are expected to be related to extensions and improvements of transmission and distribution facilities. RATES AND REGULATION -------------------- RATE MATTERS - On March 3, 1997, the Company notified the MPUC of its intent to file for a general increase in rates. Under Maine law, a utility must ordinarily notify the MPUC two months in advance of the filing of a request for a general increase in rates and the MPUC then has nine months to investigate that request. However, under certain circumstances, the MPUC may allow a utility to implement a requested increase in rates on a temporary basis pending the conclusion of its investigation of the utility s request for a general increase in rates. On April 1, 1997, the Company filed with the MPUC a Petition for Temporary Rates to increase its rates by an amount that would increase its annual revenues by $10 million effective June 1, 1997. In doing so, the Company cited the continuing impact on the Company s financial condition and cash flow of the ongoing outage at the Maine Yankee nuclear power plant. The Company also cited potential noncompliance with financial covenants contained in its bank credit agreement (including the fixed charge coverage ratio, discussed below) and the need to maintain adequate borrowing capacity for working capital purposes, including mandatory debt repayments. On June 26, 1997, the MPUC issued an order authorizing the Company to change rates temporarily to increase its annual revenues by approximately $5.1 million effective July 1, 1997. In doing so, however, the MPUC also required the Company to accelerate the amortization of the deferred regulatory asset associated with the 1993 buyout of one of its high-priced non-utility generator contracts. As a result, revenue produced by the rate increase did not increase earnings, but it did increase cash flow. Effective December 12, 1997, the MPUC authorized the Company to revert to the original amortization schedule of that deferred regulatory asset, thereby permitting the temporary rate increase previously authorized to impact the Company s earnings positively from that date on. On February 9, 1998, the MPUC issued its final order on the Company s request to increase its rates that it filed in March of 1997. Of the approximately $22 million increase in annual revenue ultimately requested by the Company, the MPUC authorized an increase of approximately $13.2 million (which includes the $5.1 million temporary rate increase discussed above) annually. While there are many factors that explain the difference between the MPUC allowance and the Company s requested increase, much of that difference is attributable to the proposed accounting treatment of various costs and the deferral of other costs for future consideration, including the deferral of certain costs associated with Maine Yankee. While those accounting recommendations will affect the timing of receipt of revenues by the Company and will require the Company to finance the payment of the associated costs, they should not significantly affect the Company s earnings during the period that the new rates are effective. The MPUC order is based upon a determination that the Company should be allowed to earn an annual return of 12.75% on common equity. It also includes a rate plan under which the Company s rates will be subject to certain reconciliations based upon actual expenditures by the Company and an annual adjustment beginning on May 1, 1999 to account for inflation with an offset for assumed increase in productivity. Other than those adjustments, the Company will not change its rates unless its return on equity exceeds or falls short of the allowed return by more than 350 basis points. If the Company's return on equity falls outside of that bandwidth, 50% of the excess or shortfall will be adjusted for in the Company's rates. OTHER REGULATION - The MPUC regulates numerous other matters affecting the Company, including financing, construction of generation and transmission facilities, credit, collection, conservation and demand side management programs, low income rate subsidies and purchases from non-utility power producers. Maine Yankee is subject to extensive regulation by the NRC. Under its continuing jurisdiction, the NRC may, after appropriate proceedings, require modification of nuclear power generating units for which operating or nonoperating licenses have already been issued, or impose new conditions on such permits or licenses. The FERC regulates rates for sales of electricity to other utilities. In addition, all the Company's hydroelectric projects are licensed by the FERC. Under the Federal Power Act, upon not less than two years' notice the United States is empowered to take over and thereafter to maintain and operate a licensed hydroelectric project at or following the time a license expires. If the United States elects this option, it must pay the licensee its net investment in the project, not to exceed fair market value. If the United States does not elect this option, the FERC may issue a new license to the existing licensee upon such terms and conditions as are authorized or required under the then-existing laws and regulations. It may also, alternatively, issue a new license to a new licensee that has filed a competing license application. In choosing between competing license applications, the FERC must issue a license to the applicant whose proposal is best adapted to serve the public interest. The following table sets forth certain information with regard to such licenses. LICENSED ISSUE DATE OF CURRENT EXPIRATION PROJECT CAPACITY ORIGINAL LICENSE DATE ------- --------- ---------------- ------------------- Ellsworth 8,900 KW April 12, 1977 December 31, 2018 Howland 1,875 KW September 12, 1980 September 30, 2000 Medway 3,400 KW March 29, 1979 March 31, 1999 Milford 6,400 KW December 31, 1969 Original license expired December 31, 1990 currently operating on year-to-year license. Orono 2,332 KW November 10, 1977 Original license expired September 25, 1985 currently operating on year-to-year license. Stillwater 1,950 KW August 10, 1978 Original license expired December 31, 1993 currently operating on year-to-year license. Veazie 8,400 KW February 18, 1965 Original license expired September 25, 1985 currently operating on year-to-year license. West Enfield* 13,000 KW February 3, 1970 June 26, 2024 - ------------------ * Through PHC, the Company has a 50% ownership interest in Bangor-Pacific, which owns and operates the West Enfield Project. The Company is actively pursuing the relicensing of the projects listed above which are operating on year-to-year licenses. Some of those relicensing proceedings had been delayed pending completion by the FERC of an Environmental Impact Statement ("EIS") of sections of the Penobscot River that was being prepared in connection with the Company's licensing of the Basin Mills project. That EIS was completed during 1997, however, the FERC has not yet issued its final order with respect to those projects. The Company has not received notice that the United States will exercise its rights to take over any of the Company's hydroelectric projects, nor have any competing applications been filed. Under a Federal statute enacted by Congress in 1986, participation in relicensing proceedings by governmental agencies and other parties was allowed to increase significantly. That increased participation may result in more burdensome and costly conditions imposed upon licensees of hydroelectric projects. The Company is unable to predict what terms and conditions, if any, might be included in new licenses or license renewals granted pursuant to the Company's licensing applications, or what impact any such terms and conditions might have on the Company's ability to operate and maintain the projects economically. SEABROOK -------- GENERAL - The Company was a participant in Seabrook from 1978 to 1986, with an ownership interest of 2.17%, or 25 MW, in each of the two 1150 MW units. Unit 2 was effectively canceled in 1984. In late 1984, following a lengthy MPUC investigation, the conclusion of which cast doubt on the wisdom of the Maine utilities' continued participation in Seabrook, the Company began efforts to sell its interest in the project. An agreement for the sale of Seabrook to EUA Power Corp. was reached in mid-1985 and was consummated in November 1986. In 1985, the MPUC approved an agreement among the Company, the MPUC Staff and the Public Advocate addressing the recovery through rates of the Company's investment in Seabrook ("Seabrook Stipulation"). Although implementation of the Seabrook Stipulation significantly improved the Company's financial condition, substantial write-offs were required. In August 1989, a comprehensive settlement agreement entered into by current and former joint owners of Seabrook became effective. Under the agreement, the signatories, representing virtually all of the ownership interests in Seabrook, relinquished claims against the lead owner, Public Service Company of New Hampshire, arising out of Seabrook. As a part of the settlement, former joint owners, including the Company, were relieved of certain contingent liabilities. JOINT VENTURES -------------- WEST ENFIELD - In 1986, the Company formed PHC, a wholly-owned subsidiary, which owns the Company's 50% ownership interest in Bangor-Pacific, a joint venture with a development subsidiary of Pacific Lighting Corporation. Bangor-Pacific undertook the redevelopment of an old 3.8 MW hydroelectric plant which the Company owned on the Penobscot River in Enfield and Howland, Maine, into a 13 MW facility, the West Enfield Project, and now operates the facility. Construction costs were shared equally by the Company and the other joint venturer until Bangor-Pacific completed its financing and took over ownership of the project, which occurred in January 1987. Commercial operation of the redeveloped West Enfield Project began in April 1988. Bangor-Pacific financed the cost of the redevelopment through the private placement of $40 million of 9.45% and 10.26% fixed rate amortizing term notes due 1996 and 2008, respectively, and $5 million of floating rate amortizing term notes due 1996 (collectively, the "Notes"). The Notes are secured by a mortgage on the West Enfield Project and a security interest in a 50-year power contract between the Company and Bangor-Pacific. The holders of the Notes are without recourse to the joint venture partners or their parent companies except that each partner has agreed to make payments in an amount equal to 50% of any amounts due and unpaid on the Notes but not exceeding distributions received from Bangor-Pacific in the preceding twelve-month period. Under the power contract between the Company and Bangor-Pacific, if the West Enfield Project operates as anticipated, payments by the Company to Bangor-Pacific are estimated at $7.5 million annually (without consideration of any distributions by the joint venture to the partners). In 1997, the Company paid approximately $7.1 million to Bangor-Pacific under this power contract. The Company would be required to make payments under the contract, regardless of whether any power were delivered, of approximately $4 million per year. However, the Company has the right to terminate the contract upon thirty-days' written notice if the failure to deliver power continues for a period of 12 consecutive months. NEPOOL/HYDRO-QUEBEC - The NEPOOL member utilities and Hydro-Quebec, a utility operating within the province of Quebec, Canada ("Hydro-Quebec"), have constructed facilities required to interconnect the electric systems in New England with the electric system of Hydro-Quebec. The initial stage of the interconnection consists of a completed and operational 450 kilovolt ("KV") transmission line from the Hydro-Quebec system to a terminal having an approximate rating of 690 MW at the Comerford Generating Station ("Comerford") on the Connecticut River in New Hampshire. The subsequent stage, HQ-II, completed in 1990, increased the interconnection transfer capability to approximately 2000 MW by means of a transmission line from Comerford to a terminal facility at the Sandy Pond Substation in Massachusetts. In 1990, the Company formed Bangor Var Co., a wholly owned corporate subsidiary, the sole function of which is to own a 50% interest in Chester SVC Partnership ("Chester"), a general partnership which owns the static var compensator ("SVC"), electrical equipment which supports the HQ-II transmission line. A wholly-owned subsidiary of Central Maine Power Company ("CMP") owns the other 50% interest in Chester. Chester has financed the acquisition and construction of the SVC through the issuance of $33 million in principal amount of 10.48% senior notes due 2020, and up to $3.2 million principal amount of additional notes due 2020 (collectively, the "SVC Notes"). The holders of the SVC Notes are without recourse to the partners or their parent companies and may only look to Chester and to the collateral for payment. Bangor Var Co. accounts for its investment in Chester under the equity method. Bangor Var Co.'s financial results are included in the Company's consolidated financial statements. The New England utilities which participate in HQ-II have agreed under a FERC-approved contract to bear the cost of Chester, on a cost-of-service basis, which includes a return on and of all capital costs. EMPLOYEES --------- At December 31, 1997, the Company had 421 full time employees approximately 53% of whom were represented by a local union affiliated with the International Brotherhood of Electrical Workers (AFL-CIO). Union membership is divided into two bargaining units, 177 employees engaged in electrical, line and meter related functions and 48 employees engaged in customer service and credit related functions. The present contract with electrical, line and meter related workers expires December 31, 1998. The present contract with customer service and credit related workers expires December 31, 1999. The Company believes that its relations with its employees are satisfactory. POWER SUPPLY SOURCES -------------------- GENERAL - In order to meet its load growth and reserve obligations under NEPOOL, the Company, in addition to utilizing its own generating capacity, acquires capacity and energy through contracts with other utilities and independent generation facilities and through joint ownership of generating facilities. The Company estimates that it has, or can acquire, sufficient generating capacity, through a combination of wholly-owned and jointly-owned generating facilities and purchased power contracts, to meet its anticipated load growth through the 1990's. The Company's sources of generation for electric sales to its customers (net of off-system sales to other utilities) for 1997, 1996 and 1995 by type of fuel is shown below. SOURCE 1997 1996 1995 ------ ---- ---- ---- Hydroelectric (Company*)....... 13% 17% 14% Nuclear Generation (Maine Yankee) 0% 19% 1% Oil (Company)................... 4% 2% 3% Biomass/Refuse (purchased)...... 6% 6% 6% NEPOOL/other purchases.......... 77% 56% 76% ---- ---- ---- Total....................... 100% 100% 100% ---- ---- ---- - --------------- * Includes purchases from the West Enfield Project, in which the Company has a 50% ownership interest. COMPANY-OWNED GENERATION ------------------------ The Company, as a tenant in common with other utilities, owns 8.33%, or approximately 50 MW, of William F. Wyman Unit No. 4 ("Wyman 4"), a 600 MW oil-fired generating unit in Yarmouth, Maine, constructed and operated by CMP as the lead owner. The Company is entitled to 8.33% of the energy produced by Wyman 4 and pays the same percentage of the unit's operating expenses. The Company owns two oil-fired generating units located at its Graham Station in Veazie, Maine ("Graham"), currently in deactivated reserve status, having a total capacity of 47 MW, as well as eleven internal combustion generation units located at three stations having a total capacity of 21 MW. The Company also owns seven hydroelectric stations having a total capacity of about 30 MW (excluding PHC's ownership interest in the West Enfield Project). All of the Company's hydroelectric stations are licensed under the Federal Power Act. See "Rates and Regulation." On February 9, 1998, the Company filed its plan for divesting its generation-related assets with the MPUC in accordance with the electric utility industry restructuring provisions signed into law last year. This plan could result in the identification of proposed purchasers by mid-summer 1998. Further regulatory approvals will then be required to actually complete the sale. The Company is offering a total of 166 MW of generation assets, including both Company-owned facilities and the resale of certain purchase power contracts that extend beyond March 1, 2000, the scheduled implementation date for retail electric competition within the State of Maine. In addition, the Company owns approximately 600 miles of transmission lines and approximately 3,600 miles of distribution lines to serve its customers. Other properties consist of office, garage and warehouse facilities at various locations in its service area. POWER PURCHASE CONTRACTS ------------------------ The following chart sets forth information concerning the Company's major power purchase contracts exclusive of Maine Yankee. CONTRACTED QUANTITY OF SELLER TERM OF CONTRACT CAPACITY OR ENERGY - ---------- ---------------------- ------------------------ Bangor-Pacific* August 21, 1986 through Total output of energy (Hydroelectric) May 31, 2024, at which from facility with name time Company can either plate rating of not more purchase the facility than 16 MW at its fair market value or extend the contract for an additional 15 years (if the West Enfield Project's FERC license is also extended) Penobscot Energy January 21, 1984 through Total output of firm Recovery Company February 28, 2018 energy; minimum annual ("PERC")(Refuse) delivery of 105,000,000 KWH up to a maximum of 166,440,000 KWH per calendar year Great Northern No Fixed Term Approximately 20 MW Paper Co. (Cogeneration) New England November 1, 1994 through 30 MW and associated energy Power Company October 31, 1999 from two designated nuclear units New England January 1, 1996 through 25 MW and associated energy Power Company October 31, 1998 from a designated system contract New Brunswick April 1, 1996 through 10 MW system purchase of Power October 31, 1998 capacity and energy (months of April-October only) New Brunswick June 8, 1997 through 60 MW system purchase of Power December 31, 1999 capacity and energy Great Bay Power January 1,1996 through 10 MW and associated energy Corporation March 31, 1998 from a designated nuclear (through PECO unit (November-March only) Energy Company) - ----------------- * Through PHC, the Company has a 50% ownership interest in Bangor-Pacific, which owns and operates the West Enfield Project. For further details with respect to certain of these contracts, see Note 6 of the Notes to Consolidated Financial Statements. The Company purchases energy from, and sells energy to, New Brunswick Electric Power Commission utilizing the transmission facilities of Maine Electric Power Company, Inc. ("MEPCO"), in which the Company owns a 14.2% equity interest. MEPCO owns and operates a 345 KV transmission line running from Wiscasset, Maine to the Maine/New Brunswick border. The Company interconnects with this line in Orrington, Maine. The Company also purchases energy on a short-term basis from time to time when it is economical to do so to displace higher cost energy from other sources. MAINE YANKEE ------------ General - The Company owns 7% of the common stock of Maine Yankee, which owns and, prior to its permanent closure in 1997, operated an 880 MW nuclear generating plant in Wiscasset, Maine. Maine Yankee, which had commenced commercial operation on January 1, 1973, is the only nuclear facility in which the Company has an ownership interest. The Company s equity ownership in the plant had entitled the Company to about 7% of the output pursuant to a cost-based power contract. Pursuant to a contract with Maine Yankee, the Company is obligated to pay its pro rata share of Maine Yankee's operating expenses, including decommissioning costs. In addition, under a Capital Funds Agreement entered into by the Company and the other sponsor utilities, the Company may be required to make its pro rata share of future capital contributions to Maine Yankee if needed to finance capital expenditures. PERMANENT SHUTDOWN OF THE MAINE YANKEE PLANT - On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at its nuclear generating plant at Wiscasset, Maine (the "Plant") and to begin decommissioning the Plant. As reported in detail in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, its Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997, June 30, 1997 and September 30, 1997 and its Reports on Form 8-K dated May 27, 1997 and February 19, 1997, and reported in more condensed form below, the Plant experienced a number of operational and regulatory problems and has been shut down since December 6, 1996. The decision to close the Plant permanently was based on an economic analysis of the costs, risks and uncertainties associated with operating the Plant compared to those associated with closing and decommissioning it. The Plant's operating license from the NRC was scheduled to expire on October 21, 2008. RECENT OPERATING HISTORY - The Plant generally 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 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, 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, acknowledge many of the weaknesses, and committed to revising its operations and procedures to address the NRC's criticisms. 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 27, 1997, the DOJ, through the United States Attorney for Maine, announced that its review had revealed no grounds for criminal prosecution. The Company believes that the OI investigation, however, could ultimately result in the imposition of civil penalties, including fines, on Maine Yankee. In 1996 the Plant was generally in operation at the 90- percent level from late January to early December, except for a two-month outage from mid-July to mid-September. The Plant was shut down again on December 6, 1996, to address several concerns, and has not operated since then. The precipitating event causing the shutdown was the need to evaluate and resolve cable- separation compliance issues, and on December 18, 1996, the NRC issued a Confirmatory Action Letter requiring the Plant to remain shut down until Maine Yankee's plan for resolving the cable- separation issues was accepted by the NRC. Subsequently, Maine Yankee uncovered additional issues, including among others, the possibility of having to replace defective fuel assemblies, address additional cable-separation issues, and determine the condition of the Plant's steam generators, all of which contributed to further operational uncertainty. On January 29, 1997, the Plant was placed on the NRC's Watch List, and on January 30, 1997, the NRC issued a supplemental Confirmatory Action Letter requiring the resolution of additional concerns before the Plant could be restarted. In December 1996 Maine Yankee requested proposals from several utilities with large and successful nuclear programs to provide a management team, and ultimately contracted with Entergy Nuclear, Inc., effective February 13, 1997, for management services that included providing a new president and regulatory compliance officer. The Entergy-provided management team made progress in addressing technical issues, but a number of operational and regulatory uncertainties remained. On May 27, 1997, the Board of Directors of Maine Yankee voted to minimize spending while preserving the options of restarting the Plant or conveying ownership interests to a third party. After unsuccessful negotiations with one prospective purchaser, Maine Yankee found no other interest in purchasing the Plant and, based on its economic analysis, closed the Plant permanently. As required by the NRC, on August 7, 1997, Maine Yankee certified to the NRC that Maine Yankee had permanently ceased operations and that all fuel assemblies had been permanently removed from the Plant's reactor vessel. On August 27, 1997, Maine Yankee filed the required Post-Shutdown Activities Report with the NRC, describing its planned post-shutdown activities and a proposed schedule. MANAGEMENT AUDIT - 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. 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 the report's negative conclusions are unfounded and may be contradictory. The Company has been charging its share of the Maine Yankee expenses against income, and 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. On November 7, 1997, Maine Yankee initiated a legal challenge 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 investigation is therefore barred on constitutional grounds. The Company filed a similar legal challenge on the same day. The MPUC subsequently stayed its investigation pending the outcome of Maine Yankee's FERC rate case, in which the MPUC is participating, while indicating that its consultant would continue its extended review. MAINE YANKEE DEBT RESTRUCTURING AND FERC RATE PROCEEDING - Maine Yankee entered into agreements in August 1997 with the holders of its outstanding First Mortgage Bonds and its lender banks (the "Standstill Agreements") under which the bondholders and banks agreed that they would not assert that the August 1997 voluntary permanent shutdown of the Plant constituted a covenant violation under Maine Yankee's First Mortgage Indenture or its two bank credit agreements. The parties also agreed in the Standstill Agreements to maintain Maine Yankee's bank borrowing at a level below that of the prior aggregate bank commitments, which level Maine Yankee considered adequate for its foreseeable needs. The Standstill Agreements, as extended in October 1997, were to terminate on January 15, 1998, by which date Maine Yankee was to have reached agreement on restructured debt arrangements reflecting its decommissioning status. On November 6, 1997, Maine Yankee filed a rate proceeding with the FERC reflecting the Plant's decommissioning status and requesting an effective date of January 15, 1998, for the amendments to Maine Yankee's Power Contracts and Additional Power Contracts, which revise Maine Yankee's wholesale rates and clarify and confirm the obligations of Maine Yankee's sponsors to continue to pay their shares of Maine Yankee's costs during the decommissioning period. On January 14, 1998, the FERC issued an "Order Accepting for Filing and Suspending Power Sales Contract Amendment, and Establishing Hearing Procedures" (the "FERC Order") in which the FERC accepted for filing the rates associated with the amended Power Contracts and made them effective January 15, 1998, subject to refund. The FERC also granted intervention requests, including among others, those of the MPUC, Maine Yankee's largest bondholder, and two of its lender banks, denied the request of an intervenor group to summarily dismiss part of the filing, and ordered that a public hearing be held concerning the prudence of Maine Yankee's decision to shut down the Plant and on the justness and reasonableness of Maine Yankee's proposed rate amendments. The Company expects the prudence issue to be pursued vigorously by several intervenors, including among others the MPUC, which stayed its own prudence investigation pending the outcome of the FERC proceeding after the jurisdictional challenge by Maine Yankee and the Company discussed above. The Company cannot predict the outcome of the FERC proceeding. On January 15, 1998, Maine Yankee, its bondholders and lender banks revised the Standstill Agreements and extended their term to April 15, 1998, subject to satisfying certain milestone obligations during the term of the extension. One such obligation was that Maine Yankee must have accepted, by February 12, 1998, an underwritten commitment to refinance its bonds and bank debt, subject only to closing conditions reasonably capable of being satisfied by April 15, 1998, and reasonably satisfactory to the bondholders and banks. Maine Yankee accepted such a commitment prior to the deadline, received regulatory approval of the refinancing on March 9, 1998, and is negotiating final loan documentation and preparing for a closing before April 15. OTHER MAINE YANKEE SHAREHOLDERS - Higher nuclear-related costs are also affecting other stockholders of Maine Yankee in varying degrees. Central Maine Power Company, the largest individual stockholder in Maine Yankee with a 38% ownership interest, reported in February, 1998 that it expected to require an additional retail rate increase under its MPUC-approved Alternative Rate Plan due to its poor financial performance resulting from increased Maine Yankee-related obligations. Under that Alternative Rate Plan, Central Maine is permitted to recover through a retail rate increase only one half of the difference between the low end of return on equity bandwidth of 7.05% and its reported 1997 earnings of 1.04%. Maine Public Service Company, a 5% stockholder, cited problems in satisfying financial covenants in loan documents, reduced its common stock dividend substantially in early March 1997 and obtained rate relief. Northeast Utilities (20% stockholder through three subsidiaries), which is also adversely affected by the substantial additional costs associated with the three shut-down Millstone nuclear units and the permanently shut-down Connecticut Yankee unit, as well as significant regulatory issues in Connecticut and New Hampshire, has implemented an indefinite suspension of its quarterly common stock dividends. Largely as a result of nuclear-related costs, Northeast Utilities reported a loss of $135 million for 1997 and continues to experience difficulty in satisfying loan covenants. A default by a Maine Yankee stockholder in making payments under its Power Contract or Capital Funds Agreement could have a material adverse effect on Maine Yankee, depending on the magnitude of the default, and would constitute a default under Maine Yankee's bond indenture and its two major credit agreements unless cured within applicable grace periods by the defaulting stockholder or other stockholders. The Company cannot predict, however, what effect, if any, the financial difficulties being experienced by some Maine Yankee stockholders will have on Maine Yankee or the Company. NUCLEAR FUEL STORAGE - Federal legislation enacted in 1987 directed the DOE to proceed with the studies necessary to develop and operate a permanent high-level waste (spent fuel) disposal site a Yucca Mountain, Nevada. The legislation also provided for the possible development of a Monitored Retrievable Storage ("MRS") facility and abandoned plans to identify and select a second permanent disposal site. An MRS facility would provide temporary storage for high-level waste prior to eventual permanent disposal. The DOE has indicated that the permanent disposal site is not expected to open before 2010, although originally scheduled to open in 1998. On April 15, 1997, the United States Senate approved the"Nuclear Waste Policy Act of 1997", (S. 104), which would reform the federal policy for managing spent nuclear fuel and instruct the DOE to develop an integrated management system, including a central storage facility, for such fuel. The bill would require the DOE to accept such nuclear fuel from commercial nuclear power plants and would establish a licensing process that would result in the storage of such fuel at a central federal facility beginning no later than June 30, 2003, if all the necessary approvals are obtained. The DOE would also be required to continue site characterization work at Yucca Mountain as a permanent disposal site. On October 30, 1997, the House of Representatives approved a bill (H.R. 1270) with generally similar objectives. Action to resolve the differences in the two bills was deferred to 1998. In June 1994, several nuclear utilities other than Maine Yankee filed suit against the DOE. The utilities sought a declaration from the United States Court of Appeals for the District of Columbia that the Nuclear Waste Policy Act of 1982 required the DOE to take responsibility for spent nuclear fuel in 1998. On July 23, 1996, the court held that the DOE is obligated "to start disposing of [spent nuclear fuel] no later than January 31, 1998." The DOE did not appeal the decision, but announced in December 1996 that it anticipated it would be unable to start accepting spent nuclear fuel for disposal by January 31, 1998. A large number of nuclear utilities and state regulators filed a new lawsuit against the DOE in January 1997 seeking to force the DOE to honor its obligation to store spent nuclear fuel and seeking other appropriate relief. On November 14, 1997, the U.S. Court of Appeals for the District of Columbia Circuit confirmed the DOE's obligation. On February 19, 1998, Maine Yankee filed a petition in the same court seeking to compel the DOE to take Maine Yankee's spent fuel from the Plant site "as soon as physically possible," alleging that removing the spent fuel on the DOE's indicated schedule would delay the decommissioning of the Maine Yankee Plant indefinitely. The Company cannot predict the ultimate results of the lawsuits. NUCLEAR INSURANCE - In accordance with the Price-Anderson Act, the limit of liability for a nuclear-related accident is approximately $8.9 billion. The primary layer of insurance for the liability is $200 million of coverage provided by the commercial insurance market. The secondary coverage is approximately $8.7 billion, based on 110 licensed reactors. The secondary layer is based on a retrospective premium assessment of $79.275 million per nuclear accident per licensed reactor, payable at a rate not exceeding $10 million per year per accident. In addition, the retrospective premium is subject to inflation-based indexing at five-year intervals and, if the sum of all public liability claims and legal costs arising from any nuclear accident exceeds the maximum amount of financial protection, each licensee can be assessed an additional 5 percent ($3.775 million) of the maximum retrospective assessment. In addition to the insurance required by the Price-Anderson Act, Maine Yankee carries all-risk nuclear property damage insurance in the amount of $500 million plus additional excess nuclear property insurance. Maine Yankee, in recognition of the reduced risk posed by the shutdown and defueled nuclear reactor, reduced the amount of excess nuclear property damage insurance purchased from the nuclear electric utility insurance company, effective September 15, 1997, from $2.25 billion to $560 million. This reduced the total amount of nuclear property damage coverage to $1.06 billion, the minimum amount of nuclear property damage insurance then required by regulation. The all-risk nuclear property damage insurance of $500 million is obtained from the commercial insurance market and is not subject to retrospective premium assessments. The excess insurance of $560 million is provided by a nuclear electric utility industry insurance company through a combination of current premiums, retrospective premium assessments and reinsurance. Each participating utility may be assessed a retrospective premium of up to 5 times its premium with respect to industry losses in any policy year. LOW-LEVEL WASTE DISPOSAL - The federal Low-Level Radioactive Waste Policy Amendments Act (the "Waste Act"), enacted in 1986, required operating disposal facilities to accept low-level nuclear waste from other states until December 31, 1992. Maine did not satisfy its milestone obligation under the Waste Act requiring submission of a site license application by the end of 1991, and therefore, became subject to surcharges on its waste and did not have access to regulated disposal facilities after the end of 1992. Maine Yankee then began storing all low-level waste generated at an on-site storage facility. On July 1, 1995, however, the State of South Carolina restored access to its facility and Maine Yankee has been shipping its low-level waste to the South Carolina facility for disposal. The states of Maine, Texas and Vermont have been pursuing the implementation of a compact for the disposal of low-level waste at a site in Texas. The compact provides for Texas to take Maine's low-level waste over a 30-year period for disposal at a planned facility in west Texas. In return, Maine would be required to pay $25 million, assessed to Maine Yankee by the State of Maine, payable in two equal installments, the first after ratification by Congress and the second upon commencement of operation of the Texas facility. In addition, the company would be assessed a total of $2.5 million for the benefit of the Texas county in which the facility would be located and would also be responsible for its pro-rata share of the Texas governing commission's operating expenses. The Maine Low-Level Radioactive Waste Authority suspended its search for a suitable disposal site in Maine and ceased operations in 1994. The compact is before the Congress for ratification and was approved by the House Of Representatives in October 1997. The Senate has deferred action on the bill until 1998. Since the Plant has permanently stopped operating, the compact is less beneficial to Maine Yankee than it would have been if the Plant had remained in operation, due to the new schedule for Maine Yankee's shipments and the anticipated schedule for opening the Texas facility. Maine Yankee cannot predict whether the final required ratification of the Texas compact or other regulatory approvals will be obtained, but Maine Yankee intends to utilize its on-site storage facility as well as dispose of low-level waste at the South Carolina site or other available sites in the interim and continue to cooperate with the State of Maine in pursuing all appropriate options. HAZARDOUS SUBSTANCE SITE - Maine Yankee has been notified by the Maine Department of Environmental Protection ("DEP") that it is one of many potentially responsible parties under the Maine Uncontrolled Hazardous Substance Sites law for having arranged for the transport of hazardous substances to sites owned by the Portland Bangor Waste Oil Company that have been designated uncontrolled hazardous substance sites by the DEP. Under the Maine law, each responsible party is jointly and severally liable for costs associated with the abatement, cleanup or mitigation of the hazards at such a site. Since the investigations by the DEP and Maine Yankee are in their early stages and a large number of potentially responsible parties is involved, The Company cannot now predict the amount of costs that Maine Yankee will ultimately be required to assume. Environmental costs that are unrelated to the decommissioning and dismantlement of the Plant site could generally be considered to be operation and maintenance costs to be recovered through Maine Yankee's billing process. Site characterization work at the Plant site, an initial part of the decommissioning process, and related activities could give rise to additional environmental issues. ENVIRONMENTAL MATTERS --------------------- The Company is regulated by the United States Environmental Protection Agency ("EPA") as to compliance with the Federal Water Pollution Control Act, the Clean Air Act, and several federal statutes governing the treatment and disposal of hazardous wastes. The Company is also regulated by the Maine Department of Environmental Protection ("MDEP") under various Maine environmental statutes. Although the Company is actively engaged in complying with these federal and state acts and statutes, the costs of which are significant, it has not, to date, encountered material difficulties in connection with such compliance. In 1992, the Company received notice from the MDEP that it was investigating the cleanup of several sites in Maine that were used in the past for the disposal of waste oil and other hazardous substances, and that the Company, as a generator of waste oil that was disposed at those sites, may be liable for certain cleanup costs. The Company learned in October 1995 that the EPA placed one of the sites on the National Priorities List ("NPL") under the Comprehensive Environmental Response, Compensation, and Liability Act. With respect to the NPL site, the Company was one of 15 PRPs to receive a Special Notice from the EPA in May 1997, requiring reimbursement of past costs, amounting to $5,639,780, as well as future costs at the site. The Special Notice also urged the PRPs to enter into an Administrative Order on Consent to conduct or finance response actions at the site. In response to the Special Notice, a group of PRPs, including Bangor Hydro, is close to signing an agreement with the EPA to fund ongoing monitoring at the site. The Company's share of this effort is expected to be approximately $20,000. According to the EPA's volumetric ranking, the Company's ranks 13th with a total contribution to the site of 1.10781 percent. As to the other site, which has been listed by the MDEP as an Uncontrolled Hazardous Substance Site, the Company is considered a de minimis generator. The Company estimates that during 1998 it will spend approximately $370,000 in operations expenses and $75,000 in capital expenditures to comply with environmental standards for air, water and hazardous materials. EXECUTIVE OFFICERS OF THE COMPANY --------------------------------- The following are the present executive officers of the Company with all positions and offices held. There are no family relationships between any of them nor are there any arrangements pursuant to which any were selected as officers. Name Age Office and Year First Elected - ----- --- --------------------- Robert S. Briggs 54 President & Chief Executive Officer since January 1991 Carroll R. Lee 48 Senior Vice President and Chief Operating Officer since December, 1996 Frederick S. Samp 47 Vice President-Finance & Law since 1995; Treasurer since 1995; Chief Financial Officer since 1995 Paul A. LeBlanc 50 Vice President - Human Resources & Information Services since November, 1996 Each of the executive officers has for more than the last five years been an officer or employee of the Company. Mr. Briggs was Vice President and General Counsel from 1979 until 1987, Vice President-Law and Public Affairs from 1987 until 1988, Executive Vice President & Chief Operating Officer from 1988 until 1989 and President and Chief Operating Officer from 1989 until 1991. From 1983 through 1984, Mr. Lee was Vice President-Power Supply and Planning and he served as Vice President-Engineering and Operations from 1985 until 1987, Vice President-Planning & Development from 1987 until 1990 and Vice President-Operations from 1990 until 1996. Mr. Samp was Corporate Counsel, Corporate Secretary and Clerk from 1985 until 1988 and General Counsel, Corporate Secretary and Clerk from 1988 until 1995. Mr. LeBlanc was Vice President-Administration from 1978 until 1987, Vice President-Customer Services from 1987 until 1988 and Assistant to the President from 1988 until 1996. ITEM 3 LEGAL PROCEEDINGS - ------ ----------------- See Note 9 to the Company's Financial Statements for a discussion of potential liabilities under the Comprehensive Environmental Response, Compensation, and Liability Act. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- Not applicable. PART II - ------- ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED - ------ ------------------------------------------------- STOCKHOLDER MATTERS ------------------- As of December 31, 1997, there were 6,868 holders of record of the Company's common stock. The Company's common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "BGR". The following table sets forth the high and low prices for the Common Stock as reported by the NYSE. The prices shown do not include commissions. DIVIDENDS DECLARED FISCAL PERIOD HIGH LOW PER SHARE - ------------- ---- --- --------- 1996 - ---- First Quarter................ $12 1/2 $10 1/4 $.18 Second Quarter............... 11 10 .18 Third Quarter................ 10 3/ 9 7/8 .18 Fourth Quarter............... 10 3/8 9 1/4 .18 1997 - ---- First Quarter................ $9 1/2 $6 $.00 Second Quarter............... 6 1/4 4 7/8 .00 Third Quarter................ 6 3/8 5 1/4 .00 Fourth Quarter............... 6 11/16 5 1/16 .00 1998 - ---- First Quarter (through March 20, 1998).. $8 1/2 $6 1/4 $.00 In June of 1995, the Board reduced the quarterly dividend on common stock by $.15 from $.33 per share to $.18 per share, resulting in a reduction in the indicated annual rate from $1.32 to $.72. At its March 19, 1997 meeting, the Board of Directors determined that the payment of common stock dividends should be suspended, and to date, no additional common stock dividend has been declared. The Company's credit agreements with its lending banks and the Finance Authority of Maine contain a number of covenants keyed to the Company's financial condition and performance. One such covenant prohibits the Company from paying out in dividends on its common stock more than 50% of its earnings applicable to common stock in any calendar year. ITEM 6 - ------ SELECTED FINANCIAL DATA - ----------------------- SIX YEAR STATISTICAL SUMMARY Bangor Hydro-Electric Company
1997 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- MEGAWATT HOURS (MWH) GENERATED AND PURCHASED Hydro Generation (Company) 262,377 321,532 275,810 271,616 275,694 305,011 Nuclear Generation (Maine Yankee) - 348,719 13,606 456,871 395,665 368,641 Oil (Company) 69,580 26,912 50,706 35,759 47,115 80,770 Biomass/Refuse 159,990 163,279 177,558 190,218 281,260 307,451 NEPOOL/Other Purchases 1,583,093 1,359,116 1,540,530 958,363 937,431 767,306 - -------------------------------------------------------------------------------------------------------------------------- Total Generated & Purchased 2,075,040 2,219,558 2,058,210 1,912,827 1,937,165 1,829,179 Less Line Losses and Company Use 141,426 140,128 136,908 135,561 131,764 - -------------------------------------------------------------------------------------------------------------------------- Remainder - MWH sold 2,075,040 2,078,132 1,918,082 1,775,919 1,801,604 1,697,415 ========================================================================================================================== CLASSIFICATION OF SALES - MWH Residential 533,161 536,490 513,076 516,470 515,242 521,889 Commercial 523,043 512,433 511,720 507,285 500,488 490,861 Industrial 680,226 647,985 686,386 611,876 615,314 563,734 Lighting 8,780 8,945 9,547 9,416 9,590 9,876 Wholesale 3,841 4,486 10,961 11,705 10,311 10,462 - -------------------------------------------------------------------------------------------------------------------------- Total MWH Billed to Customers 1,749,051 1,710,339 1,731,690 1,656,752 1,650,945 1,596,822 Unbilled Sales - Net Increase (Decrease) 33,011 2,998 4,658 6,366 2,001 (11,832) - -------------------------------------------------------------------------------------------------------------------------- Total Delivered Sales (MWH) 1,782,062 1,713,337 1,736,348 1,663,118 1,652,946 1,584,990 (Less) Interruptible Sales 265,438 237,553 295,818 231,128 254,359 208,066 - -------------------------------------------------------------------------------------------------------------------------- Total Firm Delivered Sales (MWH) 1,516,624 1,475,784 1,440,530 1,431,990 1,398,587 1,376,924 Off-System Sales 145,680 364,795 181,734 112,801 148,658 112,425 - -------------------------------------------------------------------------------------------------------------------------- Total Energy Sales (MWH) 1,927,742 2,078,132 1,918,082 1,775,919 1,801,604 1,697,415 ========================================================================================================================== ELECTRIC OPERATING REVENUES AND EXPENSES (000'S) OPERATING REVENUES Residential 67,532 $ 66,805 $ 66,061 $ 64,008 $ 64,244 $ 66,429 Commercial 55,965 54,168 55,030 53,410 53,599 53,806 Industrial 41,356 38,947 39,929 37,040 39,508 39,340 Lighting 2,065 2,032 2,051 2,010 1,915 1,933 Wholesale 310 314 859 937 903 895 - -------------------------------------------------------------------------------------------------------------------------- Total Revenue From Customers 167,228 $ 162,266 $ 163,930 $ 157,405 $ 160,169 $ 162,403 Unbilled Sales-Net Increase (Decrease) 2,375 408 210 1,450 (237) (964) - -------------------------------------------------------------------------------------------------------------------------- Total Revenue 169,603 $ 162,674 $ 164,140 $ 158,855 $ 159,932 $ 161,439 (Less) Interruptible Revenue 11,215 9,537 11,149 8,450 8,876 8,331 - -------------------------------------------------------------------------------------------------------------------------- Total Firm Revenue 158,388 $ 153,137 $ 152,991 $ 150,405 $ 151,056 $ 153,108 Off-System Revenue 13,615 18,384 14,098 12,750 15,326 13,857 - -------------------------------------------------------------------------------------------------------------------------- Total Operating Revenues 183,218 $ 181,058 $ 178,238 $ 171,605 $ 175,258 $ 175,296 ========================================================================================================================== OPERATING EXPENSES Fuel Used in Generation 92,792 $ 78,477 $ 98,684 $ 104,132 $ 116,386 $ 114,943 Operating and Maintenance Expense 32,471 32,441 35,711 33,498 29,474 27,042 Depreciation and Amortization 35,104 29,965 20,544 10,333 6,447 6,789 Taxes 3,168 10,249 6,306 8,803 8,866 9,499 - -------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 163,535 $ 151,132 $ 161,245 $ 156,766 $ 161,173 $ 158,273 ========================================================================================================================== SUMMARY OF OPERATIONS (000'S) Operating Revenue 187,324 $ 187,374 $ 184,914 $ 174,098 $ 177,972 $ 176,789 Operating Expenses 163,535 151,132 161,245 156,766 161,173 158,273 Other Income (including equity AFDC) 1,292 1,466 760 1,308 (2,657)* 1,690 Interest Expense (net of borrowed AFDC) 25,467 26,425 20,092 11,183 8,805 9,952 - -------------------------------------------------------------------------------------------------------------------------- Net Income (386) $ 11,283 $ 4,337 $ 7,457 $ 5,337 * $ 10,254 Less Preferred Dividends 1,376 1,537 1,702 1,652 1,646 1,613 - -------------------------------------------------------------------------------------------------------------------------- Earnings on Common Stock (1,762) $ 9,746 $ 2,635 $ 5,805 $ 3,691 * $ 8,641 ========================================================================================================================== SELECTED FINANCIAL DATA Total Assets (000's) 600,583 $ 556,629 $ 566,076 $ 381,250 $ 373,521 $ 288,867 ELECTRIC PLANT (000'S) Total Electric Plant 358,878 $ 341,526 $ 323,664 $ 303,637 $ 281,606 $ 255,601 Depreciation Reserve 96,595 87,736 81,934 75,667 71,184 67,645 - -------------------------------------------------------------------------------------------------------------------------- Net Electric Plant 262,283 $ 253,790 $ 241,730 $ 227,970 $ 210,422 $ 187,956 ========================================================================================================================== CAPITALIZATION (000'S) Short-Term Debt 34,000 $ 32,500 $ 35,000 $ 27,000 $ 36,000 $ 15,000 Long-Term Debt 243,643 274,221 288,075 116,367 119,126 100,685 Redeemable Preferred Stock 9,137 10,670 12,070 13,740 15,168 15,102 Preferred Stock 4,734 4,734 4,734 4,734 4,734 4,734 Common Equity 106,558 108,321 103,192 105,658 93,944 82,230 - -------------------------------------------------------------------------------------------------------------------------- Total 398,072 $ 430,446 $ 443,071 $ 267,499 $ 268,972 $ 217,751 ========================================================================================================================== CAPITAL STRUCTURE RATIOS (%) Short-Term Debt 8.5% 7.5% 7.9% 10.1% 13.4% 6.9% Long-Term Debt 61.2% 63.7% 65.0% 43.5% 44.3% 46.2% Preferred Stock 3.5% 3.6% 3.8% 6.9% 7.4% 9.1% Common Stock 26.8% 25.2% 23.3% 39.5% 34.9% 37.8% - -------------------------------------------------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ========================================================================================================================== MISCELLANEOUS STATISTICS Shares Outstanding (Average) 7,363,424 7,336,174 7,264,360 6,947,746 5,862,411 5,393,306 Shares Outstanding (Year End) 7,363,424 7,363,424 7,301,557 7,185,143 6,225,394 5,420,955 Number of Stockholders (Year End) 6,868 7,734 8,250 7,705 7,511 7,325 Earnings per Common Share -0.24 $ 1.33 $ 0.36 $ 0.84 $ 0.63 * $ 1.60 Dividends Declared per Common Share - $ 0.72 $ 0.87 $ 1.32 $ 1.32 $ 1.32 Book Value per Common Share 14.47 $ 14.71 $ 14.13 $ 14.71 $ 15.09 $ 15.17 Return on Common Equity -1.64% 9.09% 2.51% 5.55% 3.99%* 10.60% Ratio of AFDC to Common Stock Earnings -48% 12% 48% 45% 143%* 28% Ratio of Earnings to Fixed Charges 0.86 1.50 1.14 1.49 1.04 * 1.96 Payout Ratio - 54% 242% 157% 210%* 82.5 Percentage of Construction Expenditures Funded Internally 100% 100% 100% 86% 72% 70% ========================================================================================================================== RESIDENTIAL CUSTOMER DATA Average Number of Customers 90,433 89,769 86,194 85,041 84,211 83,305 Kilowatt-Hours per Customer 5,896 5,976 5,953 6,073 6,118 6,265 Revenue per Customer 746.76 $ 744.19 $ 766.42 $ 752.67 $ 762.89 $ 797.42 Revenue per Kilowatt-Hour in cents 12.67 12.45 12.88 12.39 12.47 12.73 ========================================================================================================================== MISCELLANEOUS SYSTEM DATA Net System Capability at Time of Peak (MW) Firm 344.44 373.04 330.01 340.45 341.17 342.39 System Peak Demand (MW) (Winter Peak) 277.06 274.32 267.98 275.84 267.42 253.27 Reserve Margin at Time of Peak 24.0% 36.0% 23.2% 23.4% 27.6% 35.2% System Load Factor 79.0% 77.0% 79.9% 73.5% 76.4% 77.2% ========================================================================================================================== * Includes the reserve established on certain licensing activites in 1993 ($5.6 million after taxes or $.95 per common share). (See note 6).
ITEM 7 - ------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RECENT EVENTS AFFECTING THE ELECTRIC UTILITY INDUSTRY AND THE COMPANY RESTRUCTURING THE INDUSTRY - Over the last several years, there have been a number of legislative and regulatory initiatives throughout the United States designed to restructure the traditional vertically integrated electric utility industry. These initiatives typically encourage or require the disaggregation of existing electric utility functions into transmission and distribution activities on the one hand and electrical generation and marketing activities on the other. They are intended to introduce competition into markets for the production and supply of electric energy while maintaining transmission and distribution systems owned and maintained by more traditionally regulated utilities. This industry restructuring poses a number of logistical and policy questions including 1) the most efficient way to spin-off electric generation and related assets from existing electric utilities, 2) the extent to which existing utilities can or should be permitted to participate in the competitive markets, 3) the extent to which the remaining transmission and distribution utilities should be allowed to recover through rates charged to their customers costs that have been incurred in order to meet their historical public service obligations but become "stranded" by the introduction of competition into traditionally regulated markets, 4) the mechanisms through which those stranded costs can best be recovered and 5) the uninterrupted supply of electric energy for those consumers who do not or cannot arrange independently for the purchase of electric energy. In 1995, the Maine Legislature initiated a process for the development of electric utility restructuring that culminated in "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 shall 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 must divest of all generation related assets and business functions except for: a) contracts with "qualifying facilities" (generally, those non - utility generators from whom the Company was required to purchase what turned out to be high - cost power generated by renewable resources pursuant to the Public Utilities Regulatory Policies Act of 1978 (PURPA)) and conservation providers; b) nuclear assets, namely, the Company's investment in the Maine Yankee Atomic Power Company nuclear generating plant (Maine Yankee); c) assets that the Maine Public Utilities Commission (MPUC) determines necessary for the operation of the transmission and distribution services. The MPUC may 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 must submit to the MPUC its divestiture plan no later than January 1, 1999. The Company's plan has already been submitted. 3) Billing and metering services will be subject to competition beginning March 1, 2002, but the legislation permits the MPUC to establish an earlier date, no sooner than March 1, 2000. 4) The Company, through an unregulated affiliate, may market and sell electricity both within and outside its current service territory, but limited to 33% of the load within the Company's service territory. In addition, such an unregulated affiliate could not, itself, own any generation assets. 5) The Company will continue to provide transmission and distribution services which will continue to be subject to regulation by the MPUC. 6) If after March 1, 2000, 10% or more of the stock of a regulated transmission and distribution utility is purchased by an entity, the purchasing entity and any related entity may not sell or offer for sale generation service to any retail customer of electric energy in the state of Maine. In addition, if the transmission and distribution utility has a marketing affiliate (see item 4 above), the MPUC might require divestiture of that affiliate. 7) 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 so-called "stranded costs"). The MPUC shall determine these stranded costs by considering: a) the utility's regulatory assets related to generation; 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. The Company must pursue all reasonable means to reduce its potential stranded costs and to receive the highest possible value for generation assets and contracts, including the exploration of all reasonable and lawful opportunities to reduce the cost to ratepayers of contracts with qualifying facilities. By July 1, 1999, the MPUC must estimate the stranded costs for the Company and the manner for the collection of those 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 using demand- side management measures cannot be assessed exit or entry fees. The MPUC must 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 must review and reevaluate the stranded cost recovery. 8) 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% of the electricity that they sell at retail in Maine derived from renewable resources (such as most types of hydroelectric plants and plants that would be qualifying facilities under PURPA). 9) A standard-offer service will be available for all customers. If the Company were to have an unregulated affiliate competitive electricity provider, it would be prohibited from providing more than 20% of the load within the Company's service territory under the standard - offer service. 10) An unregulated affiliate of the Company 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 transmission and distribution affiliate must provide equal access to customer information; c) the regulated transmission and distribution company cannot participate in joint advertising or marketing programs with the unregulated affiliate providing retail electric power; d) the transmission and distribution company and its unregulated affiliated provider of retail electric power must keep separate books of accounts and records; and e) the transmission and 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. 11) 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. 12) 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. In view of the Maine restructuring legislation, the Company has been reviewing and revising its business plans. The Company believes its basic business will continue to be as a regulated transmission and distribution utility. The Company will also pursue opportunities in other regulated or unregulated business activities that are compatible with the Company's basic business. The Company presently believes that it will be less likely to engage in activities that would require isolation from its basic business, such as the approach the restructuring law has taken governing the relationship between a regulated transmission and distribution utility and any affiliated entity intending to engage in marketing and selling electricity. The Company has made no final determination whether it will establish such an affiliate in order to continue the marketing and selling of electricity after March 1, 2000. MAINE YANKEE - The Company owns 7% of the common stock of Maine Yankee, which owns and, prior to its permanent closure in 1997, operated an 880 megawatt (MW) nuclear generating plant in Wiscasset, Maine. The Company's equity ownership in the plant entitled the Company to about 7% of the output pursuant to a cost-based power contract. Since the plant began operation in 1972, it has provided a source of power for the Company and its customers at a cost consistently below the cost of power otherwise available in bulk power markets. Following a year long shutdown for repairs to the steam generators in 1995, Maine Yankee came under intense regulatory scrutiny in a series of events beginning in December 1995 with an anonymous letter about an allegedly faulty computer program. The events evolved into a number of investigations by Maine Yankee's primary licensing authority, the United States Nuclear Regulatory Commission (NRC) and by Maine Yankee itself. Concerns included compliance with NRC regulations, conformance of the plant to design specifications, adequacy and condition of components and systems, and management issues. During the evolution of these events, the NRC itself became subject to public criticism about the adequacy of its regulatory activities and its relationship with nuclear plant licensees, and in response, the NRC implemented changes in its approach to oversight of licensees that had the effect of amplifying the regulatory scrutiny. Maine Yankee operated for part of 1996, but under a restriction imposed by the NRC that limited its operation to 90% of full power capacity pending the resolution of various issues. In early December 1996 the plant was shut down to address cable-separation and associated issues. Subsequently, Maine Yankee also determined that a substantial portion of the nuclear fuel in the reactor was defective and had to be replaced, thereby extending the outage into a refueling outage. During this extended outage, the plant owners analyzed in-depth the viability of continued operation of the plant. While the plant was shut down, the Company incurred incremental replacement power costs of approximately $1 million per month in addition to its 7% share of the costs expended in the owners' efforts to return the plant to service. On May 27, 1997, the Board of Directors of Maine Yankee voted to reduce maintenance and repair spending at the plant and announced that Maine Yankee was considering permanent closure based on economic concerns and uncertainty about operation of the plant. On August 6, 1997, the Board voted to cease power operations at the plant permanently and to begin the process of decommissioning the plant. The decision to shut down the plant was based on an economic analysis of the costs, risks and uncertainties associated with operating the plant compared to those associated with closing and decommissioning the plant. The decision to close the plant should mitigate the costs the Company would otherwise incur through a phasing down of Maine Yankee's operations and maintenance costs. The need to purchase replacement power will continue. Maine Yankee's most recent estimate of the total costs of decommissioning and plant closure, excluding funds already collected, is $930 million (undiscounted). The Company's share of this estimated cost is $65.1 million and was recorded as a regulatory asset and decommissioning liability at September 30, 1997. In a related matter, in early September, 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 explaining that: Maine Yankee's decision in December, 1996, to proceed with the steps necessary to restart its nuclear generating plant at Wiscasset, Maine, 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 the 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. If any of these costs are determined to have been imprudently incurred, by FERC or the MPUC, the Company may be required to write down a portion of its investment in Maine Yankee. On October 24, 1997, the MPUC issued a Notice of Investigation initiating an investigation of the prudence of the Maine Yankee shutdown decision and of the operation of Maine Yankee prior to the shutdown, and announced that it had directed its consultant to extend its review to include those areas. 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 Federal Energy Regulatory Commission (FERC) on November 6, 1997, which could address the prudence issues raised in the MPUC's 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 Commission "if we feel it necessary to further investigate these matters after the FERC proceeding ends." The Company cannot therefore predict whether the MPUC will reopen its investigation once the FERC proceeding is concluded. THE COMPANY'S RESPONSE TO PRESSURES CAUSED BY THE CLOSURE OF MAINE YANKEE - The operational problems that have plagued Maine Yankee since 1995 and its final closure in 1997 have placed a significant strain on the Company's financial resources and have had a substantially negative impact on the Company's earnings in 1995, 1996 and 1997. The Maine Yankee experience aggravated the financial pressure the Company was already under as a result of its attempt to avoid rate increases, expand its revenues through marketing efforts, and otherwise deal with emerging competitive pressures. In response, the Company has reduced its expenditures for ongoing operation and maintenance and for capital improvements where it reasonably can. In addition, the Company focused on three major areas - rate relief, restructuring another high-cost power contract, and relations with its lenders - each of which is discussed below. RATE CASE - On March 3, 1997, the Company notified the MPUC of its intent to file for a general increase in rates. Under Maine law, a utility must ordinarily notify the MPUC two months in advance of the filing of a request for a general increase in rates and the MPUC then has nine months to investigate that request. However, under certain circumstances, the MPUC may allow a utility to implement a requested increase in rates on a temporary basis pending the conclusion of its investigation of the utility's request for a general increase in rates. On April 1, 1997, the Company filed with the MPUC a Petition for Temporary Rates to increase its rates by an amount that would increase its annual revenues by $10 million effective June 1, 1997. In doing so, the Company cited the continuing impact on the Company's financial condition and cash flow of the ongoing outage at the Maine Yankee nuclear power plant. The Company also cited potential noncompliance with financial covenants contained in its bank credit agreement (including the fixed charge coverage ratio, discussed below) and the need to maintain adequate borrowing capacity for working capital purposes, including mandatory debt repayments. On June 26, 1997, the MPUC issued an order authorizing the Company to change rates temporarily to increase its annual revenues by approximately $5.1 million effective July 1, 1997. In doing so, however, the MPUC also required the Company to accelerate the amortization of the deferred regulatory asset associated with the 1993 buyout of one of its high-priced non-utility generator contracts. As a result, revenue produced by the rate increase did not increase earnings, but it did increase cash flow. Effective December 12, 1997, the MPUC authorized the Company to revert to the original amortization schedule of that deferred regulatory asset, thereby permitting the temporary rate increase previously authorized to impact the Company's earnings positively from that date on. On February 9, 1998, the MPUC issued its final order on the Company's request to increase its rates that it filed in March of 1997. Of the approximately $22 million increase in annual revenue ultimately requested by the Company, the MPUC authorized an increase of approximately $13.2 million (which includes the 5.1 million temporary rate increase discussed above) annually. While there are many factors that explain the difference between the MPUC allowance and the Company's requested increase, much of that difference is attributable to the proposed accounting treatment of various costs and the deferral of other costs for future consideration, including the deferral of certain costs associated with Maine Yankee. While those accounting recommendations will affect the timing of receipt of revenues by the Company and will require the Company to finance the payment of the associated costs, they should not significantly affect the Company's earnings during the period that the new rates are effective. The MPUC order is based upon a determination that the Company should be allowed to earn an annual return of 12.75% on common equity. It also includes a "rate plan" under which the Company's rates will be subject to certain reconciliations based upon actual expenditures by the Company and an annual adjustment beginning on May 1, 1999 to account for inflation with an offset for assumed increases in productivity. Other than those adjustments, the Company will not change its rates unless its return on equity exceeds or falls short of the allowed return by more than 350 basis points. If the Company's return on equity falls outside of that bandwidth, 50% of the excess or shortfall will be adjusted for in the Company's rates. RESTRUCTURING OF POWER PURCHASE CONTRACT - The Company has been working to restructure a power purchase contract with the Penobscot Energy Recovery Company (PERC), its last remaining high-priced non-utility generator contract that offers a potential for substantial savings. PERC owns a waste-to-energy facility in Orrington, Maine that provides solid waste disposal services to many communities in central, eastern and northern Maine. The contract requires the Company to purchase the electricity output of the plant until 2018 at a price that is presently above the cost of alternative sources of power, and, in the Company's opinion, is likely to remain so. The Company has been working with PERC and the affected municipalities at a restructuring of the power contract that would result in substantial savings for the Company and would continue to allow PERC to meet the solid waste disposal needs of Maine communities. The Company has reached an agreement with PERC and a committee representing the municipalities that includes the following major components: 1) The Company would make an up-front payment to PERC of $6 million and installment payments over the next four years following consummation of the transaction totalling an additional $4 million. These funds would be retained by PERC to meet operation and debt service reserve requirements of the PERC plant. 2) As of December 31, 1997, the PERC plant was financed in part by tax-exempt municipal revenue bonds in the principal amount of $47.9 million payable pursuant to a sinking fund schedule and finally maturing in 2004. The credit on those bonds is enhanced by letters of credit issued by a group of banks. Those bonds would be restructured to extend the maturity date to 20 years from the date of closing. The bonds would continue to be tax-exempt and their credit would be enhanced by the moral obligation of the state of Maine under the auspices of the Finance Authority of Maine (FAME) pursuant to the State of Maine's Electric Rate Stabilization Program. The extended maturity of low-cost bonds would, therefore, provide savings to be shared by the parties. 3) The Company would continue to purchase power at the rates established under the existing PERC contract. Payments would be made to a trust from which disbursements would be made according to the following priorities: a) debt service and expense, including all principal and interest; b) trustee and bond related fees and expenses; c) all operating and maintenance expenses of the PERC plant; d) operating and management fees paid to the PERC partners pursuant to a partnership operating agreement; e) payment to the PERC owners of any savings in interest expense resulting from the prepayment of bonds; and f) except for cash reserve requirements, all remaining cash would be distributed 1/3 to the Company, 1/3 to the PERC owners and 1/3 to the participating municipalities. 4) The Company would issue warrants for the purchase of two million shares of its common stock, one million each to the PERC owners and the participating municipalities. The warrants would be exercisable within ten years of their issuance and would entitle the holder to purchase common stock for $7 per share (subject to adjustment under certain circumstances). No warrants may be exercised within the first nine months after their issuance, and they would become exercisable in 500,000 share blocks following the expiration of nine months, 21 months, 33 months and 45 months from the closing date. Upon exercise, the Company would have the option, instead of providing common stock, to pay cash equal to the difference between the then market price of the stock and the exercise price of $7 per share times the number of shares as to which exercise is made. The MPUC has established a cap on ratepayers' exposure to the cost of the warrants. Ratepayer costs are limited to the difference between the higher of $15 per share or the book value per share at the time the warrants are exercised and the $7 exercise price. The Company would not recover any costs above the cap from ratepayers. 5) The municipalities would extend their waste disposal contracts through 2017 and waive their existing rights to an early termination or the buyout of PERC. There are a number of events upon which the proposed transaction is contingent, including approval by the affected municipalities, the rendering of an opinion by bond counsel that the PERC bonds will remain tax-exempt and the financing of necessary cash payments by the Company. The Company and the other parties to the transaction are tentatively planning a closing in the spring of 1998. Depending in part on the ultimate cost of the warrants, it is projected that the restructured PERC contract will result in net cost savings with a present value of $30 40 million over the remaining life of the contract. That projection is based upon a number of assumptions about future events and the markets for electricity. EXISTING LENDING AGREEMENTS AND MONETIZATION OF POWER SALE CONTRACT - The Company has been negotiating with interested parties the monetization of a power sale contract with UNITIL Power Corp. (UNITIL), a New Hampshire based electric utility. The Company currently provides power to UNITIL at significantly above-market rates, with the contract term ending in the year 2003. Based upon current projections of wholesale electricity markets, it is expected that the rates charged under the UNITIL contract will remain at above-market levels for the remainder of the contract term. Therefore, the assignment of the Company's rights under the contract has a positive present cash value. The Company is currently proceeding to complete a transaction with a financial institution pursuant to a letter of intent that would provide a loan of approximately $25 million in net proceeds secured by the value of the UNITIL contract. As discussed below, the proceeds of such a transaction could be used to finance a portion of the contract restructuring with PERC and to resolve outstanding financial covenant issues under the Company's credit agreement with its lending banks. The credit agreement with the Company's lending banks contains a number of covenants keyed to the Company's financial condition and performance. One such covenant requires the Company to maintain a consolidated fixed charge ratio of 1.5 to 1.0 (defined as the ratio of the sum of the Company's net income, income tax expense and interest expense to the Company's interest expense, subject to a few minor adjustments) and is measured quarterly for the prior four quarters. After the first quarter of 1997, the Company was not in compliance with the fixed charge ratio covenant. The Company obtained temporary waivers of the noncompliance through June 6, 1997. On June 6, 1997 the Company and the lending banks amended the credit agreement. Under the amendment, compliance with the fixed charge ratio covenant was permanently waived for the four quarters ending March 31, 1997 and June 30, 1997. The Company was also out of compliance with the fixed charge ratio covenant for the four quarters ending September 30, 1997 and December 31, 1997 and has received temporary waivers of those violations until March 31, 1998. On November 20, 1997, the Company and the lending banks amended the agreement as part of a plan to reduce the level of the banks' credit commitment and reestablish the financial covenants to levels that the Company anticipates it can reasonably achieve. Under the amendment (as subsequently modified), if the Company monetizes the UNITIL contract as discussed above before March 31, 1998 in an amount that generates the net proceeds contemplated, it will be permitted to proceed with the restructuring of its power purchase contract with PERC and to use $6 million of the proceeds of the monetization to complete the PERC transaction, with the remainder of the proceeds to be used to reduce permanently the borrowing capacity of the existing revolving credit facility. On or before December 31, 1998, the Company must further reduce permanently the borrowing capacity under the revolving credit facility by that additional $6 million. The amendment also establishes new financial covenant levels that appear reasonably achievable under the Company's current financial forecasts, although there are a number of important variables that could affect the Company's ability to meet those covenants in the future. As of this writing, the monetization of the power sale contract with UNITIL has not occurred, and only temporary waivers have been received for the covenant violations for the four quarters ending September 30, 1997 and December 31, 1997. Consequently, the Company has classified its $34 million of medium term notes as current liabilities as of December 31, 1997. If the UNITIL transaction occurs, permanent waivers will, pursuant to the credit agreement, become effective, and the medium term notes will be reclassified as long-term liabilities. The Company also anticipates that during 1998 or beyond, future cash needs may exceed the borrowing capacity under the revolving credit facility after the reductions described above, and accordingly, the Company may be required to find new sources of financing. The Company is in the process of exploring the alternatives available for such additional sources of financing. The Company expects to be able to obtain funds necessary to meet its obligations as they arise. COMMON STOCK DIVIDENDS - In June of 1995, the Board reduced the quarterly dividend on common stock by $.15 from $.33 per share to $.18 per share, resulting in a reduction in the indicated annual rate from $1.32 to $.72. At its March 19, 1997 meeting, the Board of Directors determined that the payment of common stock dividends should be suspended, and to date, no additional common stock dividend has been declared. STORM DAMAGE - Beginning on January 5, 1998, much of the state of Maine experienced weather conditions that included snow, sleet and freezing rain, culminating in a sleet storm on January 7, 8 and 9. Heavy icing conditions caused trees to fall into power lines and also caused power lines to fall from the added weight of the ice. Damage to transmission and distribution equipment was widespread throughout the Company's service territory. One of the Company's major transmission lines serving the eastern part of its service territory was entirely destroyed for a stretch of approximately eight miles. By January 9, an estimated 60,000, or roughly 60%, of the Company's customers were without power at the same time due to damage from the storm. The Governor of Maine declared a state of emergency, and President Clinton declared the state of Maine a federal disaster area. The effort to restore power and repair transmission and distribution equipment was extensive. Lineworkers and tree crews from throughout the eastern United States and Canada participated in the effort, and by January 18, power had been restored to all but a few of the Company's customers. The cost of the restoration is still being determined but it is expected to total as much as $5 million or more. The MPUC has issued an order authorizing the Company to defer incremental storm damage expenses for future recovery through the rates charged to customers. The MPUC is expected to investigate the prudence of the costs incurred and to establish a time frame for the recovery of the prudently incurred costs. The Company believes its storm damage costs were prudently incurred and that it should, therefore, be allowed to recover them in rates. PROPOSED GAS PROJECT -The Company and Energy Pacific, LLC (Energy Pacific) have formed a joint-venture company, Bangor Gas Company, LLC, that is currently seeking approval from the MPUC to build, own and operate a natural gas distribution system to serve the greater Bangor area. Los Angeles-based Energy Pacific is a joint-venture of Pacific Enterprises and Enova Corporation, which are in the process of a corporate merger. Pacific Enterprises is the parent company of Southern California Gas Company, the nation's largest natural gas distribution company. Enova is the parent of San Diego Gas and Electric Company. Together, the two companies provide natural gas to approximately six million customers in California. Pacific Enterprises and the Company worked together in a partnership to develop the West Enfield Hydro Project in 1986. Gas service to Maine will be made economically feasible for the first time by the Maritimes and Northeast Pipeline Project, slated for completion in mid-1999. The new pipeline will extend from the Sable Offshore Energy Project near Sable Island, Nova Scotia, through the state of Maine and interconnect with the Tennessee Gas Pipeline in Dracut, Massachusetts. The route, as proposed, comes near the Bangor area, providing an opportunity for retail gas distribution in the greater Bangor marketplace. Company officials estimate the cost to build and implement the new Bangor Gas system to be approximately $40 million. The Company is not obligated to make material capital contributions to the joint-venture in the near term. DIVESTITURE OF GENERATION ASSETS - On February 9, 1998, the Company filed its plan for divesting its generation-related assets with the MPUC in accordance with the electric utility industry restructuring provisions signed into law last year. This plan could result in the identification of proposed purchasers by mid-summer 1998. Further regulatory approvals will then be required to actually complete the sale. The Company is offering a total of 166 MW of generation assets. OTHER - Management's discussion and analysis of results of operations and financial condition contains items that are "forward-looking" as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. Readers should not place undue reliance on forward-looking statements, which reflect management's view only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. Factors that might cause such differences include, but are not limited to, future economic conditions, relationship with lenders, earnings retention and dividend payout policies, electric utility restructuring, developments in the legislative, regulatory and competitive environments in which the Company operates, and other circumstances that could affect revenues and costs. LIQUIDITY, CAPITAL REQUIREMENTS, AND CAPITAL RESOURCES The Consolidated Statements of Cash Flows reflect events for the years ended December 1997, 1996 and 1995 as they affect the Company's liquidity. Net cash provided by operations was $36.4 million in 1997, $44.8 million in 1996 and a negative $164.5 million in 1995. The principal reason for the decrease in cash flows from operations in 1997 was the impact of Maine Yankee. The Company incurred approximately $10.7 million in additional Maine Yankee operating and replacement power costs in 1997 as compared to 1996. Also, the Company incurred $2.7 in Maine Yankee refueling outage costs in 1997. The Company's cash flows were improved with the 3.8% temporary rate increase effective July 1, 1997. Positively impacting cash flows in the 1997 period was the payment of $545,000 in income taxes, as compared to $2.3 million in income tax payments in 1996. The Company made approximately $2 million less in interest payments in 1997 as compared to 1996. Also enhancing cash flows from operations in 1997 was an improvement in accounts receivable collections for one of the Company's largest customers. In the third quarter of the 1997, the Company received $2.6 million from a large customer, who prepaid its electric usage for a one-year period. Finally, in the 1996 period, the Company expended $1.7 million to terminate a demand-side management contract. The principal reason for the increase in cash provided by operations in 1996 as compared to 195 was the $197.7 million spent in 1995 for the buyout of purchased power contracts ($168.7 million) and related financing costs ($29 million). Exclusive of the costs of those buyouts, which were entirely debt financed, cash flows provided by operations were $33.2 million in 1995. Other factors that contributed to improved cash flows in 1996 as compared to 1995 were savings in purchased power costs because of the contract buyouts ($11.2 million), the improved operation of Maine Yankee in 1996, the necessity in 1995 to record expenses associated with the resleeving of steam generator tubes at Maine Yankee and $2.4 million in refueling costs incurred in 1995 (a net $8.6 million of improved cash flow associated with Maine Yankee in 1996). Over the last three years, capital expenditures have been $17.5 million in 1997, $18.8 million in 1996 and $19.5 million in 1995. In 1997, approximately $3.6 million of the capital expenditures was related to implementing new customer, geographic and financial information systems, $2.8 million was related to the Company's power production facilities, $7.1 million was for its distribution system, and $3.3 million was for its transmission system, with the remainder related to other general property and equipment and costs associated with the licensing of hydroelectric projects. The Company expects its capital expenditures to total between $45 million and $55 million over the next three years, although it may be necessary to adjust the budget for capital expenditures on a year-to-year basis. Dividends paid on common stock were lower in 1997 due to the suspension of the common dividend, beginning with the first quarter of 1997. The reduction in preferred dividends paid resulted principally from $3 million in sinking fund payments made on the Company's 8.76% mandatory redeemable preferred stock in 1996. In 1997 the Company repaid $14 million of principal on its outstanding medium term notes and made $1.9 million in sinking fund payments on its 12.25% first mortgage bonds. In 1997, the Company also made a sinking fund payment of $1.5 million on its 8.76% mandatory redeemable preferred stock. As discussed in more detail in Note 3 to the Consolidated Financial Statements, the Company also made approximately $94,000 in payments to the institutional holder of the 8.76% series preferred stock related to a "make whole provision" under the preferred stock purchase agreement. In 1996, the Company made a $12 million payment on its medium term notes, $1.6 million in sinking fund payments on its 12.25% first mortgage bonds, $3 million in sinking fund payments on its 8.76% mandatory redeemable preferred stock, and approximately $188,000 in make whole provision payments. Capital and operating needs in 1997 and 1996 were met through internally generated funds and the Company's revolving credit line. The Company anticipates that during 1998 or beyond, future cash needs may exceed the borrowing capacity under the revolving credit facility after the reductions described above (see "Existing Lending Agreements and Monetization of Power Sale Contract"), and accordingly, the Company may be required to find new sources of financing. The Company is in the process of exploring the alternatives available for such additional sources of financing and expects to be able to obtain amounts necessary to meet its obligations as they arise. The purchased power contract buyback in 1995 was financed through the issuance of $126 million of FAME Revenue Notes and $60 million of medium term notes, thereby significantly increasing the Company's indebtedness. Additional short-term borrowings were also made in 1995 under the Company's revolving credit agreement to finance the transaction. The Company has $132.6 million of first mortgage bond and other long-term debt sinking fund requirements and maturities in the period 1998 2002. The Company also has $1.5 million of mandatory annual sinking fund payments and $94,000 of annual payments under the "make whole provision" on its redeemable preferred stock. RESULTS OF OPERATIONS The Company incurred a loss per common share of $.24 in 1997, as compared to earnings per common share of $1.33 and $.36 in 1996 and 1995, respectively. Earned return on average common equity was 9.1% in 1996 and 2.5% in 1995. Negatively impacting earnings in 1997 and 1995 were the previously discussed shutdowns of Maine Yankee. Positively impacting earnings in 1997 and 1996 was the 1995 buyout of two high- cost power purchase contracts from non-utility generating plants. That transaction has resulted in incremental savings of approximately $2.4 million or $.32 per common share after income taxes in 1996 as compared to 1995. In 1996 Maine Yankee also operated relatively well. Effective January 1, 1997 the Company renegotiated the revenue sharing portion of a special rate contract with its largest industrial customer. The rate for this customer is based in part on a revenue sharing arrangement whereby the revenues for service vary depending on the price and volume of product sold by the industrial customer to its customers. Under the revised revenue sharing formula, the revenues from the revenue sharing were reduced by approximately $3.2 million in 1997. The Company also entered into a special rate contract with a large pulp and paper manufacturer, effective April 1, 1997. Annual revenues for this customer are estimated to be reduced by approximately $1.5 million due to the reduced rate. It was necessary to reduce rates to this pulp and paper manufacturer in order to retain the customer, since the customer was exploring self-generation for its energy needs. Electric operating revenue for the 1997 period decreased by $49,000 as compared to 1996. There was a $4.9 million decrease in off-system sales (sales related to power pool and interconnection agreements and resales of purchased power) in 1997, and revenue sharing (discussed above) decreased by $3.2 million in 1997. Electric operating revenue associated with kilowatt-hour (KWH) sales, excluding off-system sales, increased by $6.9 million or 4.26% in 1997 as compared to 1996, due to the impact of the 3.8% temporary rate increase effective July 1, 1997, and an overall 4.0% increase in total KWH sales in 1997, excluding off- system sales. These increases were offset by the effect of adjusting prices downward to some customers in order to retain sales that would otherwise be lost to competitive pressures. Of the 4.0% total increase in KWH sales in 1997, approximately 68% was related to increased usage by the Company's largest special contract customers. Electric operating revenue increased by $2.5 million, or 1.3%, in 1996 as compared to 1995 due principally to a $4.3 million increase in off- system sales. This increase was somewhat offset by the impact of a 1.33% decrease in KWH sales in 1996 and the effect of selective price reductions to meet competitive pressures. The KWH sales decrease was caused primarily by drastically reduced sales to one of the Company's largest special contract customers from which the Company receives a relatively low profit margin. Without the impact of the reduced sales to this customer, total KWH sales were 1.7% higher in 1996 than in 1995. Prior to the elimination of the so-called "fuel cost adjustment" method of recovering fuel and purchased power costs effective January 1, 1995, the MPUC had authorized the Company to use a deferred fuel accounting methodology under which fuel revenue essentially matched fuel expense. Effective with the elimination of the fuel cost adjustment, deferred fuel accounting was eliminated. This change required the Company to record, as expense, actual fuel costs incurred. The deferred fuel revenue balance at December 31, 1994 of $3 million, was amortized over a three-year period beginning January 1, 1995 as a reduction in fuel for generation and purchased power expense and was a benefit to earnings. The $14.3 million increase in fuel for generation and purchased power expense in 1997, as compared to 1996, was principally due to the Maine Yankee shutdown, as previously discussed. The increased expense in 1997 was also attributable to the 4.0% increase in KWH sales in 1997 (excluding off-system sales), a reduction in the Company's hydroelectric power generation in 1997, as well as an overall increase in the price of purchased power in 1997 as compared to 1996. Also, the Company realized greater benefits/cash settlements under its fuel hedge program (for a more complete discussion of the Company's fuel hedge program, see Note 11 to the Consolidated Financial Statements) in 1996 as compared to 1997, due principally to the spot price of residual oil decreasing significantly in 1997 (as compared to 1996), and the Company's hedge in 1997 was at a higher fixed cost than in 1996. Finally, in 1997 the Company charged to expense $1.9 million of previously deferred Maine Yankee refueling costs, as a result of the Company's most recent rate order (see Rate Case discussion above). Offsetting these increases was the $4.9 million reduction in off-system sales in 1997. Also, in connection with the most recent rate order, the Company was ordered to defer the excess of Maine Yankee related costs included in the rate order over the actual costs incurred effective December 12, 1997. The Company deferred approximately $719,000 in such costs, which prior to the rate order would have otherwise been charged to expense, for the period from December 12 through December 31, 1997. The significant decrease in fuel for generation and purchased power expense in 1996 as compared to 1995 was related principally to the buyout of the high-cost purchased power contracts in June 1995 ($18 million reduction in expense in 1996) and the improved performance of Maine Yankee in 1996. The incremental replacement power costs for Maine Yankee were $4.3 million in 1996, compared to $10.5 million in replacement power and steam tube resleeving project expenses in 1995. Offsetting these decreases was a $4.3 million increase in off-system sales in 1996. Other operation and maintenance (O&M) expense decreased by $3.3 million in 1996 from 1995 levels, principally because of the charges for the 1995 early retirement and severance program ($3.9 million charge to other O&M in 1995). Bad debt expense was $.8 million lower in 1996 due to the $.7 million increase in the reserve for uncollectible accounts in 1995 and a reduction in bad debt write-offs in 1996. O&M payroll expense decreased in 1996 by $.9 million principally as a result of the early retirement and severance program. These decreases were offset to some extent by a $.7 million increase in active employee medical expenses and postretirement pension, medical and life insurance benefit costs in 1996. The increases in depreciation and amortization expense in 1997 was principally caused by the termination, on December 31, 1996, of the amortization of the remaining balance of the over-accumulated reserve for depreciation. This amortization, which reduced annual depreciation expense, amounted to $1.8 million in each of the six years from 1989 through 1996. The depreciation expense increase in 1997, as well as in 1996, were also affected by the growth in the Company's electric plant in service, including the effect of the implementation of large information system projects, which have shorter useful lives than traditional utility equipment. The Company's expenses over the period 1995 1997 have been significantly affected by amortizations authorized by the MPUC and charged annually against earnings. The MPUC has specifically authorized the inclusion of these expenses in the Company's electric rates. Absent such regulatory authority, the expenses that gave rise to the amortizations would have been charged to operations when incurred. Instead, the recognition of such expenses has been deferred, and appear on the Consolidated Balance Sheets as assets on the strength of the regulatory authority to amortize them and collect from customers (thus the term "regulatory assets"). Although there are a number of such authorized amortizations, the major ones are the allowable recovery of the Company's abandoned investment in the Seabrook nuclear project and the costs associated with the 1993 and 1995 purchased power contract terminations. The Company's recoverable investment in Seabrook Unit 1 is being amortized at a rate of $1.7 million per year, beginning in 1985, for a period of 30 years. Effective March 1, 1994, as authorized in the base rate order from the MPUC, the Company began amortizing the deferred costs associated with the Beaver Wood purchased power contract termination at a rate of $3.9 million annually over a nine-year period. With the July 1, 1997 temporary rate increase, the MPUC required the Company to accelerate the amortization of this deferred regulatory asset. This acceleration resulted in additional amortization of $2.25 million in 1997. Effective December 12, 1997, the MPUC ordered the amortization of this regulatory asset be returned to its level prior to the temporary rate order. The approximately $170 million of costs associated with the 1995 purchased power contract buyback were deferred and recorded as a regulatory asset, to be amortized and collected over a ten-year period, beginning July 1, 1995. Amortization expense related to this contract buyout amounted to $17 million in 1997 and 1996. Property and other taxes decreased during 1997, due primarily to funds received related to a property tax abatement with one of the municipalities in the Company's service territory and receipts under the state of Maine's personal property tax reimbursement program, offset by the effect of increases in property levels and property tax rates. The 1996 increase as compared to 1995 was due principally to greater property levels and higher property tax rates. The decrease in income taxes was primarily a function of the operating loss in 1997 as compared to earnings in 1996. Income tax expense in 1997 was increased by $184,000 in investment tax credits (ITC) recorded in 1996 for financial reporting purposes, which were subsequently unable to be utilized when the 1996 federal income tax return was filed in 1997. Income tax expense in 1996 was reduced by the utilization of $947,000 of federal and state ITC. Federal and state income tax expense increased in 1996 over 1995 due principally to increased earnings, offset by the utilization of federal and state ITC. The 1997 decrease in allowance for funds used during construction (AFDC) was principally a function of lower levels of construction work in progress. AFDC decreased in 1996 as compared to 1995 due to the discontinuance of recording AFDC on the Company's hydro relicensing costs in March of 1995. The decrease in other income in 1997 was due primarily to the write - off of start-up costs associated with non-core business ventures by the Company. The 1996 increase in other income was due principally to $1.4 million of interest income earned on the $21 million capital reserve fund set aside in connection with the June 30, 1995 purchased power contracts buyback financing with FAME. Long-term debt interest expense decreased $1 million in 1997 as compared to 1996 due to $14 million in principal repayments on the medium term notes in 1997, as well as $1.9 million in sinking fund payments on the Company's 12.25% first mortgage bonds. Long-term debt interest expense increased by $6.1 million in the 1996 period as compared to 1995 due to the borrowings to finance the purchased power contract buyouts. The increase was offset to some extent by the impact of $12 million in debt repayments on the medium term notes in June 1996 and sinking fund payments on the Company's 12.25% first mortgage bonds. The decrease in other interest expense in 1997 was principally a function of a $2.4 million reduction in weighted average short-term borrowings outstanding in 1997 as compared to 1996, offset by an approximately 1/2% increase in the weighted average short-term debt interest rate (including fees) in 1997. Other interest expense in 1996 increased primarily due to the amortization of issuance costs incurred in connection with financing the 1995 purchased power contracts buyout. CONTINGENCIES ENVIRONMENTAL MATTERS - On October 10, 1996, the American Institute of Certified Public Accountants issued Statement of Position 96 1, "Environmental Remediation Liabilities" (SOP). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by entities to specific situations of recognizing, measuring and disclosing environmental remediation liabilities. The SOP became effective January 1, 1997. This SOP has not had a material impact on the Company's financial position or results of operations. In 1992, the Company received notice from the Maine Department of Environmental Protection that it was investigating the cleanup of several sites in Maine that were used in the past for the disposal of waste oil and other hazardous substances, and that the Company, as a generator of waste oil that was disposed at those sites, may be liable for certain cleanup costs. The Company learned in October 1995 that the United States Environmental Protection Agency placed one of those sites on the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act and will pursue potentially responsible parties. With respect to this site, the Company is one of a number of waste generators under investigation. As to the only other site which has been listed by the Department of Environmental Protection as an Uncontrolled Hazardous Substance Site, the Company was informed that it is considered a de minimis generator. The Company has recorded a liability, based upon currently available information, for what it believes are the estimated environmental remediation costs that the Company expects to incur for these waste disposal sites. Additional future environmental cleanup costs are not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes. At December 31, 1997, the liability recorded by the Company for its estimated environmental remediation costs amounted to $331,000. The Company's actual future environmental remediation costs may be higher as additional factors become known. IMPACT OF THE YEAR 2000 ISSUE - The "Year 2000" issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date - sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failure or miscalculations causing disruptions of operations, including, among other things, an inability to process transactions, send invoices or engage in similar normal business activities. The Company has been in the process of replacing its aged customer billing and information system and its financial systems for the past several years. This effort will provide the added benefit of ensuring that these computer systems will properly utilize dates beyond December 31, 1999. The Company will continue to assess the "Year 2000" issues as it relates to information systems and personal computer based applications and believes the risks associated with this issue can be mitigated without significant additional costs. The Company presently believes that, with replacement and modification of existing computer systems, the "Year 2000" problem will not pose significant operational problems for the Company. However, if such replacements and modifications are not completed in time, the "Year 2000" problem may have a material impact on the operations of the Company. The "Year 2000" issue also creates risks for the Company from unforeseen problems with the computer systems of third parties with whom the Company deals. Such failures of third parties' computer systems could have a material impact on the Company's ability to conduct its business. The Company is currently formulating a plan to assess the potential impact of third party vendor failures to address the problem and, if necessary, address this issue. The Company anticipates completing the assessment of the "Year 2000" issue as it relates to its significant suppliers and major customers by the end of 1998. The Company cannot predict whether the systems of other companies will be converted in time or that a failure to convert by another company would not have a material adverse effect on the Company. NEW ACCOUNTING PRONOUNCEMENTS In June 1997 the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings per Share", which establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings per Share", and makes them comparable to international EPS standards. It also requires dual presentation of basic and diluted EPS on the face of the statement of income for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This Statement is effective for financial statements issued for periods ending after December 15, 1997. The application of this Statement currently does not impact the Company's EPS calculations. If the Company's PERC restructuring transaction is completed, as previously discussed, the issuance of warrants will cause this Statement to have an effect on the Company's EPS calculations. In June 1997 the FASB issued Statement No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. Management does not believe the implementation of this Statement will have a significant effect on the Company's financial statements. In June 1997 the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments, which are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. This Statement is effective for financial statements for periods beginning after December 15, 1997. Management does not believe the implementation of this Statement will have a significant effect on the Company's financial statement disclosures. ITEM 8 FINANCIAL STATEMENTS & SUPPLEMENTARY DATA - -------------------- BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME 1997 1996 1995 ELECTRIC OPERATING REVENUE (Note 1): $187,324,379 $187,373,630 $184,913,771 ------------- ----------- ------------ OPERATING EXPENSES: Fuel for generation and purchased power (Notes 1 and 12) $ 92,791,842 78,476,864 $ 98,683,991 Other operation and maintenance (Notes 1 and 5) 32,471,149 32,440,649 35,711,185 Depreciation and amortization (Note 1) 10,187,102 7,429,719 6,522,019 Amortization of Seabrook Nuclear Project (Note 7) 1,699,050 1,699,050 1,699,050 Amortization of contract buyouts (Note 6) 23,218,500 20,836,561 12,322,570 Taxes - Local property and other 5,124,146 5,367,045 4,884,565 Income (Note 2) (1,956,303) 4,882,453 1,421,674 ------------- ------------ ------------ $163,535,486 151,132,341 $161,245,054 ------------- ----------- ------------- OPERATING INCOME $ 23,788,893 36,241,289 $ 23,668,717 OTHER INCOME AND (DEDUCTIONS): Allowance for equity funds used during construction (Note 1) 285,972 368,056 561,898 Other, net of applicable income taxes (Notes 1 and 2) 1,005,849 1,097,931 197,924 ------------- ------------ ------------ INCOME BEFORE INTEREST EXPENSE $ 25,080,714 37,707,276 $ 24,428,539 ------------- ----------- ------------- INTEREST EXPENSE: Long-term debt (Note 4) $ 22,638,201 23,651,316 $ 17,596,586 Other (Note 4) 3,392,169 3,529,002 3,201,030 Allowance for borrowed funds used during construction (Note 1) (562,966) (755,708) (705,552) ------------- ------------ ------------ $ 25,467,404 26,424,610 $ 20,092,064 ------------- ------------ ------------ NET INCOME (LOSS) $ (386,690) 11,282,666 $ 4,336,475 DIVIDENDS ON PREFERRED STOCK (Note 3) 1,375,888 1,537,202 1,701,960 ------------- ------------ ------------ EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (1,762,578) 9,745,464 $ 2,634,515 ============= =========== ============= BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE, based on the weighted average number of shares outstanding of 7,363,424 in 1997, 7,336,174 in 1996 and 7,264,860 in 1995 (Note 14) $ (0.24) 1.33 0.36 ============= ============= =========== DIVIDENDS DECLARED PER COMMON SHARE $ - 0.72 0.87 ============= ============= =========== The accompanying notes are an integral part of these consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS December 31, ASSETS 1997 1996 INVESTMENT IN UTILITY PLANT: Electric plant in service, at original cost (Notes 4 and 6) $341,008,967 $317,832,993 Less - Accumulated depreciation and amortization (Notes 1 and 6) 96,594,713 87,736,285 -------------------------- $244,414,254 $230,096,708 Construction work in progress (Note 1) 12,011,246 18,554,154 -------------------------- $256,425,500 $248,650,862 Investments in corporate joint ventures (Notes 1 and 6) - Maine Yankee Atomic Power Company $ 5,531,912 $ 5,013,781 Maine Electric Power Company, Inc. 326,005 124,900 -------------------------- $262,283,417 $253,789,543 -------------------------- OTHER INVESTMENTS, principally at cost (Note 6) $ 5,274,213 $ 4,812,895 -------------------------- FUNDS HELD BY TRUSTEE at cost (Notes 4 and 10) $ 21,195,772 $ 21,199,004 -------------------------- CURRENT ASSETS: Cash and cash equivalents (Notes 1 and 10) $ 936,796 $ 1,274,386 Accounts receivable, net of reserve ($1,450,000 in 1997 and 1996) 16,614,977 20,691,010 Unbilled revenue receivable (Note 1) 11,605,163 9,229,777 Inventories, at average cost: Materials and supplies 2,759,091 2,993,910 Fuel oil 34,771 302,851 Prepaid expenses 1,206,596 1,671,964 Deferred Maine Yankee refueling costs (Note 1 & 11) 285,894 895,798 -------------------------- Total current assets $ 33,443,288 $ 37,059,696 -------------------------- DEFERRED CHARGES: Investment in Seabrook Nuclear Project, net of accumulated amortization of $28,474,146 in 1997 and $26,775,096 in 1996 (Notes 7 and 11) $ 30,367,929 $ 32,066,979 Costs to terminate purchased power contracts, net of accumulated amortization of $59,616,261 in 1997 and $36,397,761 in 1996 (Notes 6 and 11) 147,632,924 171,703,691 Maine Yankee decommissioning costs (Notes 6 and 11) 60,923,840 - Deferred regulatory assets (Notes 2, 5 and 11) 32,551,381 29,498,630 Demand-side management costs (Note 11) 1,705,311 2,631,880 Other (Note 11) 5,204,718 3,867,087 -------------------------- Total deferred charges $278,386,103 $239,768,267 -------------------------- Total Assets $600,582,793 $556,629,405 ========================== The accompanying notes are an integral part of these consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS December 31, 1997 1996 STOCKHOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION (see accompanying statement): Common stock investment (Note 3) $106,558,488 $108,321,066 Preferred stock (Note 3) 4,734,000 4,734,000 Preferred stock subject to mandatory redemption, exclusive of sinking fund requirements (Notes 3 and 10) 9,137,160 10,670,171 Long-term debt, net of current portion (Notes 4, 10 and 12) 221,642,897 274,221,451 --------------------------- Total capitalization $342,072,545 $397,946,688 --------------------------- CURRENT LIABILITIES: Notes payable - banks (Note 4) $ 34,000,000 $ 32,500,000 --------------------------- Other current liabilities - Current portion of long-term debt and sinking fund requirements on preferred stock (Notes 3, 4 and 10) $ 52,172,468 $ 15,447,429 Accounts payable 13,170,952 13,432,594 Dividends payable 327,443 1,687,495 Accrued interest 3,666,641 3,719,387 Deferred revenue (Notes 1 and 11) 1,570,995 1,008,402 Customers' deposits 296,706 359,974 Current income taxes payable 7,768 - --------------------------- Total other current liabilities $ 71,212,973 $ 35,655,281 --------------------------- Total current liabilities $105,212,973 $ 68,155,281 --------------------------- COMMITMENTS AND CONTINGENCIES (Notes 6, 9 and 12) DEFERRED CREDITS AND RESERVES (Note 2): Deferred income taxes - Seabrook $ 15,765,811 $ 16,651,386 Other accumulated deferred income taxes 55,858,652 54,805,629 Maine Yankee decommissioning liability (Note 6) 60,925,586 - Deferred regulatory liability (Note 11) 9,972,246 8,445,642 Unamortized investment tax credits 1,962,014 2,178,588 Accrued pension (Note 5) 658,880 640,328 Other (Note 5) 8,154,086 7,805,863 --------------------------- Total deferred credits and reserves $153,297,275 $ 90,527,436 --------------------------- Total Stockholders' Investment and Liabilities $600,582,793 $556,629,405 =========================== The accompanying notes are an integral part of these consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31, 1997 1996 Common Stock Investment (Notes 1 and 3): Common stock, par value $5 per share- Authorized -- 10,000,000 shares Outstanding -- 7,363,424 shares in 1997 and 1996 $ 36,817,120 $ 36,817,120 Amounts paid in excess of par value 56,969,428 56,969,428 Retained earnings 12,771,940 14,534,518 - ------------------------------------------------------------------------------- Total common stock investment $106,558,488 $ 108,321,066 - ------------------------------------------------------------------------------- Preferred Stock, Non-participating, cumulative, par value $100 per share, authorized 600,000 shares (Notes 3 and 10): Not redeemable or redeemable solely at the option of the issuer- 7%, Noncallable, 25,000 shares authorized and outstanding $ 2,500,000 $ 2,500,000 4-1/4%, Callable at $100, 4,840 shares authorized and outstanding 484,000 484,000 4%, Series A, Callable at $110, 17,500 shares authorized and outstanding 1,750,000 1,750,000 - ------------------------------------------------------------------------------- $ 4,734,000 $ 4,734,000 - ------------------------------------------------------------------------------- Subject to mandatory redemption requirements- 8.76%, Callable at 103.75% if called on or prior to December 27, 1998, 150,000 shares authorized and 105,000 shares outstanding in 1997 and 120,000 out- standing in 1996 $ 10,731,074 $ 12,264,085 Less-Sinking fund requirements 1,593,914 1,593,914 - ------------------------------------------------------------------------------- $ 9,137,160 $ 10,670,171 - ------------------------------------------------------------------------------- LONG-TERM DEBT (Notes 4, 10 and 12): First Mortgage Bonds- 6.75% Series due 1998 $ 2,500,000 $ 2,500,000 10.25% Series due 2019 15,000,000 15,000,000 10.25% Series due 2020 30,000,000 30,000,000 8.98% Series due 2022 20,000,000 20,000,000 7.38% Series due 2002 20,000,000 20,000,000 7.30% Series due 2003 15,000,000 15,000,000 12.25% Series due 2001 5,521,451 7,374,966 - ------------------------------------------------------------------------------- $108,021,451 $ 109,874,966 Less-Current maturity and sinking fund requirements 4,278,554 1,853,515 - ------------------------------------------------------------------------------- $103,742,897 $ 108,021,451 - ------------------------------------------------------------------------------- Variable rate demand pollution control revenue bonds Series 1983 due 2009 $ 4,200,000 $ 4,200,000 - ------------------------------------------------------------------------------- Other Long-Term Debt- Finance Authority of Maine - Taxable Electric Rate Stabilization Revenue Notes, 7.03% Series 1995A, due 2005 $126,000,000 $ 126,000,000 Medium Term Notes, Variable interest rate - LIBO rate plus 2%, due 2000 34,000,000 48,000,000 - ------------------------------------------------------------------------------- $160,000,000 174,000,000 Less: Current portion of long-term debt $ 46,300,000 $ 12,000,000 - ------------------------------------------------------------------------------- $113,700,000 $ 162,000,000 - ------------------------------------------------------------------------------- Total long-term debt $221,642,897 $ 274,221,451 - ------------------------------------------------------------------------------- Total Capitalization $342,072,545 $ 397,946,688 =============================================================================== The accompanying notes are an integral part of these consolidated financial statements. Bangor Hydro-Electric Company CONSOLIDATED STATEMENT OF CASH FLOWS
For the Years Ending December 31, 1997 1996 1995 -------------- -------------- -------------- Cash Flows From Operations: Net Income (Loss) $ (386,690)$ 11,282,666 $ 4,336,475 Adjustments to reconcile net income to net cash provided by (used in) operations: Costs to terminate purchased power contracts (Note 6) - - (197,717,853) Depreciation and amortization 10,187,102 7,429,719 6,522,019 Amortization of Seabrook Nuclear Project (Note 7) 1,699,050 1,699,050 1,699,050 Amortization of costs to terminate purchased power contracts (Note 6) 23,218,500 20,836,561 12,322,570 Other amortizations 1,665,566 2,000,150 1,440,501 Cost to terminate demand-side management contract - (1,702,678) - Payment received related to terminated purchased power contract (Note 6) 1,000,000 1,000,000 1,000,000 Cost of early retirement and involunary severance plan - - 3,835,303 Allowance for equity funds used during construction (Note 1) (285,972) (368,056) (561,898) Deferred income tax provision (Note 2) (1,766,249) 4,495,490 1,791,082 Deferred investment tax credits, net (Note 2) (216,574) (175,464) (61,193) Changes in assets and liabilities: Deferred fuel revenue and Maine Yankee refueling costs (Note 1) (398,498) 514,464 (3,191,510) Accounts receivable, net and unbilled revenue 1,700,647 (2,872,894) 693,496 Accounts payable (261,642) 2,905,952 (4,141,870) Accrued interest (52,746) (1,188,433) 1,257,625 Current and deferred income taxes 344,790 (722,833) 625,059 Accrued postretirement benefit costs (Note 5) 547,237 1,411,000 612,446 Other current assets and liabilities, net 906,745 (85,138) 296,938 Other, net (Note 4) (1,528,112) (1,618,007) 4,719,636 - ------------------------------------------------------------------------------------------------------- Net Cash Provided By (Used In) Operations $ 36,373,154 $ 44,841,549 $ (164,522,124) - ------------------------------------------------------------------------------------------------------- Cash Flows From Investing: Construction expenditures $ (17,525,312)$ (18,816,194)$ (19,459,606) Allowance for borrowed funds used during construction (Note 1) (562,966) (755,708) (705,552) - ------------------------------------------------------------------------------------------------------- Net Cash (Used In) Provided By Investing $ ($18,088,278)$ ($19,571,902)$ ($20,165,158) - ------------------------------------------------------------------------------------------------------- Cash Flows From Financing: Dividends on preferred stock $ (1,349,620)$ (1,481,020)$ (1,579,570) Dividends on common stock (1,325,416) (5,273,157) (7,375,736) Payments on long-term debt (15,853,515) (13,645,737) (2,107,705) Payments on mandatory redeemable preferred stock (1,593,915) (3,187,828) - Issuances: Common stock dividend reinvestment plan (Note 3) - 668,215 1,218,400 Long-term debt (Note 4) - - 186,000,000 Short-term debt, net (Note 4) 1,500,000 (2,500,000) 8,000,000 - ------------------------------------------------------------------------------------------------------- Net Cash (Used In) Provided by Financing $ (18,622,466)$ (25,419,527)$ 184,155,389 - ------------------------------------------------------------------------------------------------------- Net Change in Cash and Cash Equivalents $ (337,590)$ (149,880)$ (531,893) Cash and Cash Equivalents - Beginning of Year 1,274,386 1,424,266 1,956,159 - ------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents - End of Year $ 936,796 $ 1,274,386 $ 1,424,266 ======================================================================================================= The accompanying notes are an integral part of these consolidated financial statements.
Bangor Hydro-Electric Company CONSOLIDATED STATEMENTS OF COMMON STOCK INVESTMENT
Amounts Paid in Common Excess of Retained Total Common Stock Par Value Earnings Stock Investment BALANCE DECEMBER 31, 1994 $ 35,925,715 $ 55,974,218 $ 13,757,751 $ 105,657,684 Issuance of 116,414 shares of common stock 582,070 636,330 - 1,218,400 Net income - - 4,336,475 4,336,475 Cash dividends declared on- Preferred stock - - (1,579,570) (1,579,570) Common stock - $.87 per share - - (6,318,919) (6,318,919) Other (Note 3) - - (122,390) (122,390) - ------------------------------ ------------ ------------ ------------ --------------- BALANCE DECEMBER 31, 1995 $ 36,507,785 $ 56,610,548 $ 10,073,347 $ 103,191,680 Issuance of 61,867 shares of common stock 309,335 358,880 668,215 Net income - - 11,282,666 11,282,666 Cash dividends declared on- Preferred stock - - (1,448,170) (1,448,170) Common stock - $.72 per share - - (5,284,293) (5,284,293) Other (Note 3) - - (89,032) (89,032) - ------------------------------- ------------ ------------ ------------ --------------- BALANCE DECEMBER 31, 1996 $ 36,817,120 $ 56,969,428 $ 14,534,518 $ 108,321,066 Net loss - - (386,690) (386,690) Cash dividends declared on- Preferred stock - - (1,314,984) (1,314,984) Other (Note 3) - - (60,904) (60,904) - ------------------------------ ------------ ------------ ------------ --------------- BALANCE DECEMBER 31, 1997 $ 36,817,120 $ 56,969,428 $ 12,771,940 $ 106,558,488 ============ ============ ============ =============== The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Bangor Hydro-Electric Company (the Company) is a public utility engaged in the generation, purchase, transmission, distribution and sale of electric energy and other energy related services, with a service area of approximately 5,275 square miles having a population of approximately 191,000 people. The Company serves approximately 105,000 customers in portions of the Maine counties of Penobscot, Hancock, Washington, Waldo, Piscataquis, and Aroostook. The Company is subject to the regulatory authority of the Maine Public Utilities Commission (MPUC) as to retail rates, accounting, service standards, territory served, the issuance of securities and other matters. The Company is also subject to the jurisdiction of the Federal Energy Regulatory Commission (FERC) as to certain matters, including licensing of its hydro-electric stations, rates for wholesale purchases and sales of energy and capacity and transmission services. The Company is a member of the New England Power Pool, and is interconnected with other New England utilities to the south and with New Brunswick Power Corporation to the north. BASIS OF CONSOLIDATION - The Consolidated Financial Statements of the Company include its wholly owned subsidiaries, Penobscot Hydro Co., Inc. (PHC), and Bangor Var Co., Inc. (BVC). The operations of PHC consist solely of a 50% interest in Bangor-Pacific Hydro Associates (Bangor-Pacific), the owner and operator of the redeveloped West Enfield hydroelectric station. PHC accounts for its investment in Bangor-Pacific under the equity method. BVC was incorporated in 1990 to own the Company's 50% interest in the Chester SVC Partnership (Chester), a partnership which owns certain facilities used in the Hydro-Quebec Phase II transmission project in which the Company is a participant. BVC accounts for its investment in Chester under the equity method. See Note 6 for additional information with respect to these investments. All intercompany balances and transactions have been eliminated. The accounts of the Company are maintained in accordance with the Uniform System of Accounts prescribed by the regulatory bodies having jurisdiction. EQUITY METHOD OF ACCOUNTING - The Company accounts for its investments in the common stock of Maine Yankee Atomic Power Company (Maine Yankee) and Maine Electric Power Company, Inc. (MEPCO) under the equity method of accounting, and records its proportionate share of the net earnings of these companies as a reduction of fuel for generation and purchased power expense. See Note 6 for additional information with respect to these investments. ELECTRIC OPERATING REVENUE - Electric Operating Revenue consists primarily of amounts charged for electricity delivered to customers during the period. The Company records unbilled revenue, based on estimates of electric service rendered and not billed at the end of an accounting period, in order to match revenue with related costs. ACCOUNTING FOR DEFERRED FUEL AND MAINE YANKEE REFUELING COSTS - Prior to January 1, 1995, the Company utilized deferred fuel accounting. Under this accounting method, retail fuel costs were expensed when recovered through rates and recognized as revenue. Retail fuel costs not yet expensed were classified on the Consolidated Balance Sheets as deferred fuel costs. The fuel cost adjustment rate included a factor calculated to reimburse the Company or its customers, as appropriate, for the carrying cost of funds used to finance under- or over- collected fuel costs, respectively. Under the MPUC fuel cost adjustment (FCA) regulations effective through December 31, 1994, the Company was allowed to recover its fuel costs on a current basis. The fuel charge was based on the Company's projected cost of fuel for a twelve-month period. Under- or over- collections resulting from differences between estimated and actual fuel costs for a twelve-month period were included in the computation of the estimated fuel costs of the succeeding fuel adjustment period. As of January 1, 1995, the Company's collections under the FCA had exceeded its costs by approximately $3.03 million. With the elimination of the FCA, the MPUC recognized that there would no longer be a mechanism for the return of that sum to customers. The MPUC allowed the Company to retain that over-collection and ordered that the amount be amortized over a period of three years, effective January 1, 1995. Prior to the receipt of the most recent rate order from the MPUC (See Note 11), the Company was allowed to defer Maine Yankee refueling costs and amortize these costs over the period of Maine Yankee's refueling cycle. The unamortized refueling costs are presented on the Consolidated Balance Sheets as Deferred Maine Yankee Refueling Costs. With the previously mentioned rate order, the Company was not be allowed recovery, in its new rates effective February 13, 1998, of the deferred Maine Yankee Refueling Costs. Consequently the Company charged to operations $1.9 million of such unrecoverable costs at December 31, 1997. DEPRECIATION OF ELECTRIC PLANT AND MAINTENANCE POLICY - Depreciation of electric plant is provided using the straight-line method at rates designed to allocate the original cost of the properties over their estimated service lives. The composite depreciation rate (excluding intangible assets), expressed as a percentage of average depreciable plant in service, and considering the amortization of the over-accrued depreciation (discussed below), was approximately 3.0% in 1997, 2.4% in 1996, and 2.3% in 1995. A study conducted in 1989 determined that the Company's reserve for depreciation was over-accumulated by $11.4 million. The agreement on base rates with the MPUC which became effective on October 1, 1990, contained a provision to amortize the remaining balance of the over- accumulated reserve for depreciation account over a six-year period. This amortization ended in 1996. The Company follows the practice of charging to maintenance the cost of repairs, replacements and renewals of minor items considered to be less than a unit of property. Costs of additions, replacements and renewals of items considered to be units of property are charged to the utility plant accounts, and any items retired are removed from such accounts. The original costs of units of property retired and removal costs, less salvage, are charged to the depreciation reserve. Depreciation, local property taxes and other taxes not based on income, which were charged to operating expenses, are stated separately in the Consolidated Statements of Income. Rents, advertising and research and development expenses are not significant. No royalty expenses were incurred. Maintenance expense was $5.7 million in 1997, $6.5 million in 1996 and $5.9 million in 1995. EQUITY RESERVE FOR LICENSED HYDRO PROJECTS - The FERC requires that a reserve be maintained equal to one-half of the earnings in excess of a prescribed rate of return on the Company's investment in licensed hydro property, beginning with the twenty-first year of the project operation under license. The required reserve for licensed hydro projects is classified in retained earnings and had a balance of approximately $1.9 million and $1.5 million at December 31, 1997 and 1996, respectively. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFDC) - In accordance with regulatory requirements of the MPUC, the Company capitalizes as AFDC financing costs related to portions of its construction work in progress, at a rate equal to its weighted cost of capital, into utility plant with offsetting credits to other income and interest. This cost is not an item of current cash income, but is recovered over the service life of plant in the form of increased revenue collected as a result of higher depreciation expense and return. The average AFDC rates computed by the Company were 8.7% in 1997, 8.6% for 1996 and 9.0% in 1995. CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Cash paid for interest, net of amounts capitalized was approximately $24.6 million, $26.7 million and $17.9 million in 1997, 1996 and 1995, respectively. Cash paid for income taxes was approximately $545,000, $2.3 million and $346,000 in 1997, 1996 and 1995, respectively. DERIVATIVE FINANCIAL INSTRUMENTS - The Company uses derivative financial instruments (derivatives), including swaps and interest rate caps (see Note 12), as a means of hedging exposure to price and interest rate risk. The Company does not hold or issue derivatives for trading purposes. The Company's accounting for derivatives that are used to manage risk is in accordance with Statement of Financial Accounting Standards No. 80, "Accounting for Futures Contracts". RECLASSIFICATIONS - Certain prior year amounts have been reclassified to conform with the presentation used in the 1997 Consolidated Financial Statements. 2. INCOME TAXES In accordance with Statement of Financial Accounting Standards No. 109 "Accounting for In-come Taxes" (FAS 109), the Company recorded net additional deferred income tax liabilities of approximately $22.1 million as of December 31, 1997 and $20.5 million as of December 31, 1996. These additional deferred income tax liabilities have resulted from the accrual of deferred taxes on temporary differences on which deferred taxes had not been previously accrued ($32.1 million and $29 million as of December 31, 1997 and 1996, respectively), offset by the effect of the 1987 change to lower income tax rates (reduced by the 1% increase in the federal income tax rate in 1993) that will be refunded to customers over time ($8.8 million and $7.2 million as of December 31, 1997 and 1996, respectively), and the establishment of deferred tax assets on unamortized investment tax credits ($1.2 million as of December 31, 1997 and $1.3 million as of December 31, 1996). These latter amounts have been recorded as deferred regulatory liabilities at December 31, 1997 and 1996. The accrual of the additional amount of deferred tax liabilities have been offset by regulatory assets which represent the customers' future payment of these income taxes when the taxes are, in fact, expensed. As a result of this accounting, the Consolidated Statements of Income are not affected by the implementation of FAS 109. The rate-making practices followed by the MPUC permit the Company to recover federal and state income taxes payable currently, and to recover some, but not all, deferred taxes that would otherwise be recorded in accordance with FAS 109 in the absence of regulatory accounting. The individual components of other accumulated deferred income taxes are as follows at December 31, 1997 and 1996: 1997 1996 - ------------------------------------------------------------------------------- Deferred Income Tax Liabilities: Costs to terminate purchased power contracts $ 58,026,033 $ 67,731,973 Excess book over tax basis of electric plant in service 51,559,302 52,708,038 Investment in jointly owned companies 1,405,388 832,646 Deferred demand-side management costs 685,447 1,018,733 Other 701,047 510,215 - ------------------------------------------------------------------------------- $ 112,377,217 $ 122,801,605 - ------------------------------------------------------------------------------- Less: Deferred Income Tax Assets: Net tax operating loss carryforwards $ 39,757,653 $ 51,252,151 Deferred income taxes provided on alternative minimum tax 6,447,244 5,808,234 Investment in Basin Mills 2,825,592 2,801,261 Unamortized investment tax credits 1,160,073 1,251,322 Postretirement benefit costs other than pensions 2,122,130 1,861,054 Deferred state income tax benefit 1,987,659 2,213,840 Accrued pension costs 458,869 1,008,523 Reserve for bad debts 873,007 807,447 Other 886,338 992,144 - ------------------------------------------------------------------------------- $ 56,518,565 $ 67,995,976 - ------------------------------------------------------------------------------- Total other accumulated deferred income taxes $ 55,858,652 $ 54,805,629 =============================================================================== The individual components of federal and state income taxes reflected in the Consolidated Statements of Income for 1997, 1996 and 1995 are stated in the table below. Year Ended December 31, - ----------------------------------------------------------------------- 1997 1996 1995 ---------- ----------- --------- Current: Federal $ 524,373 $ 1,804,206 $ -- State 141,581 526,576 -- - ----------------------------------------------------------------------- $ 665,954 $ 2,330,782 $ -- - ----------------------------------------------------------------------- Deferred: Federal-Other $ (661,330) $ 4,034,809 $ 2,131,643 State-Other (690,829) 861,136 70,424 Federal-Seabrook (341,917) (331,076) (339,415) State-Seabrook (72,173) (69,379) (71,570) - ----------------------------------------------------------------------- $(1,766,249) $ 4,495,490 $ 1,791,082 - ----------------------------------------------------------------------- Investment Tax Credits, Net $ (140,379) $(1,122,798) $ (61,193) - ----------------------------------------------------------------------- Total Provision $(1,240,674) $ 5,703,474 $ 1,729,889 Allocated to Other Income (715,629) (821,021) (308,215) - ----------------------------------------------------------------------- Charged to Operating Expense $(1,956,303) $ 4,882,453 $ 1,421,674 ======================================================================= The table below reconciles an income tax provision (benefit), calculated by multiplying income (loss) before federal income taxes (as reported on the Consolidated Statements of Income) by the statutory federal income tax rate to the federal income tax expense (benefit) reported on the Consolidated Statements of Income. The difference is represented by the permanent and timing differences for which deferred taxes are not provided for ratemaking purposes. 1997 1996 1995 - ----------------------------------------------------------------------- Amount % Amount % Amount % ------------------------------------------- (Dollars in Thousands) ------------------------------------------- Federal income tax provision at statutory rate $(569) 35.0% $5,860 34.5% $2,063 34.0% Less (Plus) permanent reductions in tax expense resulting from statutory exclusions from taxable income: Dividend received deduction related to earnings of associated companies 29 (1.8) 116 .7 31 .5 Equity component of AFDC 100 (6.2) 127 .8 191 3.1% Amortization of equity component of AFDC on recoverable Seabrook investment (160) 9.8 (157) (.9) (155) (2.5) Other (80) 5.1 (68) (.5) (104) (1.7) - ------------------------------------------------------------------------ Federal income tax provision before effect of timing differences $(458) 28.1% $5,842 34.4% $2,100 34.6% Less (Plus) timing differences that are flowed through for rate- making and accounting purposes: Amortization of debt component of AFDC and capitalized overheads on recoverable Seabrook investment (151) 9.3 (149) (.9) (146) (2.4) Book depreciation greater than tax depreciation on assets acquired before 1971 (79) 4.8 (90) (.5) (292) (4.8) Equity earnings in excess of dividends 217 (13.3) (6) -- 129 2.1 State income tax liability deducted for federal income tax purposes (186) 11.4 314 1.9 -- -- Reversal of excess deferred income taxes 173 (10.6) 101 .6 101 1.7 Amortization of investment tax credits 217 (13.3) 175 1.0 676 11.1 Investment tax credits flowed through (184) 11.3 540 3.2 62 1.0 Other 46 (2.9) 164 .9 (161) (2.6) - ------------------------------------------------------------------------ Federal income tax provision $(511) 31.4% $4,793 28.2% $1,731 28.5% ======================================================================== Under the federal income ax laws, the Company received investment tax credits (ITC) on qualified property additions through 1986. ITC utilized were deferred and are being amortized over the life of the related property. In 1997 the Company recorded $108,140 of state of Maine ITC and $216,574 of amortization of deferred ITC. Income tax expense in 1997 was increased by $184,000 in ITC recorded in 1996 for financial reporting purposes, which were subsequently unable to be utilized when the 1996 federal income tax return was filed in 1997. In 1996 the Company recorded the utilization of approximately $540,000 of ITC, which were utilized to reduce income taxes payable upon an Internal Revenue Service (IRS) examination of the Company's 1993 and 1994 federal income tax returns and to reduce federal alternative minimum income taxes, which were flowed-through for financial reporting purposes as a reduction of income tax expense. The Company in 1996 also recorded $407,000 of state of Maine ITC and $175,000 of amortization of deferred ITC. ITC available of about $3.2 million ($2.2 million which is attributable to PHC and $955,000 to BVC) have not been utilized or recorded and, subject to review by the IRS, may be used prior to their expiration, which occurs between 2001 and 2005. At December 31, 1997, the Company had federal and state alternative minimum tax credits of approximately $6.4 million for the reduction of future tax liabilities. In 1997 and 1996 the Company utilized approximately $21.5 million and $32.6 million, respectively, of tax net operating loss carryforwards to reduce its regular income tax liability. At December 31, 1997, the Company had, for income tax reporting purposes, approximately $99.4 million of tax net operating loss carryforwards that expire in 2010. These net operating losses were principally due to the Company deducting for income tax reporting purposes the costs of the purchased power contract terminations in 1995, which were deferred for financial reporting purposes (see Note 6). 3. COMMON AND PREFERRED STOCK COMMON STOCK - Prior to 1992, stockholders had been able to invest their dividends and optional cash payments in common stock of the Company acquired by an independent agent in the open market through the Company's Dividend Reinvestment and Common Stock Purchase Plan (the Plan). In 1992 the Company amended the Plan to enable it to issue original shares in return for the reinvested dividends and optional cash payments. The common stock has general voting rights of one vote per twelve shares owned. In January 1997, the Company further amended the Plan to allow for the option of purchasing shares either on the open market or from newly issued shares sold by the Company. The Company anticipates that for the foreseeable future common stock will be purchased on the open market. PREFERRED STOCK - Authorized but unissued shares of 447,660 (plus additional shares equal in number to such presently outstanding shares as may be retired) may be issued with such preferences, restrictions or qualifications as the Board of Directors may determine. Under the Company's current credit facilities with its bank lending group, preferred stock may be issued only to refund preferred stock or debt. Any new shares so issued will be required to be issued with per share voting rights no greater than that of the common stock. The callable preferred stock may be called in whole or in part upon any dividend date by appropriate resolution of the Board of Directors. Except for the holders of the 8.76% issue, which does not carry general voting rights, the currently outstanding preferred stock has general voting rights of one vote per share. With regard to payment of dividends or assets available in the event of liquidation, preferred stock ranks prior to common stock. REDEEMABLE PREFERRED SHARES - December 27, 1989, the Company issued to an institutional investor $15 million of nonvoting preferred stock carrying an annual dividend rate of 8.76%. These shares have a maturity of fifteen years with a mandatory sinking fund of $1.5 million per year starting in 1995. The agreement to issue this series of preferred stock contains a provision where- by, if the Company pays a dividend that is considered a return of capital for federal income tax purposes, the Company is required to make a payment (make whole provision) to the stockholder in order to restore the stockholder's after-tax yield to the level it would have been had the dividend not been considered a return of capital. Since 100% of the dividends paid in 1990 and 1995 and 50% in 1993, pending any review by the IRS (for 1995 only), were considered a return of capital, the Company became obligated to pay this stockholder approximately $939,000, on a pro-rata basis (10% per year) in conjunction with each sinking fund payment starting in 1995. This obligation is being recognized over the remaining life of the issue through a direct charge to retained earnings, which amounted to approximately $61,000 in 1997. In 1997 the Company made a $1.5 million sinking fund payment, as well as approximately $94,000 under the make whole provision. 4. LENDING AGREEMENTS AND MONETIZATION OF POWER SALE CONTRACT In connection with financing the costs of the purchased power contract buyback accomplished in June 1995 (see Note 6), the Company entered into a Loan Agreement with the Finance Authority of Maine (FAME), a body corporate and politic and public instrumentality of the state of Maine. Pursuant to authorizing legislation in Maine, FAME issued $126 million of notes through a private placement, the repayment of which is the responsibility of the Company under the terms of the Loan Agreement. Of that amount, approximately $105 million was made available to the Company to finance a portion of the buyback and approximately $21 million was set aside in a capital reserve fund. The notes bear interest at an annual rate of 7.03%, mature on July 1, 2005 and are subject to a schedule of annual principal payments beginning on July 1, 1998. The amount held in the capital reserve fund will be used to pay the final installments of principal and interest due in 2005. The assets in the capital reserve fund are held by a third party trustee and invested in a guaranteed investment contract, earning interest at an annual rate of 6.51%. The interest earnings are utilized to offset the semiannual interest payments on the FAME notes. In order to secure the FAME notes, the Company executed a new General and Refunding Mortgage Indenture and Deed of Trust establishing a lien on the Company's property junior to the lien under the Company's First Mortgage Bonds Indenture. After the issuance of $115 million in First Mortgage Bonds to a group of bank lenders discussed below, the Company may not issue any additional First Mortgage Bonds in the future. The Company issued bonds to FAME under the new mortgage in the amount of $126 million. On June 30, 1995, the Company entered into a Credit Agreement (Agreement) with a group of seven banks consisting of a revolving credit facility in the initial amount of $55 million and medium term notes in the amount of $60 million. The revolving credit facility replaced the Company's short-term credit facilities that existed prior to the closing, and also provided for the issuance of a letter of credit required to support $4.2 million of the Company's Pollution Control Revenue Bonds. To secure the existing letter of credit related to the Pollution Control Revenue Bonds, until the new letter of credit could be issued, the Company deposited approximately $4.4 million of the proceeds from this financing with a third party trustee. These funds were released to the Company upon the issuance of the new letter of credit in August 1995. The receipt of these funds is reflected in Other, net in the 1995 Consolidated Statements of Cash Flows. The Agreement is secured by $115 million of non-interest bearing First Mortgage Bonds. The revolving credit facility has a term of five years and was automatically and permanently reduced by $1 million on December 31, 1995, by $2 million on June 30, 1996 and by $3 million on December 31, 1996. The medium term notes, used to finance a portion of the buyback cost, also have a term of five years and originally required annual principal payments of $12 million beginning June 30, 1996 (see 1997 update below). The Company may borrow at rates, as defined in the Agreement, based on the London Interbank Offered (LIBO) rate, or the higher of the prime rate, the three month certificate of deposit rate or the federal funds rate. A risk premium based on the Company's senior debt rating is added to the base portion of the rate, which results in the combined total interest rate for borrowings under the Agreement. A required commitment fee, based on the Company's available revolving credit commitment, is also priced according to the Company's senior debt rating. In August 1995, the Company entered into agreements with three banks to cap the LIBO rate on the term loan at 7.25%, with the cost to cap the interest rate amounting to $624,000. These costs are being amortized over the life of the term loan. The Agreement allows the Company to incur, outside of the revolving credit facility, additional unsecured debt of $5 million, plus 50% of the aggregate amount of mandated or optional reductions to the $55 million revolving credit facility. In connection with this provision, the Company maintains a $5 million uncommitted line of credit. CURRENT DEVELOPMENTS - The Company has been negotiating with interested parties the monetization of a power sale contract with UNITIL Power Corp. (UNITIL), a New Hampshire based electric utility. The Company currently provides power to UNITIL at significantly above-market rates, with the contract term ending in the year 2003. Based upon current projections of wholesale electricity markets, it is expected that the rates charged under the UNITIL contract will remain at above-market levels for the remainder of the contract term. Therefore, the assignment of the Company's rights under the contract has a positive present cash value. The Company is currently proceeding to complete a transaction with a financial institution pursuant to a letter of intent that would provide a loan of approximately $25 million in net proceeds secured by the value of the UNITIL contract. As discussed below, the proceeds of such a transaction could be used to finance a portion of the contract restructuring with the Penobscot Energy Recovery Company (PERC) (see Note 6) and to resolve outstanding financial covenant issues under the Company's credit agreement with its lending banks. That credit agreement contains a number of covenants keyed to the Company's financial condition and performance. One such covenant requires the Company to maintain a consolidated fixed charge ratio of 1.5 to 1.0 (defined as the ratio of the sum of the Company's net income, income tax expense and interest expense to the Company's interest expense, subject to a few minor adjustments) and is measured quarterly for the prior four quarters. After the first quarter of 1997, the Company was not in compliance with the fixed charge ratio covenant. The Company obtained temporary waivers of the noncompliance through June 6, 1997. On June 6, 1997 the Company and the lending banks amended the credit agreement. Under the amendment, compliance with the fixed charge ratio covenant was permanently waived for the four quarters ending March 31, 1997 and June 30, 1997. The Company was also out of compliance with the fixed charge ratio covenant for the four quarters ending September 30, 1997 and December 31, 1997 and has received temporary waivers of those violations until March 31, 1998. On November 20, 1997, the Company and the lending banks amended the agreement as part of a plan to reduce the level of the banks' credit commitment and reestablish the financial covenants to levels that the Company anticipates it can reasonably achieve. Under the amendment (as subsequently modified), if the Company monetizes the UNITIL contract as discussed above before March 31, 1998 in an amount that generates the net proceeds contemplated, it will be permitted to proceed with the restructuring of its power purchase contract with PERC and to use $6 million of the proceeds of the monetization to complete the PERC transaction, with the remainder of the proceeds to be used to reduce permanently the borrowing capacity of the existing revolving credit facility. On or before December 31, 1998, the Company must further reduce permanently the borrowing capacity under the revolving credit facility by that additional $6 million. The amendment also establishes new financial covenant levels that appear reasonably achievable under the Company's current financial forecasts although there are a number of important variables that could affect the Company's ability to meet those covenants in the future. As of this writing, the monetization of the power sale contract with UNITIL has not occurred, and only temporary waivers have been received for the covenant violations for the four quarters ending September 30, 1997 and December 31, 1997. Consequently, the Company has classified its $34 million of medium term notes as current liabilities as of December 31, 1997. If the UNITIL transaction occurs, permanent waivers of the violations will, pursuant to the credit agreement, become effective, and the medium term notes will be reclassified as long-term liabilities. Certain information related to total short-term borrowings under the Credit Agreement and the lines of credit is as follows: 1997 1996 1995 - -------------------------------------------------------------------- Total credit available at end of period $54,000,000 $54,000,000 $59,000,000 Letter of credit secured under the revolving credit facility $ 4,200,000 $ 4,200,000 $ 4,200,000 Unused credit at end of period $15,800,000 $17,300,000 $19,800,000 Borrowings outstanding at end of period $34,000,000 $32,500,000 $35,000,000 Effective interest rate 8.3% 7.7% 8.4% (exclusive of fees)on borrowings outstanding at end of period Average daily outstanding borrowings for the period $31,236,301 $33,609,973 $33,573,973 Weighted daily average annual interest rate 8.1% 7.6% 8.4% Highest level of borrowings outstanding at any month-end during the period $36,500,000 $41,500,000 $47,000,000 ===================================================================== Under the provisions of the first mortgage bond indenture, substantially all of the Company's plant and property has been mortgaged to secure the Company's first mortgage bonds. Sinking fund requirements and current maturities of the first mortgage bonds and other long-term debt (including the impact of the previously discussed classification of the medium term notes as current obligations at December 31, 1997) for the five years subsequent to December 31, 1997 are: Sinking Fund Current Requirements Maturities Total - --------------------------------------------------------------------- 1998 $ 1,778,554 $ 48,800,000 $ 50,578,554 1999 1,675,205 13,100,000 14,775,205 2000 1,886,702 14,000,000 15,886,702 2001 180,990 15,100,000 15,280,990 2002 -- 36,100,000 36,100,000 - --------------------------------------------------------------------- $5,521,451 $127,100,000 $ 132,621,451 ===================================================================== 5. POSTRETIREMENT BENEFITS The Company has a noncontributory pension plan covering substantially all of its employees. On July 17, 1987, the Company created separate union and nonunion plans from an original plan. Effective January 1, 1995, the Company merged the union and nonunion plans into one plan. Benefits under the plan are generally based on the employee's years of service and compensation during the years preceding retirement. The Company's general policy is to contribute to the funds the amounts deductible for federal income tax purposes. The following tables detail the components of pension expense for 1997 and 1996 and pension income for 1995, the funded status of the plan, the amounts recognized in the Company's Consolidated Financial Statements and the major assumptions used to determine these amounts. There were no employer contributions to the plan in 1997, 1996 or 1995. In 1995 the Company implemented an early retirement program which resulted in additional pension expense of approximately $2.5 million. The plan's assets are composed of fixed income securities, equity securities and cash equivalents. Total pension expense (income) included the following components: 1997 1996 1995 - ------------------------------------------------------------------------ Service cost benefits earned during the period $1,046,466 $ 991,569 $ 813,811 Interest cost on projected benefit obligation 2,861,434 2,781,366 2,458,466 Actual return on plan assets (7,560,449) (6,298,817) (8,505,484) Total of amortized obligations and the net gain (loss) deferred 3,671,101 2,539,961 4,889,703 - ------------------------------------------------------------------------ Total pension expense (income)$ 18,552 $ 14,079 $ (343,504) ======================================================================== 1997 1996 1995 - ------------------------------------------------------------------------ Significant assumptions used were Discount rate 7.5% 7.25% 8.25% Rate of increase in future compensation levels 5.0% 5.0% 5.0% Expected long-term rate of return on plan assets 9.0% 9.0% 9.0% - ------------------------------------------------------------------------ The following table sets forth the plan's funded status at Decemeber 31,1997 and 1996: 1997 1996 - ------------------------------------------------------------------------ Actuarial present value of accumulated benefit obligation Vested $ 35,691,586 $ 30,856 Non-vested 2,754,950 2,696,764 - ------------------------------------------------------------------------ Total $ 38,446,536 $ 33,552,824 ======================================================================== Projected benefit obligation $(44,557,086) $(39,369,783) Plan assets at fair value 48,323,318 44,143,679 - ------------------------------------------------------------------------ Excess of plan assets over projected benefit obligation $ 3,766,232 $ 4,773,896 Items not yet recognized in earnings Net (asset) at transition (3,187,150) (4,119,475) Prior service cost 3,984,025 4,540,404 Unrecognized net gain from past experience and changes in assumptions (5,221,987) (5,835,153) - ------------------------------------------------------------------------ Net pension liability recognized $ (658,880) $ (640,328) ======================================================================== The discount rate and rate of increase in future compensation levels used to determine pension obligations, effective January 1, 1998, are 7% and 4%, respectively, and were used to calculate the plan's funded status at December 31, 1997. The Company also changed to the 83-Group Annuity Mortality Table to calculate the plan's funded status at December 31, 1997. In addition to pension benefits, the Company provides certain health care and life insurance benefits to its retired employees. Substantially all of the Company's employees may become eligible for retiree benefits if they reach normal retirement age while working for the Company. The MPUC in 1993 issued a final accounting rule in connection with Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post- retirement Benefits Other Than Pensions" (FAS 106), which adopted this pronouncement for ratemaking purposes and authorized the Company to defer the excess of the net periodic postretirement benefit cost recognized under FAS 106 over the pay-as-you-go amount in 1993 through February 28, 1994, and to include such excess as a regulatory asset pending inclusion in the new base rates, effective March 1, 1994. This regulatory asset, which amounted to $705,283 at February 28, 1994, is being recovered, beginning March 1, 1994, over a ten-year period. The Company, also in accordance with the final accounting ruling, is amortizing the unrecognized transition obligation of $10,023,200 over a 20-year period. In 1995 the Company implemented an early retirement program which resulted in $909,418 of expense related to additional medical and life insurance benefits provided to the early retirees. In 1994 the Company established an irrevocable external Voluntary Employee Benefit Association Trust Fund (VEBA) to fund the payment of postretirement medical and life insurance benefits. Company contributions to the VEBA, which commenced in July 1994, amounted to approximately $1.1 million in 1997, $490,000 in 1996 and $1.2 million in 1995. The VEBA's assets are composed of United States Treasury money market funds. The Company's general policy is to contribute to the VEBA amounts necessary to fund claims and administrative costs. The actuarially determined net periodic postretirement benefit cost for 1997, 1996 and 1995 and the major assumptions used to determine these amounts are shown in the following tables: 1997 1996 1995 - -------------------------------------------------------------------------------- Service cost of benefits earned $ 342,739 $ 326,809 $ 378,400 Interest cost on accumulated post- retirement benefit obligation 994,936 928,423 948,000 Actual return on plan assets (9,395) (21,000) (23,300) Amortization of unrecognized transition obligation 501,200 501,200 501,200 Other deferrals, net (11,605) -- 23,699 Early retirement plan benefits -- -- 909,418 - -------------------------------------------------------------------------------- Net periodic postretirement benefit cost $ 1,817,875 $ 1,735,432 $ 2,737,417 ================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------- Significant assumptions used were- Discount rate 7.25% 7.25% 8.25% Health care cost trend rate, employees less than age 65- Near-term 8.5% 9.0% 8.5% Long-term 4.5% 4.5% 4.5% Health care cost trend rate, employees greater than age 65- Near-term 6.8% 7.0% 6.8% Long-term 4.5% 4.5% 4.5% Rate of return on plan assets 5.0% 5.0% 5.0% - -------------------------------------------------------------------------------- The following table sets forth the benefit plan's funded status at December 31, 1997 and 1996: 1997 1996 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 9,923,357 $ 8,606,932 Fully eligible active plan participants 1,203,946 847,920 Other active participants 5,107,487 3,783,868 - -------------------------------------------------------------------------------- $ 16,234,790 $ 13,238,720 Fair value of plan assets (283,731) (240,878) Unrecognized net transition obligation (7,517,200) (8,018,400) Unrecognized (loss) gain (2,058,535) 683,075 - -------------------------------------------------------------------------------- Accrued postretirement benefit cost (included in Other Reserves) $ 6,375,324 $ 5,662,517 ================================================================================ The discount rate used to determine postretirement benefit obligations, effective January 1, 198, and the Plan's funded status at December 31, 1997, was 7%. The Company changed to the 83-Group Annuity Mortality Table to calculate the plan's funded status at December 31, 1997. If the health care cost trend rate was increased one percent, the accumulated postretirement benefit obligation as of December 31, 1997 would have increased by 15.8%. The effect of such change on the aggregate of service and interest cost for 1997 would be an increase of 17.0%. The estimates of the Company's accrued pension and postretirement benefit costs involve the utilization of significant assumptions. Any change in these assumptions could impact the liabilities in the near term. The Company also provides a defined contribution 401(k) savings plan for substantially all of its employees. The Company's matching of employee voluntary contributions amounted to approximately $295,000 in 1997, $290,000 in 1996 and $216,000 in 1995. 6. JOINTLY OWNED FACILITIES AND POWER SUPPLY COMMITMENTS MAINE YANKEE - The Company owns 7% of the common stock of Maine Yankee, which owns and, prior to its permanent closure in 1997, operated an 880 megawatt (MW) nuclear generating plant in Wiscasset, Maine. The Company's equity ownership in the plant entitled the Company to about 7% of the output pursuant to a cost-based power contract. The Company is obligated to pay its pro rata share of Maine Yankee's operating expenses, capital costs and decommissioning costs. The Company's equity investment in Maine Yankee is approximately $5.5 million as of December 31, 1997. Following a year long shutdown for repairs to the steam generators in 1995, Maine Yankee came under intense regulatory scrutiny in a series of events beginning in December 1995 with an anonymous letter about an allegedly faulty computer program. The events evolved into a number of investigations by Maine Yankee's primary licensing authority, the United States Nuclear Regulatory Commission (NRC) and by Maine Yankee itself. Concerns included compliance with NRC regulations, conformance of the plant to design specifications, adequacy and condition of components and systems, and management issues. During the evolution of these events, the NRC itself became subject to public criticism about the adequacy of its regulatory activities and its relationship with nuclear plant licensees, and in response, the NRC implemented changes in its approach to oversight of licensees that had the effect of amplifying the regulatory scrutiny. Maine Yankee operated for part of 1996, but under a restriction imposed by the NRC that limit-ed its operation to 90% of full power capacity pending the resolution of various issues. In early December 1996 the plant was shut down to address cable-separation and associated issues. Subsequently, Maine Yankee also determined that a substantial portion of the nuclear fuel in the reactor was defective and had to be replaced, thereby extending the outage into a refueling outage. During this extended outage, the plant owners analyzed in-depth the viability of continued operation of the plant. While the plant was shut down, the Company incurred incremental replacement power costs of approximately $1 million per month in addition to its 7% share of the costs expended in the owners' efforts to return the plant to service. On May 27, 1997, the Board of Directors of Maine Yankee voted to reduce maintenance and repair spending at the plant and announced that Maine Yankee was considering permanent closure based on economic concerns and uncertainty about operation of the plant. On August 6, 1997, the Board voted to cease power operations at the plant permanently and to begin the process of decommissioning the plant. The formal vote followed an announcement by the Maine Yankee Board on August 1, 1997. The decision to shut down the plant was based on an economic analysis of the costs, risks and uncertainties associated with operating the plant compared to those associated with closing and decommissioning the plant. The decision to close the plant should mitigate the costs the Company would otherwise incur through a phasing down of Maine Yankee's operations and maintenance costs. The need to purchase replacement power will continue. Maine Yankee's most recent estimate of the total costs of decommissioning and plant closure, excluding funds already collected, is $930 million (undiscounted). The Company's share of this estimated cost is $65.1 million and was recorded as a regulatory asset and decommissioning liability at September 30, 1997. The regulatory asset was recorded for the full amount of the decommissioning and plant closure costs due to the recent industry restructuring legislation (see Note 11) allowing the Company future recovery of nuclear decommissioning expenses related to Maine Yankee, as well as the Company being allowed a recovery mechanism in its most recent rate order (see Note 11) for Maine Yankee non-decommissioning plant closure costs. Accumulated decommissioning funds at December 31, 1997 had an adjusted market value of $199.5 million of which the Company's share was approximately $14 million. In a related matter, in early September, 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 explaining that: Maine Yankee's decision in December, 1996 to proceed with the steps necessary to restart its nuclear generating plant at Wiscasset, Maine, 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 the 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. If any of these costs are determined to have been imprudently incurred, by FERC or the MPUC, the Company may be required to write down a portion of its investment in Maine Yankee. On October 24, 1997, the MPUC issued a Notice of Investigation initiating an investigation of the prudence of the Maine Yankee shutdown decision and of the operation of Maine Yankee prior to the shutdown, and announced that it had directed its consultant to extend its review to include those areas. 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 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 Commission "if we feel it necessary to further investigate these matters after the FERC proceeding ends." The Company cannot therefore predict whether the MPUC will reopen its investigation once the FERC proceeding is concluded. During 1997, 1996 and 1995 the Company incurred substantial cost for replacement power, and, since the FCA was eliminated at the beginning of 1995, the replacement power costs had a material impact in reducing earnings in these three years. With the Plant off-line for most of 1995, portions of 1996 and all of 1997, and operating at 90% capacity in 1996 when on-line, the Company incurred replacement power costs of $12.9 million in 1997, $4.3 million in 1996 and $8.6 million in 1995. MEPCO - The Company owns 14.2% of the common stock of MEPCO. MEPCO owns and operates electric transmission facilities from Wiscasset, Maine, to the Maine-New Brunswick border. Information relating to the operations and financial position of Maine Yankee and MEPCO appears at the top of page 37.
- --------------------------------------------------------------------------------------------------------------- Maine Yankee MEPCO - --------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - --------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1997 1996 1995 ---------- --------- --------- --------- --------- --------- Operations: As reported by investee- Operating Revenue $ 238,586 $ 185,661 $ 205,977 $ 24,473 $ 55,391 $ 49,699 - --------------------------------------------------------------------------------------------------------------- Depreciation $ 33,625 $ 32,952 $ 32,722 $ 222 $ 845 $ 1,383 Interest and Preferred Divivends 18,031 15,922 17,332 67 61 96 Other expenses, net 179,317 130,150 148,866 23,112 54,265 48,115 - --------------------------------------------------------------------------------------------------------------- Operating expenses $ 230,973 $ 179,024 $ 198,920 $ 23,401 $ 55,171 $ 49,594 - --------------------------------------------------------------------------------------------------------------- Earnings Applicable to Common Stock $ 7,613 $ 6,637 $ 7,057 $ 1,072 $ 220 $ 105 =============================================================================================================== Amounts Reported by the Company- Purchased power costs $ 16,764 $ 12,839 $ 14,299 $ - $ - $ - Equity in net income (524) (449) (498) (215) (15) (15) - --------------------------------------------------------------------------------------------------------------- Net purchased power expense $ 16,240 $ 12,390 $ 13,801 $ (215) $ (15) $ (15) =============================================================================================================== Financial Position: As reported by investee- Plant in service $ 687 $ 409,865 $ 404,499 $ 23,510 $ 23,146 $ 23,135 Accumulated depreciation - (225,735) (208,537) (22,618) (22,545) (21,777) Other assets 1,367,456 417,931 384,996 3,470 10,126 4,667 - --------------------------------------------------------------------------------------------------------------- Total assets $1,368,143 $ 602,061 $ 580,958 $ 4,362 $ 10,727 $ 6,025 Less- Preferred stock 17,400 18,000 18,600 - - - Long-term debt 143,665 103,332 109,999 420 620 - Other liabilities and deferred credits 1,128,128 409,392 381,158 1,578 9,110 5,147 - --------------------------------------------------------------------------------------------------------------- Net assets $ 78,950 $ 71,337 $ 71,201 $ 2,364 $ 997 $ 878 =============================================================================================================== Company's reported equity- Equity in net assets $ 5,527 $ 4,994 $ 4,984 $ 336 $ 142 $ 125 Adjust Company's estimated to actual 5 20 30 (10) (17) - - --------------------------------------------------------------------------------------------------------------- Equity in net assets as reported $ 5,532 $ 5,014 $ 5,014 $ 326 $ 125 $ 125 ===============================================================================================================
WYMAN 4 - The Company owns 8.33% (50 MW) of the oil-fired 600 MW Wyman Unit No. 4 in Yarmouth, Maine. The Company's proportionate share of the direct expenses of this unit is included in the corresponding operating expenses in the Consolidated Statements of Income. Included in the Company's utility plant are the following amounts with respect to this unit: 1997 1996 1995 - ------------------------------------------------------------------------- Electric plant in service $ 16,886,776 $ 16,885,690 $ 16,876,963 Accumulated depreciation (9,389,542) (8,927,440) (8,459,911) - ------------------------------------------------------------------------- $ 7,497,234 $ 7,958,250 $ 8,417,052 ========================================================================= NEPOOL/HYDRO-QUEBEC PROJECT - The Company is a 1.6% participant in the NEPOOL/Hydro-Quebec Phase 1 project (Phase 1), a 690 MW DC intertie between the New England utilities and Hydro-Quebec constructed by a subsidiary of another New England utility at a cost of about $140 million. The participants receive their respective share of savings from energy transactions with Hydro-Quebec, and are obliged to pay for their respective shares of the costs of ownership and operation whether or not any savings are realized. The Company is also a 1.5% participant in the NEPOOL/Hydro-Quebec Phase 2 project (Phase 2), which involves an increase to the capacity of the Phase 1 intertie to 2,000 MW. As in the Phase 1 project, the Company receives a share of the anticipated energy cost savings derived from purchases from Hydro-Quebec and capacity benefits provided by the intertie and is required to pay its share of the costs of ownership and operation whether or not any savings are obtained. In 1990, the Company formed BVC, whose sole function is to be a 50% general partner in Chester, a partnership which owns a static var compensator (SVC), which is electrical equipment that supports the Phase 2 transmission line. A wholly-owned subsidiary of Central Maine Power Company owns the other 50% interest in Chester. Chester has financed the acquisition and construction of the SVC through the issuance of $33 million in principal amount of 10.48% senior notes due 2020, and up to $3.25 million principal amount of additional notes due 2020 (collectively, the SVC Notes). The holders of the SVC Notes are without recourse against the partners or their parent companies and may only look to Chester and to the collateral for payment. The New England utilities which participate in Phase 2 have agreed under a FERC approved contract to bear the cost of Chester, on a cost of service basis, which includes a return on and of all capital costs. Information relating to the operations and financial position of Chester appears at the top of page 38.
- ---------------------------------------------------------------------------------------------------------------- Bangor-Pacific Chester - ---------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) - ---------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1997 1996 1995 --------- --------- --------- --------- --------- --------- Operations: As reported by investee- Operating Revenue $ 7,057 $ 8,252 $ 7,277 $ 4,642 $ 4,782 $ 5,016 - ---------------------------------------------------------------------------------------------------------------- Depreciation $ 870 $ 866 $ 862 $ 1,075 $ 1,075 $ 1,075 Interest expense 3,294 3,501 3,657 2,859 2,988 3,114 Other expenses, net 911 832 707 708 719 827 - ---------------------------------------------------------------------------------------------------------------- Operating expenses $ 5,075 $ 5,199 $ 5,226 $ 4,642 $ 4,782 $ 5,016 - ---------------------------------------------------------------------------------------------------------------- Net Income $ 1,982 $ 3,053 $ 2,051 $ - $ - $ - ================================================================================================================ Company's reported equity in net income $ 991 $ 1,527 $ 1,026 $ - $ - $ - ================================================================================================================ Financial Position: As reported by investee- Plant in service $ 44,047 $ 44,043 $ 44,035 $ 31,993 $ 31,993 $ 31,993 Accumulated depreciation (8,163) (7,293) (6,427) (7,447) (6,372) (5,296) Other assets 3,129 3,114 3,399 3,087 3,277 3,351 - ---------------------------------------------------------------------------------------------------------------- Total assets $ 39,013 $ 39,864 $ 41,007 $ 27,633 $ 28,898 $ 30,048 Less- Long-term debt 28,500 30,600 32,600 25,837 27,021 28,204 Other liabilities 2,425 2,359 2,255 1,796 1,877 1,844 - ---------------------------------------------------------------------------------------------------------------- Net assets $ 8,088 $ 6,905 $ 6,152 $ - $ - $ - ================================================================================================================ Company's reported equity in net assets $ 4,044 $ 3,453 $ 3,076 $ - $ - $ - ================================================================================================================
SMALL POWER PRODUCTION FACILITIES - As of the end of 1997, the Company had contracts with six independent, non-utility power producers known as "small power production facilities." The West Enfield Project, described below, is one such facility. There are four other relatively small hydroelectric facilities, and a 20 MW facility fueled by municipal solid waste (see PERC discussion below). The cost of power from the small power production facilities is more than the Company would incur from other sources if it were not obligated under these contracts, and, in the case of the solid waste plant, substantially more. The prices were negotiated at a time when oil prices were much higher than at present, and when forecasts for the costs of the Company's long-term power supply were higher than current forecasts. The Company has been attempting to alleviate the adverse impact of high-cost contracts with small power production facilities. One method for doing so has been to pay a fixed sum in return for terminating the contract. The first such transaction was accomplished in 1993, and in 1995 the Company succeeded in accomplishing two more. These contract terminations have resulted in significant savings in purchased power costs, and the Company believes such savings will continue over the long term. The 1995 transactions involved a "buyback" of the contracts for the purchase of power from two biomass-fueled generating plants in West Enfield and Jonesboro, Maine, which are identical plants under common ownership. The buyback cost was approximately $170 million, including transaction costs. Under the Company's Alternative Marketing Plan, the buyback costs were deferred and recorded as a regulatory asset, to be amortized and collected over a ten-year period, beginning July 1, 1995. The cost of the buyback was financed entirely by new debt instruments, thereby significantly increasing the Company's indebtedness. See Note 4 for discussion of these financings. In addition to the buyback costs incurred to date, the Company was committed under certain conditions to reimburse the towns of Enfield and Jonesboro for lost property tax revenues in an amount which was not expected to exceed $1.4 million over a two-year period. In 1997 and 1996 the Company made payments of approximately $1.5 million to the two towns under this commitment. In the 1993 transaction, the Company negotiated an agreement to cancel its long-term purchased power agreement with one of the biomass plants, the Beaver Wood Joint Venture (Beaver Wood), in June 1993. In connection with the cancellation, the Company paid Beaver Wood $24 million in cash and issued a new series of 12.25% First Mortgage Bonds due July 15, 2001 to the holders of Beaver Wood's debt in the amount of $14.3 million in substitution for Beaver Wood's previously outstanding 12.25% Secured Notes. Also, in connection with the cancellation agreement, a reconstituted Beaver Wood partnership paid the Company $1 million at the time of settling the transaction and agreed to pay the Company $1 million annually for a six-year period beginning in 1994 in return for retaining the ownership and the option of operating the plant. The payments are secured by a mortgage on the property of the Beaver Wood facility. In May 1993 the Company received an accounting order from the MPUC related to this purchased power contract buyout. The order stipulated that the Company could seek recovery of the costs associated with the buyout in a future base rate case, and could also record carrying costs on the deferred balance. Consequently, a regulatory asset of $40.3 million had been recorded as of December 31, 1993. Effective with the implementation of new base rates on March 1, 1994, the Company began recovering over a nine-year period the deferred balance, net of the additional $6 million anticipated from Beaver Wood. In connection with the temporary rate increase effective July 1, 1997, the MPUC required the Company to accelerate the amortization of this regulatory asset, and effective December 12, 1997, the MPUC authorized the Company to revert to the original amortization schedule (see Note 11). In each of the years from 1994 through 1997 the Company received its $1 million payment. The Company has been working to restructure its power purchase contract with PERC, its last remaining high-priced non-utility generator contract that offers a potential for substantial savings. PERC owns a 20 MW waste-to-energy facility in Orrington, Maine that provides solid waste disposal services to many communities in central, eastern and northern Maine. The contract requires the Company to purchase the electricity output of the plant until 2018 at a price that is presently above the cost of alternative sources of power (projected to be $15 milion annually, net of revenues from the resale of power to another utility), and, in the Company's opinion, is likely to remain so. The Company's net purchased power expense under this contract was approximately $15 million in 1997. The Company has been working with PERC and the affected municipalities at a restructuring of the power contract that would result in substantial savings for the Company and would continue to allow PERC to meet the solid waste disposal needs of Maine communities. The Company has reached an agreement with PERC and a committee representing the municipalities that includes the following major components: 1) The Company would make an up-front payment to PERC of $6 million and installment payments over the next four years following consummation of the transaction totalling an additional $4 million. These funds would be retained by PERC to meet operation and debt service reserve requirements of the PERC plant. 2) As of December 31, 1997, the PERC plant was financed in part by tax-exempt municipal revenue bonds in the principal amount of $47.9 million payable pursuant to a sinking fund schedule and finally maturing in 2004. The credit on those bonds is enhanced by letters of credit issued by a group of banks. Those bonds would be restructured to extend the maturity date to 20 years from the date of closing. The bonds would continue to be tax-exempt and their credit would be enhanced by the moral obligation of the state of Maine under the auspices of FAME pursuant to the State of Maine's Electric Rate Stabilization Program. The extended maturity of low-cost bonds would, therefore, provide savings to be shared by the parties. 3) The Company would continue to purchase power at the rates established under the existing PERC contract. Payments would be made to a trust from which disbursements would be made according to the following priorities: a) debt service and expense, including all principal and interest; b) trustee and bond related fees and expenses; c) all operating and maintenance expenses of the PERC plant; d) operating and management fees paid to the PERC partners pursuant to a partnership operating agreement; e) payment to the PERC owners of any savings in interest expense resulting from the prepayment of bonds; and f) except for cash reserve requirements, all remaining cash would be distributed 1/3 to the Company, 1/3 to the PERC owners and 1/3 to the participating municipalities. 4) The Company would issue warrants for the purchase of two million shares of its common stock, one million each to the PERC owners and the participating municipalities. The warrants would be exercisable within ten years of their issuance and would entitle the holder to purchase common stock for $7 per share (subject to adjustment under certain circumstances). No warrants may be exercised within the first nine months after their issuance, and they would become exercisable in 500,000 share blocks following the expiration of nine months, 21 months, 33 months and 45 months from the closing date. Upon exercise, the Company would have the option, instead of providing common stock, to pay cash equal to the difference between the then market price of the stock and the exercise price of $7 per share times the number of shares as to which exercise is made. The MPUC has established a cap on ratepayers' exposure to the cost of the warrants. Ratepayer costs are limited to the difference between the higher $15 per share or the book value per share at the time the warrants are exercised and the $7 exercise price. The Company would not recover any costs above the cap from ratepayers. 5) The municipalities would extend their waste disposal contracts through 2017 and waive their existing rights to an early termination or the buyout of PERC. There are a number of events upon which the proposed transaction is contingent, including approval by the affected municipalities, the rendering of an opinion by bond counsel that the PERC bonds will remain tax-exempt and the financing of necessary cash payments by the Company. The Company and the other parties to the transaction are tentatively planning a closing in the spring of 1998. Depending in part on the ultimate cost of the warrants, it is projected that the restructured PERC contract will result in net cost savings with a present value of $30 40 million over the remaining life of the contract. That projection is based upon a number of assumptions about future events and the markets for electricity. WEST ENFIELD PROJECT - In 1986, the Company entered into a joint venture with a development subsidiary of Pacific Lighting Corporation or the purpose of financing and constructing the redevelopment of an old 3.8 MW hydroelectric plant which the Company owned on the Penobscot River in Enfield and Howland, Maine, into a 13 MW facility for the purpose of operating the facility once it was completed. Commercial operation of the redeveloped project began in April 1988. PHC was formed to own the Company's 50% interest in the joint venture, Bangor-Pacific. Bangor-Pacific financed the cost of the redevelopment through the issuance in a privately placed transaction of $40 million of fixed rate term notes and a commitment for up to $5 million of floating rate notes. The notes are secured by a mortgage on the project and a security interest in a 50-year purchased power contract, and the revenues expected thereunder, between the Company and Bangor-Pacific. Except as described below, the holders of the notes issued by Bangor-Pacific are without recourse to the joint venture partners or their parent companies. In the event Bangor-Pacific fails to pay when due amounts payable pursuant to the loan agreement, each partner has agreed to make capital contributions to Bangor-Pacific in an amount equal to 50% of such amounts due and payable, but not exceeding an amount equal to distributions from Bangor-Pacific received by such partner in the preceding twelve-month period. The Company is obliged to provide funds necessary to support the foregoing limited financial commitment to the project undertaken by PHC as the partner. Under the purchased power contract, if the project operates as anticipated, payments by the Company to Bangor-Pacific are estimated to be about $7.5 million annually (without consideration of any distributions by the joint venture to the partners). It is possible that the Company would be required to make payments under the contract regardless of whether any power is delivered, in an amount of approximately $4 million per year. However, the Company has the right to terminate the contract if the failure to deliver power continues for a period of twelve consecutive months. Information relating to the operations and financial position of Bangor-Pacific appears at the top of page 38. OTHER POWER SUPPLY COMMITMENTS - The Company has a contract, which started in June 1997, for the delivery of up to 60 MW of power from another utility, ending December 31, 1999. The Company's purchased power expense under this contract was a approximately $7.3 million in 1997 and is projected to be approximately $12 million annually through the end of the contract. BASIN MILLS AND VEAZIE PROJECTS - As a result of increased uncertainty about the recoverability of amounts invested through 1993 in licensing activities for proposed additional hydroelectric facilities, the Company established a reserve against those investments in the amount of $8.7 million as of December 31, 1993. Since 1993 the Company has charged to non-operating expense all amounts related to these licensing activities. The projects for which the reserve was established are a proposed 38 MW generating facility located at the so-called Basin Mills site on the Penobscot River in Orono and Bradley, Maine and an 8 MW addition to the Company's existing dam and power station on the Penobscot River in Veazie and Eddington, Maine. Under the industry restructuring provisions (see Notes 11 and 13), the Company is required to divest of its generation assets by March 1, 2000, which includes the Company's investment in the Basin Mills and Veazie projects. Consequently, the Company is unlikely to expend significant amounts related to these projects in the future. 7. RECOVERY OF SEABROOK INVESTMENT AND SALE OF SEABROOK INTEREST The Company was a participant in the Seabrook nuclear project in Seabrook, New Hampshire. On December 31, 1984, the Company had almost $87 million invested in Seabrook, but because the uncertainties arising out of the Seabrook Project were having an adverse impact on the Company's financial condition, an agreement for the sale of Seabrook was reached in mid-1985 and was finally consummated in November 1986. During 1985, a comprehensive agreement was negotiated among the Company, the MPUC staff, and the Maine Public Advocate addressing the recovery through rates of the Company's investment in Seabrook (the Seabrook Stipulation). This negotiated agreement was approved by the MPUC in late 1985. Although the implementation of the Seabrook Stipulation significantly improved the Company's financial condition, substantial write-offs were required as a result of the determination that a portion of the Company's investment in Seabrook would not be recovered. In addition to the disallowance of certain Seabrook costs, the Seabrook Stipulation also provided for the recovery through customer rates of 70% of the Company's year-end 1984 investment in Seabrook Unit 1 over 30 years, and 60% of the Company's investment in Unit 2 over seven years, with base rate treatment on the unamortized balances. As of December 31, 1992, the Company's investment in Seabrook Unit 2 was fully amortized. 8. UNAUDITIED QUARTERLY FINANCIAL DATA Unaudited quarterly financial data pertaining to the results of operations are shown below: Quarter Ended ---------------------------------------------- Mar. 31 June 30 Sept. 30 Dec. 31 ---------------------------------------------- 1997 DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - -------------------------------------------------------------------------------- Electric Operating Revenue $ 48,176 $ 42,236 $ 47,557 $ 49,356 Operating Income 6,657 4,896 5,902 6,334 Net Income (Loss) 716 (1,037) (188) 122 Earnings (Loss) Per Share of Common Stock $ 0.05 $ (.19) $ (.07) $ (.03) ================================================================================ 1996 - ---------------------------------- Electric Operating Revenue $ 48,161 $ 43,152 $ 47,355 $ 48,706 Operating Income 10,454 9,036 8,417 8,334* Net Income 4,095 2,758 2,295 2,135* Earnings Per Share of Common Stock$ .51 $ .32 $ .26 $ .24 * ================================================================================ 1995 - ---------------------------------- Electric Operating Revenue $ 48,263 $ 43,694 $ 46,025 $ 46,931 Operating Income 6,004 1,438 7,538 8,688* Net Income (Loss) 3,293 (1,696) 828 1,911* Earnings (Loss) Per Share of Common Stock $ .40 $ (.29) $ .05 $ .20 * ================================================================================ * Includes $498,000 of amortization of investment tax credit or $.07 per common share. 9. CONTINGENCIES ENVIRONMENTAL MATTERS - On October 10, 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, "Environmental Remediation Liabilities" (SOP). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by entities to specific situations of recognizing, measuring and disclosing environmental remediation liabilities. The SOP became effective January 1, 1997. This SOP has not had a material impact on the Company's financial position or results of operations. In 1992, the Company received notice from the Maine Department of Environmental Protection that it was investigating the cleanup of several sites in Maine that were used in the past for the disposal of waste oil and other hazardous substances, and that the Company, as a generator of waste oil that was disposed at those sites, may be liable for certain cleanup costs. The Company learned in October 1995 that the United States Environmental Protection Agency placed one of those sites on the National Priorities List under the Comprehensive Environmental Response, Compensation, and Liability Act and will pursue potentially responsible parties. With respect to this site, the Company is one of a number of waste generators under investigation. As to the only other site which has been listed by the Department of Environmental Protection as an Uncontrolled Hazardous Substance Site, the Company was informed that it is considered a de minimis generator. The Company has recorded a liability, based upon currently available information, for what it believes are the estimated environmental remediation costs that the Company expects to incur for these waste disposal sites. Additional future environmental cleanup costs are not reasonably estimable due to a number of factors, including the unknown magnitude of possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes. At December 31, 1997, the liability recorded by the Company for its estimated environmental remediation costs amounted to $331,000. The Company's actual future environmental remediation costs may be higher as additional factors become known. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value at December 31, 1997 of each class of financial instrument for which it is practical to estimate the value: Cash and cash equivalents: the carrying amount of $936,796 approximates fair value. The fair values of other financial instruments at December 31, 1997 based upon similar issuances of comparable companies are as follows: In Thousands - ----------------------------------------------------------------------------- Carrying Fair Amount Value ------------------------- Funds held by trustee-guaranteed investment contract $ 21,196 $ 21,680 Mandatory redeemable cumulative preferred stock 10,500 10,500 First Mortgage Bonds 108,021 115,896 Pollution Control Revenue Bonds 4,200 4,200 FAME Revenue Notes 126,000 119,784 Medium Term Notes 34,000 34,000 - ----------------------------------------------------------------------------- 11. INDUSTRY RESTRUCTUING AND RATE REGULATION INDUSTRY RESTRUCTURING - In the Company's 1996 Form 10-K, the Company described electric utility restructuring efforts in Maine, including the MPUC's 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 must divest of all generation related assets and business functions except for: a) contracts with qualifying facilities and conservation providers; b) nuclear assets, namely, the Company's investment in Maine Yankee, however, the MPUC may require divestiture on or after January 1, 2009; c)assets that the MPUC determines necessary for the operation of the transmission and distribution services. The MPUC may 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. 3) Billing and metering services will be subject to competition beginning March 1, 2002, but the legislation permits the MPUC to establish an earlier date, no sooner than March 1, 2000. 4) The Company, through an unregulated affiliate, may market and sell electricity both within and outside its current service territory, limited to 33% of the load within the Company's service territory and unlimited outside the Company's service territory. 5) The Company will continue to provide transmission and distribution services which will be subject to continued regulation by the MPUC. 6) If after March 1, 2000, 10% or more of the stock of a regulated distribution utility is purchased by an entity, the purchasing entity and any related entity may not sell or offer for sale generation service to any retail customer of electric energy in the state of Maine. 7) 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; 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. The Company shall pursue all reasonable means to reduce its potential stranded costs and to receive the highest possible value for generation assets and contracts, including the exploration of all reasonable and lawful opportunities to reduce the cost to ratepayers of contracts with qualifying facilities. 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 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. 8) 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 (which include hydroelectric generation) in their energy portfolios. 9) A standard-offer service will be available for all customers. An unregulated affiliate of the Company providing retail electric power are prohibited from providing more than 20% of the load within the Company's service territory under the standard offer service. 10) An unregulated affiliate of the Company 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 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. 11) 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. 12) 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. REGULATORY ASSETS AND MEETING THE REQUIREMENTS OF FAS 71 - The Company is subject to the provisions of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (FAS 71). FAS 71 allows the establishment of regulatory assets for costs accumulated for certain items other than the usual and customary capital assets, and allows the deferral of the income statement impact of those costs if they are expected to be recovered in future rates. As of December 31, 1997, the Company has regulatory assets, net of regulatory liabilities, of approximately $264.4 million. The Company continues to meet the requirements of FAS 71 since the Company's rates are intended to recover the cost of service plus a rate of return on the Company's investment, as well as providing specific recovery of costs deferred in prior periods. The recent legislation enacted in Maine associated with industry restructuring specifically addressed the issue of cost recovery of regulatory assets stranded as a result of industry restructuring. Specifically, the legislation requires the MPUC, when retail access begins, to provide a "reasonable opportunity" for the recovery of stranded costs through the rates of the transmission and distribution company, comparable to the utility's opportunity to recover stranded costs before the implementation of retail access under the legislation. If the Company is not allowed full recovery of its stranded costs, it would be required to write-off any disallowed costs. As provided for in Emerging Issues Task Force Issue No. 97 4, "Deregulation of the Pricing of Electricity," the Company will continue to record regulatory assets in a manner consistent with FAS 71 as long as future recovery is probable, since the Maine legislation provides the opportunity to recover regulatory assets including stranded costs through the rates of the transmission and distribution company. The Company anticipates, based on current generally accepted accounting principles, that FAS 71 will continue to apply to the regulated transmission and distribution segments of its business. If the Company failed to meet the requirements of FAS 71, due to legislative or regulatory initiatives, the Company would be required to revert to Statement of Financial Accounting Standards No. 101, "Regulated Enterprises Accounting for the Discontinuation of Application of FASB No. 71" (FAS 101). If, under FAS 101, legislative or regulatory changes and/or competition result in electric rates which do not fully recover the Company's costs, a write-down of assets could be required. The Company does not anticipate any write-down of assets at this time. RATE ORDER - On March 3, 1997, the Company notified the MPUC of its intent to file for a general increase in rates. Under Maine law, a utility must ordinarily notify the MPUC two months in advance of the filing of a request for a general increase in rates and the MPUC then has nine months to investigate that request. However, under certain circumstances, the MPUC may allow a utility to implement a requested increase in rates on a temporary basis pending the conclusion of its investigation of the utility's request for a general increase in rates. On April 1, 1997, the Company filed with the MPUC a Petition for Temporary Rates to increase its rates by an amount that would increase its annual revenues by $10 million effective June 1, 1997. In making its Petition for a Temporary Increase in Rates, the Company cited the continuing impact on the Company's financial condition and cash flow of the ongoing outage at the Maine Yankee nuclear power plant. The Company also cited potential noncompliance with financial covenants contained in its bank credit agreement (including the fixed charge coverage ratio, discussed below) and the need to maintain adequate borrowing capacity for working capital purposes, including mandatory debt repayments. On June 26, 1997, the MPUC issued an order authorizing the Company to change rates temporarily to increase its annual revenues by approximately $5.1 million effective July 1, 1997. In doing so, however, the MPUC also required the Company to accelerate the amortization of the deferred regulatory asset associated with the 1993 buyout of one of its high-priced non-utility generator contracts. As a result, the rate increase did not have any net impact on earnings but increased cash flow. Effective December 12, 1997, the MPUC authorized the Company to revert to the original amortization schedule of that deferred regulatory asset, thereby permitting the temporary rate increase previously authorized to impact the Company's earnings positively from that date. On February 9, 1998, the MPUC issued its final order on the Company's request to increase its rates permanently. Of the approximately $22 million increase in annual revenue ultimately requested by the Company, the MPUC authorized an increase of approximately $13.2 million (which includes the $5.1 million temporary rate increase above) annually. While there are many factors that explain the difference between the MPUC allowance and the Company's requested increase, much of that difference is attributable to the proposed accounting treatment of various costs and the deferral of other costs for future consideration, including the deferral of certain costs associated with the Company's ownership interest in the Maine Yankee nuclear power plant. While those accounting recommendations will affect the timing of receipt of revenues by the Company and will require the Company to finance the payment of the associated costs, they should not significantly affect the Company's earnings during the period that the new rates are effective. The MPUC order is based upon a determination that the Company should be allowed to earn an annual return of 12.75% on common equity. It also includes a "rate plan" under which the Company's rates will be subject to certain reconciliations based upon actual expenditures by the Company and an annual adjustment beginning on May 1, 1999 to account for inflation with an offset for assumed increases in productivity. Other than those adjustments, the Company will not change its rates unless its return on equity exceeds or falls short of the allowed return by more than 350 basis points. If the Company's return on equity falls outside of that bandwidth, 50% of the excess or shortfall will be adjusted for in the Company's rates. 12. DERIVATIVE FINANCIAL INSTRUMENTS INTEREST RATE CAPS - As discussed in Note 4, the Company, in 1995, entered into interest rate cap agreements (the cap or caps) with three financial institutions related to its $60 million of medium term notes to manage its exposure to interest rate fluctuations. Under the caps, the LIBO rate was capped at 7.25% over the five-year term of the medium term notes for the full notional amount of $60 million. At the beginning of each calendar quarter the notional interest rate is set by the financial institutions based on the current LIBO rate. The Company will be reimbursed for incremental interest expense incurred in excess of the 7.25% cap. During 1997, 1996 and 1995 the notional rate was not in excess of 7.25%. Credit risk arises from potential non-performance of counter parties to these agreements. The Company controlled the credit risk related to the cap by spreading the risk amongst three financial institutions and reviewing their financial stability prior to entering into the arrangements. There is no market risk associated with changes in interest rates since the Company paid for the cap when entering into the agreement. The Company will receive payment if the notional interest rate exceeds 7.25%. FUEL SWAPS - The Company purchases, rather than generates itself, a significant portion of the energy required to service its retail business. These purchased energy prices can vary with changes in the price or availability of the underlying fuel sources, and the risk of such price volatility is no longer covered by a rate mechanism like the FA. A significant portion of the Company's exposure to purchased energy price volatility is closely matched to changes in residual oil prices. To manage the oil-related risk of energy price fluctuations, the Company has entered into agreements known as "swaps", essentially in which the Company agreed to pay a fixed price for a specific quantity of a specific commodity (residual oil in this case), for a given time period. This transfers the risk (or the benefit) of commodity price fluctuations to the other party to the agreement for the given period of time. These are strictly financial transactions, and no delivery of the underlying commodity is taken. Settlements occur on a monthly basis and the cash receipts/payments arising from the "swap" transactions offset corresponding increases/decreases in the Company's purchased energy costs. The Company entered into "swap" transactions for 1997 and 1996 amounting to 475,000 and 775,000 barrels of residual oil, respectively. As a result of market movements in 1997 and 1996 the Company received cash payments of approximately $1.2 million and $3.6 million, respectively, from the swap transactions. The cash received from the "swaps" was recorded as a reduction in fuel for generation and purchased power expense in the Consolidated Statements of Income. As a result of these hedging activities, the Company is managing a substantial portion of the risk of energy price fluctuations, which allows the Company to more accurately predict its future purchased energy costs and cash flow requirements. To ensure the Company maintains a hedging, and not a speculative position, the Company has established official policies, procedures and controls for its fuel hedging program. The Company manages the credit risk related to the fuel swaps through credit limits, collateral instruments, monitoring procedures, and diversification of counterparts. Basis risk is the risk that changes in the Company's costs do not move perfectly in tandem with the index/commodity specified in the swap. While basis risk exists with the residual oil swaps, the relationship between the Company's oil related purchased power costs and the index is highly correlated, and the Company continues to develop its purchased power portfolio to ensure that a high degree of correlation exists. Therefore, the Company does not expect any significant exposure to market/basis risk from the oil swaps. As a result of the achievement of this high degree of correlation, the "swaps" are accounted for as hedges, and are not speculative financial instruments. At December 31, 1997, the Company was a party to "swaps" covering 1,180,000 barrels and 816,000 barrels of residual oil for the years 1998 and 1999 respectively. The fair market value of these 1998 and 1999 "swaps" at December 31, 1997 is estimated to be a negative $1.3 million. This value has not been recorded in the Consolidated Financial Statements. The fair market value estimate was determined using available market data. Judgement is required in interpreting market data, and the use of different market assumptions or estimation methodologies may affect the estimated fair market value. 13. SUBSEQUENT EVENTS STORM DAMAGE - Beginning on January 5, 1998, much of the state of Maine experienced weather conditions that included snow, sleet and freezing rain, culminating in a sleet storm on January 7, 8 and 9. Heavy icing conditions caused trees to fall into power lines and also caused power lines to fall from the added weight of the ice. Damage to transmission and distribution equipment was widespread throughout the Company's service territory. One of the Company's major transmission lines serving the eastern part of its service territory was entirely destroyed for a stretch of approximately eight miles. By January 9, an estimated 60,000, or roughly 60%, of the Company's customers were without power at the same time due to damage from the storm. The Governor of Maine declared a state of emergency, and President Clinton declared the state of Maine a federal disaster area. The effort to restore power and repair transmission and distribution equipment was extensive. Lineworkers and tree crews from throughout the eastern United States and Canada participated in the effort, and by January 18, power had been restored to all but a few of the Company's customers. The cost of the restoration is still being determined but it is expected to total as much as $5 million or more. The MPUC has issued an order authorizing the Company to defer incremental storm damage expenses for future recovery through the rates charged to customers. The MPUC is expected to investigate the prudence of the costs incurred and to establish a time frame for the recovery of the prudently incurred costs. The Company believes its storm damage costs were prudently incurred and that it should, therefore, be allowed to recover them in rates. DIVESTITURE OF GENERATION ASSETS - On February 9, 1998, the Company filed its plan for divesting its generation related assets with the MPUC in accordance with the electric utility industry "restructuring" provisions signed into law last year. The Company anticipates that the MPUC will proceed expeditiously with the case, but cannot predict when the plan will be approved. This plan could result in the identification of proposed purchasers by mid-summer 1998. The Company is offering a total of 166 MW of generation assets. 14. NEW ACCOUNTING PRONOUNCEMENTS In June 1997 the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings per Share", which establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings per Share", and makes them comparable to international EPS standards. It also requires dual presentation of basic and diluted EPS on the face of the statement of income for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This Statement is effective for financial statements issued for periods ending after December 15, 1997. The application of this Statement currently does not impact the Company's EPS calculations. If the Company's PERC transaction (see Note 6) is completed, the issuance of warrants will cause this Statement to have an effect on the Company's EPS calculations. In June 1997 the FASB issued Statement No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. Management does not believe the implementation of this Statement will have a significant effect on the Company's financial statements. In June 1997 the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments, which are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. This Statement is effective for financial statements for periods beginning after December 15, 1997. Management does not believe the implementation of this Statement will have a significant effect on the Company's financial statement disclosures. COOPERS & LYBRAND REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Stockholders and Directors of Bangor Hydro-Electric Company: We have audited the accompanying consolidated balance sheets and statements of capitalization of Bangor Hydro-Electric Company and subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, common stock investment, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. ---------------------------- COOPERS & LYBRAND L.L.P. Boston, Massachusetts January 23, 1998 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH AUDIT FIRMS ON - ------ ------------------------------------------------ FINANCIAL DISCLOSURE -------------------- There have been no changes in or disagreements with audit firms on financial disclosure. PART III - -------- ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- See Part I above, and see the information under "Election of Directors" in the Company's definitive proxy statement for the annual meeting of stockholders to be held on May 13, 1998, which information is incorporated herein by reference. ITEM 11 EXECUTIVE COMPENSATION - ------------------------------- See the information under "Executive Compensation" in the Company's definitive proxy statement for the annual meeting of stockholders to be held on May 13, 1998, which information is incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS - -------------------------------------------------------- AND MANAGEMENT -------------- (a) Security Ownership of Certain Beneficial Owners See the Company's definitive proxy statement for the annual meeting of stockholders to be held on May 13, 1998, which information is incorporated herein by reference. (b) Security Ownership of Management See the Company's definitive proxy statement for the annual meeting of stockholders to be held on May 13, 1998, which information is incorporated herein by reference. (c) Changes in Control Not applicable. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ---------------------------------------------- See the information under "Compensation Committee Interlocks and Insider Participation" in the Company's definitive proxy statement for the annual meeting of stockholders to be held on May 13, 1998, which information is incorporated herein by reference. PART IV - ------- ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS - ------- ---------------------------------------------------- ON FORM 8-K ----------- (a) Consolidated Financial Statements of the Company covered by the Report of the of Independent Auditors (See Item 8): Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Common Stock Investment for the Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Capitalization - December 31, 1997 and 1996 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Report of Independent Accountants (b) Schedules Report of Independent Accountants Schedule VIII - Reserves for Doubtful Accounts and Insurance All other schedules are omitted as the required information is inapplicable or the information is presented in the Company's consolidated financial statements or related notes. (c) Exhibits See Exhibit Index, page (d) Reports on Form 8-K The Company has no current reports on Form 8-K for the Fourth Quarter of 1997. Two Current Reports on Form 8-K, dated January 23, 1998 and February 13, 1998, were filed in the first quarter of 1998 regarding significant storm damage from a recent ice storm, the divestitue of generation assets, and the results of the Company's request for an increase in retail rates. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Bangor Hydro-Electric Company /s/ Robert S. Briggs --------------------------- By: Robert S. Briggs President and Chairman of the Board Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Robert S. Briggs /s/ G. Clifton Eames - ------------------------ ------------------------ Robert S. Briggs G. Clifton Eames President and Director Chairman of the Board /s/ Marion M. Kane - ------------------------ ------------------------ William C. Bullock, Jr. Marion M. Kane Director Director /s/ Norman A. Ledwin - ------------------------ ------------------------ Jane J. Bush Norman A. Ledwin Director Director /s/ David M. Carlisle /s/ Carroll R. Lee - ---------------------- ------------------------ David M. Carlisle Carroll R. Lee Director Director, Senior Vice President and Chief Operating Officer /s/ Frederick S. Samp - ---------------------- ----------------------- Alton E. Cianchette Frederick S. Samp Director Vice President - Finance & Law (Chief Financial Officer) /s/ David R. Black ----------------- David R. Black Controller (Chief Accounting Officer) Each of the above signatures is affixed as of March 18, 1998. COOPERS & LYBRAND REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors of Bangor Hydro-Electric Company: Our report on the consolidated financial statements of Bangor Hydro-Electric Company is included in Item 8 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index in Item 14(b) of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. ------------------------------ COOPERS & LYBRAND L.L.P. Boston, Massachusetts January 23, 1998 SCHEDULE VIII RESERVES FOR DOUBTFUL ACCOUNTS AND INSURANCE --------------------------------------------
Additions ----------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Of Period Expenses Accounts Deductions of Period ------- ------- ------- ------- ------- 1997 Reserve for Doubtful Accounts $ 1,450,000 $ 1,401,313 $ - $ 1,401,313 (A) $ 1,450,000 ----------- ----------- ---------- ----------- ----------- Reserve for Retirees' Life Insurance $ - $ - $ - $ - $ - ----------- ----------- ---------- ----------- ----------- 1996 Reserve for Doubtful Accounts $ 1,450,000 $ 1,826,884 $ - $ 1,826,884 (A) $ 1,450,000 ----------- ----------- ---------- ----------- ----------- Reserve for Retirees' Life Insurance $ 852,000 $ - $ - $ 852,000 $ - ----------- ----------- ---------- ----------- ----------- 1995 Reserve for Doubtful Accounts $ 730,000 $ 2,637,301 $ - $ 1,917,301 (A) $ 1,450,000 ----------- ----------- ---------- ----------- ----------- Reserve for Retirees' Life Insurance $ 848,000 $ 32,000 $ - $ 28,000 $ 852,000 ----------- ----------- ---------- ----------- ----------- NOTE: (A) Accounts written off, less recoveries.
EXHIBIT INDEX EXHIBITS FILED HEREWITH ----------------------- EXHIBIT NO. DESCRIPTION OF EXHIBIT ---------- ---------------------- 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS --------------------------------------------------- 4(a) Second Amendment dated as of June 6, 1997 to the Credit Agreement Dated as of June 30, 1995 among Bangor Hydro- Electric Company and the Banks named therein, Chase Manhattan Bank (formerly known as Chemical Bank) as Administrative Agent and Fleet Bank of Maine and First National Bank of Boston as Co-Agents. 4(b) Security Agreement dated as of June 6, 1997 between Bangor Hydro-Electric Company and Chase Manhattan Bank as Administrative Agent under the Credit Agreement dated as of June 30, 1995, as amended from time to time. 4(c) Third Amendment dated as of November 20, 1997 to the Credit Agreement Dated as of June 30, 1995 among Bangor Hydro- Electric Company and the Banks named therein, Chase Manhattan Bank (formerly known as Chemical Bank) as Administrative Agent and Fleet Bank of Maine and First National Bank of Boston as Co-Agents. 4(d) Amended and Restated Security Agreement Dated as of November 20, 1997 between Bangor Hydro-Electric Company and Chase Manhattan Bank as Administrative Agent under the Credit Agreement dated as of June 30, 1995, as amended from time to time. EXHIBITS INCORPORATED HEREIN BY REFERENCE ----------------------------------------- EXHIBIT NO. DESCRIPTION OF EXHIBIT INCORPORATED BY REFERENCE TO: ----------- --------------------- ---------------------------- 3. ARTICLES OF INCORPORATION & BY-LAWS ----------------------------------- 3.1 Company's Certificate Form S-2, Reg. No. 33-39181, of Organization, together Exhibit 3.1 with all amendments thereto 3.2 Articles of Amendment Form S-2, Reg. No. 33-63500, increasing Company's Exhibit 4.3 authorized capital stock 3.3 Articles of Amendment Form 10-K, 1995, Exhibit 3(a) changing Corporate Clerk 3.4 By-Laws of the Company Form S-2, Reg. No. 33-63500, Exhibit 4.4 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS --------------------------------------------------- 4.1 Mortgage and Deed of Form S-1, Reg. No. 2-54452, Trust dated as of Exhibit 4(b)(1) July 1, 1936, re First Mortgage Bonds 4.2 Supplemental Indenture Form S-1, Reg. No. 2-54452, dated as of December 1, Exhibit 4(b)(2) 1945, amending the Mortgage 4.3 Supplemental Indenture Form S-1, Reg. No. 2-54452 dated as of September 1, Exhibit 4(b)(4) 1969, re 8 1/4% Series Bonds, together with form of purchase agreement. (Supplemental indentures and purchase agreements with respect to prior issues are substantially identical in substantive content to the 8 1/4% Series documents). 4.4 Supplemental Indenture Form 10-K, 1975, Exhibit B dated as of November 1, 1975, re 10 1/2% Series Bonds, together with form of purchase agreement 4.5 Supplemental Indenture Form 8-K, 6/28/76, Exhibit A dated as of June 1, 1976, re 9 1/4% Series Bonds 4.6 Form of Purchase Form 10-K, 1976, Exhibit C Agreement re 9 1/4% Series Bonds 4.7 Supplemental Indenture Form S-7, Reg. No. 2-61589, dated as of January 1, Exhibit 5(a)(7) 1978, re 8.6% Series Bonds, together with form of purchase agreement 4.8 Supplemental Indenture Form 10-Q, 3rd Quarter 1979, dated as of August 1, Exhibit A 1979, re 10.25% Series Bonds, together with form of purchase agreement Common Stock Purchase Plan 4.9 Supplemental Indenture Form 10-Q, 1st Quarter, 1981, dated as of April 1, Exhibit A 1981 re 15.25% Series Bonds, together with form of purchase agreement 4.10 Supplemental Indenture Form 10-Q, 2nd Quarter 1981, dated as of July 30, Exhibit (4) 1981 re 16.50% Series Bonds, together with form of purchase agreement 4.11 Bond Purchase Agreement, Form 10-K, 1983, Exhibit 4(a) including form of supplemental indenture, with respect to First Mortgage Bonds, 12.50% Series due 1998 4.12 Loan Agreement, Indenture Form 10-K, 1983, Exhibit 4(b) of Trust and Letter of Credit Reimbursement Agreement with respect to Variable Rate Demand Pollution Control Revenue Bonds (Bangor Hydro- Electric Company Project) Series 1983 4.13 Bond Purchase Agreement, Form 10-K, 1984, Exhibit 4(a) including form of supplemental indenture, with respect to First Mortgage Bonds, 17.35% Series due 1994 4.14 Bond Purchase Agreement Form 10-Q, First Quarter, dated as of March 1, 1989 1989, Exhibit 4.1 including form of supplemental indenture, with respect to First Mortgage Bonds, 10.25% Series due 2019 4.15 Preferred Stock Purchase Form 10-K, 1990, Exhibit 4(a) Agreement, 8.76% Series dated as of December 19, 1989 4.16 Bond Purchase Agreement Form 10-K, 1990, Exhibit 4(b) dated as of June 15, 1990 including form of supplemental indenture, with respect to First Mortgage Bonds, 10.25% Series due 2020 4.17 Loan Agreement by and Form 10-Q, 3rd Quarter 1995, Finance Authority of Exhibit 4.1 Maine and Bangor Hydro- Electric Company 4.18 Credit Agreement Dated Form 10-Q, 3rd Quarter 1995, as of June 30, 1995 Exhibit 4.2 among Bangor Hydro- Electric Company, the Banks named therein, Chemical Bank as Administrative Agent and Fleet Bank of Maine and First National Bank of Boston, as Co-Agents. 4.19 Purchase Contract dated Form 10-Q, 3rd Quarter 1995, as of June 28, 1995 among Exhibit 4.3 the Finance Authority of Maine and Bangor Hydro- Electric Company and Prudential Securities Incorporated 4.20 General and Refunding Form 10-Q, 3rd Quarter 1995, Mortgage Indenture and Exhibit 4.4 Deed of Trust - Bangor Hydro-Electric Company to Chemical Bank, As Trustee, Dated as of June 1, 1995 4.21 Supplemental Indenture Form 10-Q, 3rd Quarter 1995, Dated as of June 15, 1995 Exhibit 4.5 to General and Refunding Mortgage Indenture and Deed of Trust dated as of June 1, 1995 (Bangor Hydro- Electric Company to Chemical Bank). 4.22 Supplemental Indenture as Form 10-Q, 3rd Quarter 1995, of June 29, 1995 to Mortgage and Deed of Trust dated as of July 1, 1936 (Bangor Hydro-Electric Company to Citibank, N.A. at Trustee). 4.23 Supplemental Indenture Form 10-K, 1995, Exhibit 4(a) Dated as of October 1, 1995 (Identified as Exhibit 10(a)) to General and Refunding Mortgage and Deed of Trust dated as of June 1, 1995 (Bangor Hydro-Electric Company to Chemical Bank). 10. MATERIAL CONTRACTS - --- ------------------ 10.1 New England Power Pool Form S-7, Reg. No. 2-69904, Agreement dated as of Exhibit 10(a)(3) September 1, 1971, with all amendments through December 1980 10.2 Copy of Twelfth Amendment Form S-7, Reg. No. 2-69904, dated as of June 16, 1980 Exhibit 10(a)(4) to the Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units 10.3 Participation Agreement Form S-1, Reg. No. 2-54452, dated June 20, 1969 Exhibit 13(a)(2)(a)-1 between Maine Electric Power Company, Inc. ("MEPCO") and the Company 10.4 Agreement dated June Form S-1, Reg. No. 2-54452, 29, 1969 among Maine Exhibit 13(a)(2)(a)-2 participants in MEPCO Participation Agreement 10.5 Power Contract dated Form S-1, Reg. No. 2-54452, May 20, 1968 between Exhibit 13(a)(3)(a) Maine Yankee Atomic Power Company ("Maine Yankee") and the Company and other utilities 10.6 Stockholder Agreement Form S-1, Reg. No. 2-54452, dated May 20, 1968 Exhibit 13(a)(3)(b) among stockholders of Maine Yankee, (including the Company). 10.7 Capital Funds Agreement Form S-1, Reg. No. 2-54452, dated May 29,1968 Exhibit 13(a)(3)(c) between Maine Yankee and sponsors, including the Company 10.8 Maine Yankee Transmission Form S-1, Reg. No. 2-54452, Agreement dated April 1, Exhibit 13(a)(3)(d) 1971 among the Company and other utilities 10.9 Modification of Maine Form S-1, Reg. No. 2-54452, Yankee Transmission Exhibit 13(a)(3)(f) Agreement of December 1, 1972 10.10 Agreement for Joint Form S-1, Reg. No. 2-54452, Ownership, Construction Exhibit 13(a)(4)(a) and Operation dated November 1, 1974 of Wyman Unit No. 4 among Central Maine Power Company, the Company and other utilities 10.11 Amendment No. 1 dated Form S-1, Reg. No. 2-54452, June 30, 1975 to Wyman 4 Exhibit 13(a)(4)(b) Agreement of November 1, 1974 10.12 Transmission Agreement Form S-1, Reg. No. 2-54452, dated November 1, 1974 Exhibit 13(a)(4)(c) re Wyman Unit No. 4 among Central Maine Power Company and other utilities 10.13 Form of Federal Power Form S-1, Reg. No. 2-54452, Commission license Exhibit 13(b)(4) for hydro-electric dam facility 10.14 Employee Stock Ownership Form S-7, Reg. No. 2-59747, Plan, including related Exhibit 5(a)(2) trust agreements, dated June 1, 1977 10.15 Sample of binder relating Form S-7, Reg. No. 2-59747, to contingent liability Exhibit 5(a)(4) for nuclear incidents 10.16 Agreements relating to Form S-7, Reg. No. 2-61589, Seabrook 1 and 2 Exhibit 5(a)(3) including offering letter dated September 7, 1977 and the Company's response thereto dated October 6, 1977, the Agreement to Transfer Ownership Share between the Company and The Connecticut Light and Power Co., dated November 1, 1977 and a letter amendment thereto dated January 31, 1978, and the Joint Ownership Agreement with Public Service Company of New Hampshire and other utilities as amended through January 31, 1975 10.17 Amendment No. 2 dated Form 10-K, 1976, Exhibit H(2) August 16, 1976 to Joint Ownership Agreement dated November 1, 1974 with Central Maine Power Company and others re Wyman Unit No. 4 10.18 Copies of Tenth and Form 10-K, 1979, Exhibit D Eleventh Amendments dated October 11, 1979 and December 15, 1979, respectively, to the Agreement for Joint Ownership Construction and Operation of New Hampshire Nuclear Units 10.19 Copies of Forms of Form 10-Q, 2nd Qtr. 1979, documents related to Exhibit A the Company's proposed purchase of an additional 1.80142% interest in the Seabrook Nuclear Units, consisting of PSNH's offer to sell ownership shares dated March 8, 1979, the Company's letter response thereto dated March 19, 1979, and the Sixth, Seventh, Eighth and Ninth Amendment to the Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units, dated April 18, 1979, April 18, 1979, April 25, 1979, and June 8, 1979, respectively 10.20 Copy of Thirteenth Form 10-K, 1981, Exhibit Amendment dated as of 10(a) December 31, 1980 to the Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units 10.21 Forms of contracts Form 10-Q, 2nd Qtr. 1982, concerning the Company's Exhibit 10 participation with other New England utilities in the proposed Quebec interconnection 10.22 Fourteenth Amendment Form 10-K, 1983, Exhibit 10.1 dated as of June 1, 1982 to the Agreement for Joint Ownership, Construction and Operation of New Hampshire Nuclear Units 10.23 Third Amendment dated Form 10-K, 1983, Exhibit 10.2 as of November 1, 1982 to Preliminary Quebec Interconnection Support Agreement 10.24 Second Amendment dated Form 10-K, 1983, Exhibit 10.3 as of November 1, 1982 to Agreement With Respect to Use of Quebec Interconnection 10.25 Amendment No. 2 dated Form 10-K, 1983, Exhibit 10.4 as of November 1, 1982, to Phase 1 Terminal Facility Support Agreement (Quebec Interconnection) 10.26 Amendment No. 2 dated Form 10-K, 1983, Exhibit 10.5 as of November 1, 1982 to Phase 1 Vermont Transmission Line Support Agreement (Quebec Interconnection) 10.27 Fourth Amendment Form 10-Q, 1st Quarter 1983, dated as of March 1, Exhibit 10.1 1983, to Preliminary Quebec Interconnection Support Agreement 10.28 Fourteenth Amendment to Form 10-Q, 2nd Quarter 1983, Agreement for Joint Exhibit 10.2 Ownership, Construction and Operation of New Hampshire Nuclear Units 10.29 Fifth Amendment to Form 10-Q, 2nd Quarter 1983, Preliminary Quebec Exhibit 10.2 Interconnection Support Agreement 10.30 Amendment dated as of Form 10-Q, 2nd Quarter 1983, September 1, 1981 Exhibit 10.3 to New England Power Pool Agreement 10.31 Amendment dated as of Form 10-Q, 2nd Quarter 1983, June 1, 1982 to New Exhibit 10.4 England Power Pool Agreement 10.32 Amendment dated as of Form 10-Q, 2nd Quarter 1983, June 15, 1983 to New Exhibit 10.5 England Power Pool Agreement 10.33 Amendment dated as of Form 10-Q, 3rd Quarter 1983, October 1, 1983 to Exhibit 10.1 New England Power Pool Agreement 10.34 Amendment No. 1 to the Form 10-K, 1983, Exhibit 10(b) Maine Yankee Power Contract 10.35 Amendment No. 2 to the Form 10-K, 1983, Exhibit 10(c) Maine Yankee Power Contract 10.36 Additional Power Con- Form 10-K, 1983, Exhibit 10(d) tract between Maine Yankee and its sponsors, including the Company 10.37 Interim Protection Agree- Form 10-Q, 1st Quarter 1984, ment dated as of April Exhibit 10.1 27, 1984 relating to the Seabrook project 10.38 Fifteenth Amendment Form 10-Q, 1st Quarter 1984, to the Seabrook Joint Exhibit 10.2 Ownership Agreement 10.39 Sixteenth Amendment Form 10-Q, 2nd Quarter 1984, to the Seabrook Joint Exhibit 10.1 Ownership Agreement 10.40 Agreement for Seabrook Form 10-Q, 2nd Quarter 1984, Project Disbursing Agent Exhibit 10.2 10.41 Seventeenth Amendment to Form 10-K, 1984, Exhibit 10(a) Seabrook Joint Ownership Agreement and corresponding First Amendment to Seabrook Project Disbursing Agent Agreement (neither of which were executed by the Company) 10.42 Preliminary Support Form 10-K, 1984, Exhibit 10(b) Agreement - Phase 2 of Hydro-Quebec Inter- connection 10.43 Letter of Intent between Form 10-Q, 2nd Quarter 1985, the Company and Eastern Exhibit 10.1 Utilities Associates re: possible sale of Seabrook interest 10.44 First, Second and Third Form 10-K, 1985, Exhibit 10(a) Amendments to agreement for Seabrook Project Disbursing Agent (none of which were executed by the Company) 10.45 Amendment dated September 1, Form 10-K, 1985, Exhibit 10(b) 1985 to Agreement with respect to Use of Quebec Interconnection 10.46 Energy Contract dated Form 10-K, 1985, Exhibit 10(c) March 1983 between NEPOOL and Hydro-Quebec re: Hydro-Quebec Phase I interconnection project 10.47 Energy Banking Agreement Form 10-K, 1985, Exhibit 10(d) dated March 1983 between NEPOOL and Hydro-Quebec re Hydro-Quebec Phase I interconnection project 10.48 Interconnection Agreement Form 10-K, 1985, Exhibit 10(e) dated March 1983 between NEPOOL and Hydro-Quebec re: Hydro-Quebec Phase I interconnection project 10.49 Amendment dated September 1 Form 10-K, 1985, Exhibit 10(f) 1985 to NEPOOL Agreement re: Hydro-Quebec Phase II interconnection project 10.50 Firm Energy Contract dated Form 10-K, 1985, Exhibit 10(g) October 14, 1985 between New England utilities and Hydro-Quebec re: Hydro- Quebec Phase II interconnection project 10.51 Boston Edison AC Facilities Form 10-K, 1985, Exhibit 10(h) Support Agreement dated June 1, 1985 re: Hydro-Quebec Phase II interconnection project 10.52 Phase II New England Form 10-K, 1985, Exhibit 10(i) Power AC Facilities Support Agreement dated June 1, 1985 re: Hydro- Quebec Phase II interconnection project 10.53 Phase II Massachusetts Form 10-K, 1985, Exhibit 10(j) Transmission Facilities Support Agreement dated June 1, 1985 re: Hydro- Quebec Phase II interconnection project 10.54 Phase II New Hampshire Form 10-K, 1985, Exhibit 10(k) Facilities Support Agreement dated June 1, 1985 re: Hydro-Quebec Phase II interconnection project 10.55 First Amendment dated Form 10-K, 1985, Exhibit 10(l) March 1, 1985 and Second Amendment dated January 1, 1986 to Preliminary Quebec Interconnection Support Agreement - Phase II 10.56 Amendment No. 3 dated Form 10-K, 1985, Exhibit 10(m) October 1, 1984 to Maine Yankee Power Contract 10.57 Amendment No. 1 dated Form 10-K, 1985, Exhibit 10(n) August 1, 1985 to Maine Yankee Capital Funds Agreement 10.58 Amendments dated August 1, Form 10-K, 1985, Exhibit 10(o) 1985, August 15, 1985, and January 1, 1986 to NEPOOL Agreement 10.59 Fourth Amendment to Form 10-Q, 1st Quarter 1986, Seabrook Project Exhibit 10.1 Disbursing Agent Agreement 10.60 Third Amendment to Vermont Form 10-Q, 1st Quarter 1986, Transmission Line Support Exhibit 10.2 Agreement 10.61 First Amendment to Hydro- Form 10-Q, 1st Quarter 1986, Quebec Phase I Intercon- Exhibit 10.3 nection Agreement 10.62 First Amendment to Hydro- Form 10-Q, 2nd Quarter 1986, Quebec Phase II Exhibit 10.1 Massachusetts Trans- mission Facilities Support Agreement 10.63 First Amendment to Hydro- Form 10-Q, 2nd Quarter 1986, Quebec Phase II New Exhibit 10.2 Hampshire Transmission Facilities Support Agreement 10.64 First Amendment to Hydro- Form 10-Q, 2nd Quarter 1986, Quebec Phase II New England Exhibit 10.3 Power AC Facilities Support Agreement 10.65 First Amendment to Form 10-Q, 2nd Quarter 1986, Hydro-Quebec Phase II Exhibit 10.4 Boston Edison Company AC Facilities Support Agreement 10.66 Eighteenth Amendment to Form 10-Q, 2nd Quarter 1986, Seabrook Joint Ownership Exhibit 10.5 Agreement 10.67 Amendment Number 3 to Form 10-Q, 3rd Quarter 1986, Hydro-Quebec Phase l Exhibit 10.1 Terminal Facility Support Agreement 10.68 Amendment Number 3 to Form 10-Q, 3rd Quarter 1986, Hydro-Quebec Phase I Exhibit 10.2 Vermont Transmission Line Support Agreement 10.69 Power Sale Agreement for Form 10-Q, 3rd Quarter 1986, sale of approximately Exhibit 10.3 31 MW of system power by Bangor Hydro-Electric Company to UNITIL Power Corp. 10.70 Purchase Agreement with Form 10-Q, 3rd Quarter 1986, respect to Wyman No. 4 Exhibit 10.4 between Bangor Hydro- Electric Company and Fitchburg Gas and Electric Light Company 10.71 Nineteenth Amendment to Form 10-K, 1986, Exhibit 10(a) Seabrook Joint Ownership Agreement 10.72 Twentieth Amendment to Form 10-K, 1986, Exhibit 10(b) Seabrook Joint Ownership Agreement 10.73 Agreement of Purchase and Form 10-K, 1986, Exhibit 10(c) Sale dated February 19, 1986, regarding the sale of the Company's Seabrook interest to EUA Power 10.74 Bill of Sale and Assumption Form 10-K, 1986, Exhibit 10(d) of Obligations dated November 25, 1986 regarding the sale of the Company's Seabrook interest to EUA Power 10.75 Deed dated November 21, Form 10-K, 1986, Exhibit 10(e) 1986 regarding the sale of the Company's Seabrook interest to EUA Power 10.76 Agreement to Share Certain Form 10-K, 1986, Exhibit 10(f) Costs re Tewksbury-Seabrook Transmission Line dated May 8, 1986 10.77 Joint Venture Agreement Form 10-K, 1986, Exhibit 10(g) effective as of June 9, 1986, between the Company and Pacific Lighting Energy Systems (as amended by a First Amendment thereto dated June 16, 1986) re Bangor-Pacific Hydro Associates (formerly West Enfield Associates) 10.78 Capital Support Agreement Form 10-K, 1986, Exhibit 10(h) dated as of January 29, 1987, among the Company and lenders to Bangor- Pacific Hydro Associates 10.79 Power Purchase Agreement Form 10-K, 1986, Exhibit 10(i) dated June 9, 1986 and Amendment No. 1 thereto dated January 14, 1987, between the Company and Bangor-Pacific Hydro Associates (formerly West Enfield Associates) 10.80 Deed and Bill of Sale re Form 10-K, 1986, Exhibit 10(j) transfer of West Enfield site from the Company to Bangor-Pacific Hydro Associates 10.81 Assignment by the Company Form 10-K, 1986, Exhibit 10(k) of Joint Venture Interest to Penobscot Hydro Co., Inc. 10.82 Power Sale Agreement dated Form 10-K, 1986, Exhibit 10(l) August 1, 1986, and First Amendment thereto, between the Company and Unitil Power Corp. re Wyman No. 4 10.83 Third Amendment to Pre- Form 10-K, 1987, Exhibit 10(a) liminary Quebec Intercon- nection Support Agreement - Phase II 10.84 Fourth Amendment to Pre- Form 10-K, 1987, Exhibit 10(b) liminary Quebec Intercon- nection Support Agreement - Phase II 10.85 Fifth Amendment to Pre- Form 10-K, 1987, Exhibit 10(c) liminary Quebec Intercon- nection Support Agreement - Phase II 10.86 Sixth Amendment to Pre- Form 10-K, 1987, Exhibit 10(d) liminary Quebec Intercon- nection Support Agreement - Phase II 10.87 Seventh Amendment to Pre- Form 10-K, 1987, Exhibit 10(e) liminary Quebec Intercon- nection Support Agreement - Phase II 10.88 Amendment to New England Form 10-K, 1987, Exhibit 10(f) Power Pool Agreement dated March 1, 1988 10.89 Second Amendment to Credit Form 10-K, 1987, Exhibit 10(h) Agreement, dated as of July 22, 1987, among the Company and the Banks named therein 10.90 Dividend Reinvestment and Form 10-K, 1987, Exhibit 10(i) Common Stock Purchase Plan Effective as of December 1, 1987 10.91 Deed dated December 2, Form 10-K, 1988, Exhibit 10(a) 1988 regarding the sale of certain Seabrook trans- mission facilities to EUA Power 10.92 Ninth Amendment to Form 10-K, 1988, Exhibit 10(b) Preliminary Quebec Interconnection Support Agreement - Phase II 10.93 Tenth Amendment to Form 10-K, 1988, Exhibit 10(c) Preliminary Quebec Interconnection Support Agreement - Phase II 10.94 Second Amendment to Form 10-K, 1988, Exhibit 10(d) Massachusetts Trans- mission Facilities Support Agreement 10.95 Third Amendment to Form 10-K, 1988, Exhibit 10(e) Massachusetts Trans- mission Facilities Support Agreement 10.96 Fourth Amendment to Form 10-K, 1988, Exhibit 10(f) Massachusetts Trans- mission Facilities Support Agreement 10.97 Fifth Amendment to Form 10-K, 1988, Exhibit 10(g) Massachusetts Trans- mission Facilities Support Agreement 10.98 Sixth Amendment to Form 10-K, 1988, Exhibit 10(h) Massachusetts Trans- mission Facilities Support Agreement 10.99 Second Amendment to Form 10-K, 1988, Exhibit 10(i) New Hampshire Trans- mission Facilities Support Agreement 10.100 Third Amendment to Form 10-K, 1988, Exhibit 10(j) New Hampshire Trans- mission Facilities Support Agreement 10.101 Fourth Amendment to Form 10-K, 1988, Exhibit 10(k) New Hampshire Trans- mission Facilities Support Agreement 10.102 Fifth Amendment to Form 10-K, 1988, Exhibit 10(l) New Hampshire Trans- mission Facilities Support Agreement 10.103 Sixth Amendment to Form 10-K, 1988, Exhibit 10(m) New Hampshire Trans- mission Facilities Support Agreement 10.104 Second Amendment to Form 10-K, 1988, Exhibit 10(n) Phase II AC New England Power Facilities Sup- port Agreement 10.105 Third Amendment to Form 10-K, 1988, Exhibit 10(o) Phase II AC New England Power Facilities Sup- port Agreement 10.106 Fourth Amendment to Form 10-K, 1988, Exhibit 10(p) Phase II AC New England Power Facilities Sup- port Agreement 10.107 Fifth Amendment to Form 10-K, 1988, Exhibit 10(q) Phase II AC New England Power Facilities Sup- port Agreement 10.108 Second Amendment to Form 10-K, 1988, Exhibit 10(r) Phase II Boston Edison AC Facilities Support Agreement 10.109 Third Amendment to Form 10-K, 1988, Exhibit 10(s) Phase II Boston Edison AC Facilities Support Agreement 110.110 Fourth Amendment to Form 10-K, 1988, Exhibit 10(t) Phase II Boston Edison AC Facilities Support Agreement 10.111 Fifth Amendment to Form 10-K, 1988, Exhibit 10(u) Phase II Boston Edison AC Facilities Support Agreement 10.112 Letter of Assurances, Form 10-K, 1988, Exhibit 10(v) Consents and Agreements With Respect to Credit Facility Financing for Phase II Hydro-Quebec Financing 10.113 Agreement With Hanlin Form 10-K, 1988, Exhibit 10(w) Group, Inc., also known as "LCP", for the sale of electricity 10.114 401 (k) Plan for Non- Form 10-K, 1988, Exhibit 10(x) Union Employees 10.115 Credit Agreement dated Form 10-Q, First Quarter, 1989 as of May 2, 1989 among Exhibit 4.2 the Company, the Banks named therein, and Manufacturers Hanover Trust Company, as Agent 10.116 Agreement for the Sale Form S-2, Reg. No. 33-39181, and Purchase of Electricity Exhibit 10.79 dated as of August 13, 1984 between Ultrapower Incorpor- ated-Jonesboro and the Company 10.117 Agreement for the Sale Form S-2, Reg. No. 33-39181, and Purchase of Electricity Exhibit 10.80 dated as of August 13, 1984 between Ultrapower Incorpor- ated-West Enfield and the Company 10.118 Amendment Agreement Form S-2, Reg. No. 33-39181, dated November 3, 1988 Exhibit 10.81 between the Company and Babcock-Ultrapower West Enfield and Babcock- Ultrapower-Jonesboro 10.119 Agreement for the Form S-2, Reg. No. 33-39181, Purchase and Sale of Exhibit 10.82 Electricity dated as of June 21, 1984 between Penobscot Energy Recovery Company and the Company 10.120 Amendment No. 1 as of Form S-2, Reg. No. 33-39181, March 24, 1986 to the Exhibit 10.83 Agreement for the Purchase and Sale of Electricity dated as of June 21, 1984 between Penobscot Energy Recovery Company and the Company 10.121 Power Purchase Agree- Form S-2, Reg. No. 33-39181, ment dated October 24, 1984 Exhibit 10.84 between Alternative Energy Decisions, Inc. and the Company 10.122 Partnership Agreement Form S-2, Reg. No. 33-39181, dated as of July 1, 1990 Exhibit 10.85 between NORVARCO and Bangor Var Co., Inc. 10.123 Form of Agreement with Form 10-K, 1992, Exhibit 10(a) certain Executive Officers providing supplemental death and retirement benefits 10.124 Form of Agreement with Form 10-K, 1992, Exhibit 10(b) certain Executive Officers providing benefits upon a change of control 10.125 Purchase Agreement between Form 10-Q, 3rd Quarter 1995, Babcock-Ultrapower Exhibit 10.1 Jonseboro and Bangor Hydro- Electric Company 10.126 Purchase Agreement between Form 10-Q, 3rd Quarter 1995, Babcock-Ultrapower West Exhibit 10.2 Enfield and Bangor Hydro- Electric Company EX-27 2 FINANCIAL DATA SCHEDULE ACCOMPANYING FORM 10-K
UT This schedule contains summary financial information extracted from Bangor Hydro's Form 10-K for 12/31/97 and is qualified in its entirety by reference to such 10-K. 0000009548 BANGOR HYDRO-ELECTRIC COMPANY 1,000 12-MOS DEC-31-1997 DEC-31-1997 PER-BOOK 244,414 44,339 33,443 278,387 0 600,583 36,817 56,970 12,771 106,558 9,137 4,734 221,643 0 34,000 0 50,578 1,594 0 0 172,339 600,583 187,324 (1,956) 165,491 163,535 23,789 1,292 25,081 25,467 (386) 1,376 (1,762) 0 22,638 36,373 (.24) (.24)
EX-4 3 BANGOR HYDRO-ELECTRIC COMPANY FORM 10-K EXHIBIT 4(a) ------------- EXECUTION COPY SECOND AMENDMENT, dated as June 6, 1997 (this "AMENDMENT"), to the CREDIT AGREEMENT, dated as of June 30, 1995, as amended by the First Amendment thereto dated as of October 2, 1995 (as further amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among Bangor Hydro-Electric Company, a Maine corporation (the "COMPANY"), the several banks from time to time parties to the Credit Agreement (individually, a "BANK" and collectively, the "BANKS"), The Chase Manhattan Bank (formerly known as Chemical Bank), as administrative agent for the Banks, and Fleet Bank of Maine and The First National Bank of Boston, as co-agents (in such capacity, the "CO-AGENTS"). Terms defined in the Credit Agreement shall be used in this Amendment with their defined meanings unless otherwise defined herein. W I T N E S S E T H : ------------------- WHEREAS, pursuant to Waivers with respect to the Credit Agreement, dated as of March 31, 1997 and May 15, 1997, the Banks parties thereto temporarily waived compliance by the Company with Section 6.8 of the Credit Agreement for the period of four consecutive fiscal quarters ended March 31, 1997; and WHEREAS, the Company has requested the Banks to permanently waive compliance by the Company with Section 6.8 of the Credit Agreement for the respective periods of four consecutive fiscal quarters ended March 31, 1997 and June 30, 1997 and to make certain other changes to the Credit Agreement on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: I. AMENDMENT. 1. SECTION 1.1. (a) The definition of "Loan Documents" contained in Section 1.1 of the Credit Agreement is hereby amended by adding the words "and the Security Agreement" to the end thereof. (b) The definition of "Substantial Part" contained in Section 1.1 of the Credit Agreement is hereby amended and restated in its entirety as follows: "SUBSTANTIAL PART": with respect to any Person, refers to assets sold, leased or otherwise transferred at any time on or after January 1, 1997 pursuant to any one or more transactions (whether or not related) which, in the aggregate (including any assets sold, leased or otherwise transferred by any Subsidiary of such Person during such period), have a fair market value, or yield gross proceeds, in excess of $5,000,000 in any calendar year, excluding any such transaction in the ordinary course of business pursuant to which equipment is sold and replaced with equipment having an equivalent or higher value within 30 days after such sale. It is understood that the UNITIL Transfer shall be disregarded for the purposes of this definition, but that contract rights and receivables shall otherwise constitute "assets" for the purposes of this definition and Section 6.6." (c) The following new definitions are hereby added to Section 1.1 of the Credit Agreement in the appropriate alphabetical order: "NET CASH PROCEEDS": in connection with the UNITIL Transfer, the proceeds thereof in the form of cash, net of reasonable and documented attorneys' fees and other customary fees and expenses actually incurred in connection therewith. "PERC CONTRACT": the power purchase agreement dated as of June 21, 1984, as amended, between the Company and Penobscot Energy Recovery Company. "PERC LETTER OF INTENT": the draft letter of intent dated January 30, 1997 between the Company and Penobscot Energy Recovery Company. "SECURITY AGREEMENT": the Security Agreement executed and delivered by the Company in connection with the Second Amendment to this Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "UNITIL CONTRACT": the Power Sale Agreement dated as of March 26, 1986 between the Company and UNITIL Power Corp. "UNITIL TRANSFER": as defined in Section 6.12. 2. SECTION 2.11. (a) Paragraph (a) of Section 2.11 of the Credit Agreement is hereby amended and restated in its entirety as follows: "(a) The Term Loans shall be repaid by the Company in installments on the dates listed below and in the aggregate amount for each such installment listed opposite such dates below: INSTALLMENT DATE AGGREGATE INSTALLMENT AMOUNT ---------------- ---------------------------- June 30, 1996 $12,000,000 June 9, 1997 $12,000,000 September 30, 1997 $1,000,000 December 31, 1997 $1,000,000 March 31, 1998 $4,000,000 June 30, 1998 $6,000,000 September 30, 1998 $1,000,000 December 31, 1998 $1,000,000 March 31, 1999 $4,000,000 June 30, 1999 $6,000,000 September 30, 1999 $1,000,000 December 31, 1999 $1,000,000 March 31, 2000 $4,000,000 June 30, 2000 $6,000,000." (b) Paragraph (b) of Section 2.11 of the Credit Agreement is hereby amended by adding the following sentence immediately after the table set forth therein: "In addition, in the event that the UNITIL Transfer shall be consummated, the Revolving Credit Commitments shall be automatically and permanently reduced (a) on the date thereof in the aggregate amount of $25,000,000, (b) on the first anniversary thereof in the aggregate amount of 25% of the excess, if any, of the Net Cash Proceeds of the UNITIL Transfer received by the Company OVER $40,000,000 and (c) on the second anniversary thereof in the aggregate amount of 25% of the excess, if any, of the Net Cash Proceeds of the UNITIL Transfer received by the Company OVER $40,000,000. Each reduction in the Revolving Credit Commitments pursuant to the preceding sentence shall be accompanied by a prepayment of the Revolving Credit Loans in an aggregate amount equal to the amount of such commitment reduction." 3. SECTION 6.3. (a) Paragraph (f) of Section 6.3 of the Credit Agreement is hereby amended and restated in its entirety as follows: "(f) Any unsecured Debt not otherwise permitted by this Section 6.3 in an aggregate principal amount not to exceed at any one time the sum of (i) $5,000,000 plus (ii) an amount equal to 50% of the aggregate amount of any reductions in the Revolving Credit Commitments made pursuant to Section 2.6 or 2.11 prior to June 1, 1997 plus (iii) an amount equal to 50% of the aggregate amount of any reductions in the Revolving Credit Commitments made pursuant to Section 2.6 or 2.11 on or after June 1, 1997 minus the aggregate outstanding principal amount of any Indebtedness incurred pursuant to Section 6.3(g); and" (b) Section 6.3 of the Credit Agreement is hereby amended by adding a new paragraph (g) to the end thereof which shall read in its entirety as follows: "(g) Unsecured Debt incurred by the Company in connection with the restructuring of the PERC Contract so long as the aggregate principal amount of Debt incurred pursuant to this paragraph (g) does not exceed $5,000,000." 4. SECTION 6.4. Section 6.4 of the Credit Agreement is hereby amended by adding a new paragraph (e) to the end thereof which shall read in its entirety as follows: "(e) Investments in ACCESS Communications, a joint venture formed for the purpose of providing two-way communication services, in an aggregate amount not to exceed $1,000,000 during the term of this Agreement, so long as no more than $500,000 of such investments are made in the form of cash and the remainder are made in the form of contributions of assets and services (with the fair market value of such non-cash investments being certified in reasonable detail pursuant to a written notice to the Administrative Agent delivered prior to the contribution thereof)" 5. SECTION 6.7. Section 6.7 of the Credit Agreement is hereby amended by adding the following sentence to the end thereof: "Notwithstanding the foregoing, the maximum permitted Consolidated Total Debt Ratio for the period from April 1, 1997 to but excluding September 30, 1997 shall be 0.74 to 1.0 rather than 0.72 to 1.0." 6. SECTION 6.8. Section 6.8 of the Credit Agreement is hereby amended by adding the following sentence to the end thereof: "Notwithstanding the foregoing, the Company shall not be required to comply with this Section 6.8 for the four consecutive fiscal quarters ending March 31, 1997 or June 30, 1997." 7. SECTION 6.10. The last sentence of paragraph (a) of Section 6.10 is hereby amended and restated in its entirety as follows: "Notwithstanding the foregoing, the Company may pay dividends in respect of its common stock in any fiscal year in an aggregate amount not to exceed (i) in the case of the 1997 fiscal year, $1,320,000 (it being understood that the full amount of dividends permitted for the 1997 fiscal year was paid in January 1997) and (ii) in the case of each subsequent fiscal year, 60% of Adjusted Consolidated Net Income for such fiscal year. As used in this paragraph, "Adjusted Consolidated Net Income" means, for any period, Consolidated Net Income for such period MINUS, to the extent included in such Consolidated Net Income, net revenue attributable to gains recognized as a result of the UNITIL Transfer, and PLUS, to the extent not reflected in such Consolidated Net Income, net revenue that would have been attributable to the UNITIL Contract during such period if the UNITIL Transfer had not been consummated." 8. SECTION 6.12. (a) Section 6.12 of the Credit Agreement is hereby amended by adding a new clause (c) to the end thereof which shall read in its entirety as follows: "or (c) the UNITIL Contract" (b) Section 6.12 of the Credit Agreement is hereby further amended by adding the following sentences to the end thereof: "The Company shall not sell, assign, transfer or otherwise dispose of (other than pursuant to the Security Agreement) all or any part of its rights or interests under the UNITIL Contract (the "UNITIL Transfer") unless (a) the consideration paid to the Company in connection with the UNITIL Transfer is entirely in the form of cash and (b) the Net Cash Proceeds of the UNITIL Transfer received by the Company equal at least $25,000,000. In the event that the PERC Contract shall be restructured, (a) the aggregate amount expended by the Company and its Subsidiaries in connection therewith (excluding reasonable transaction costs) shall not exceed $8,000,000 plus any additional amounts (not to exceed $500,000 per annum) required to be paid by the Company as provided in the PERC Letter of Intent plus any warrants to purchase common stock of the Company issued as part of the consideration for such restructuring, (b) the sources for any cash consideration paid in connection therewith shall be limited solely to proceeds of the issuance or incurrence of equity or, subject to clause (c) below, Debt or the net cash proceeds of the UNITIL Transfer (as demonstrated in a certificate furnished by the Company to the Administrative Agent prior to the consummation of such restructuring) and (c) any Debt incurred to finance such restructuring pursuant to Section 6.3(f) or (g) shall be subordinated, shall have no scheduled amortization prior to July 1, 2001 and shall have terms and conditions (including subordination terms) satisfactory to the Majority Banks (which consent shall not be unreasonably withheld)." II. MISCELLANEOUS. ------------- 1. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants as of the date hereof that, after giving effect to this Amendment, (a) no Default or Event of Default has occurred and is continuing and (b) all representations and warranties of the Company contained in the Loan Documents are true and correct in all material respects with the same effect as if made on and as of such date. 2. EXPENSES. The Company agrees to pay or reimburse the Administrative Agent on demand for all its reasonable out-of-pocket costs and expenses incurred in connection with the preparation and execution of this Amendment, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 3. NO CHANGE. Except as expressly provided herein, no term or provision of the Credit Agreement shall be amended, modified or supplemented, and each term and provision of the Credit Agreement shall remain in full force and effect. 4. EFFECTIVENESS. This Amendment shall become effective as of the date hereof upon (a) receipt by the Administrative Agent of counterparts hereof duly executed by the Company and the Majority Banks, (b) receipt by the Administrative Agent of a security agreement in form and substance satisfactory to it, pursuant to which the Company shall have granted a first priority security interest in the UNITIL Contract to the Administrative Agent for the benefit of the Banks, and (c) receipt by the Administrative Agent of an amendment fee in the aggregate amount of $125,000, to be distributed by the Administrative Agent to the Banks PRO RATA based on the amounts of their respective Revolving Credit Commitments and Term Loans. 5. COUNTERPARTS. This Amendment may be executed by the parties hereto in any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 6. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. BANGOR HYDRO-ELECTRIC COMPANY By:________________________________ Title: THE CHASE MANHATTAN BANK, as Administrative Agent and as a Bank By:________________________________ Title: THE FIRST NATIONAL BANK OF BOSTON By:________________________________ Title: THE BANK OF NEW YORK By:________________________________ Title: FLEET BANK OF MAINE By:________________________________ Title: KEY BANK By:________________________________ Title: THE TORONTO-DOMINION BANK By:________________________________ Title: EX-4 4 BANGOR HYDRO-ELECTRIC COMPANY FORM 10-K EXHIBIT 4(b) ------------- EXECUTION COPY SECURITY AGREEMENT SECURITY AGREEMENT, dated as of June 6, 1997, made by BANGOR HYDRO- ELECTRIC COMPANY (the "COMPANY"), in favor of THE CHASE MANHATTAN BANK, as Administrative Agent (in such capacity, the "ADMINISTRATIVE AGENT") for the banks and other financial institutions (the "BANKS") from time to time parties to the Credit Agreement, dated as of June 30, 1995 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Company, the Banks and the Administrative Agent. W I T N E S S E T H: ------------------- WHEREAS, pursuant to the Second Amendment, dated as of the date hereof (the "SECOND AMENDMENT"), to the Credit Agreement, the Banks have agreed to amend the Credit Agreement upon the terms and subject to the conditions set forth in the Second Amendment; and WHEREAS, it is a condition precedent to the effectiveness of the Second Amendment that the Company shall have executed and delivered this Agreement to the Administrative Agent for the ratable benefit of the Banks; NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Banks to enter into the Second Amendment, the Company hereby agrees with the Administrative Agent, for the ratable benefit of the Banks, as follows: SECTION 1. DEFINED TERMS 1.1 DEFINITIONS. (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement, and the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are used herein as so defined: Chattel Paper and Instruments. (b) The following terms shall have the following meanings: "AGREEMENT": this Security Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "COLLATERAL": as defined in Section 2. "COLLATERAL ACCOUNT": any collateral account established by the Administrative Agent as provided in Section 5. "CONTRACT": the UNITIL Contract, as the same may be amended, supplemented or otherwise modified from time to time, including, without limitation, (i) all rights of the Company to receive moneys due and to become due to it thereunder or in connection therewith, (ii) all rights of the Company to damages arising thereunder and (iii) all rights of the Company to perform and to exercise all remedies thereunder. "INDENTURE": the Mortgage and Deed of Trust, dated as of July 1, 1936, made by the Company in favor of the Trustee named therein, as the same may be amended, supplemented or otherwise modified from time to time. "INDENTURE LIEN": any Lien created under the Indenture in respect of the Collateral. "NEW YORK UCC": the Uniform Commercial Code as from time to time in effect in the State of New York. "OBLIGATIONS": the collective reference to the unpaid principal of and interest on the Loans and Reimbursement Obligations and all other obligations and liabilities of the Company (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and Reimbursement Obligations and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post- filing or post-petition interest is allowed in such proceeding) to the Administrative Agent or any Bank, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, this Agreement, the other Loan Documents or any Letter of Credit or any other document made, delivered or given in connection therewith, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Banks that are required to be paid by the Company pursuant to the terms of any of the foregoing agreements). "PROCEEDS": all "proceeds" as such term is defined in Section 9- 306(1) of the Uniform Commercial Code in effect in the State of New York on the date hereof. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof," "herein", "hereto" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. GRANT OF SECURITY INTEREST The Company hereby grants to the Administrative Agent, for the ratable benefit of the Banks, a security interest in the Contract and all Proceeds thereof (collectively, the "COLLATERAL"), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Banks to enter into the Second Amendment, the Company hereby represents and warrants to the Administrative Agent and each Bank that: 3.1 TITLE; NO OTHER LIENS. Except for (a) the security interest granted to the Administrative Agent for the ratable benefit of the Banks pursuant to this Agreement and (b) the Indenture Lien (if any), the Company owns each item of the Collateral free and clear of any and all Liens or claims of others. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed (i) in favor of the Administrative Agent, for the ratable benefit of the Banks, pursuant to this Agreement or (ii) in connection with the Indenture Lien (if any). 3.2 PERFECTED LIENS. The security interests granted pursuant to this Agreement, upon completion of the filings and other actions specified on SCHEDULE 1 (which, in the case of all filings and other documents referred to on said Schedule, have been delivered to the Administrative Agent in completed and duly executed form), will constitute valid perfected security interests, subject only to the Indenture Lien (if any), in all of the Collateral in favor of the Administrative Agent, for the ratable benefit of the Banks, as collateral security for the Obligations, enforceable in accordance with the terms hereof against all creditors of the Company and any Persons purporting to purchase any Collateral from the Company. Except as specified above in this paragraph, no approval, consent or authorization of or filing with any governmental or public regulatory body or authority is required in connection with the execution, delivery and performance of this Agreement. 3.3 CHIEF EXECUTIVE OFFICE. The Company's jurisdiction of organization is the State of Maine and the location of the Company's chief executive office or sole place of business is 33 State Street, Bangor, Maine 04401. 3.4 CONTRACT. (a) No consent of any party (other than the Company) to the Contract is required, or purports to be required, in connection with the execution, delivery and performance of this Agreement. (b) The Contract is in full force and effect and constitutes a valid and legally enforceable obligation of the parties thereto, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (c) No consent or authorization of, filing with or other act by or in respect of any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of the Contract by any party thereto other than those which have been duly obtained, made or performed, are in full force and effect and do not subject the scope of any the Contract to any material adverse limitation, either specific or general in nature. (d) Neither the Company nor (to the best of the Company's knowledge) any other party to the Contract is in default in the performance or observance of any of the terms thereof. (e) The right, title and interest of the Company in, to and under the Contract are not subject to any defenses, offsets, counterclaims or claims. (f) The Company has delivered to the Administrative Agent a complete and correct copy of the Contract, including all amendments, supplements and other modifications thereto. (g) No amount payable to the Company under or in connection with the Contract is evidenced by any Instrument or Chattel Paper which has not been delivered to the Administrative Agent. (h) None of the parties to the Contract is a Governmental Authority. 3.5 CORPORATE AND OTHER MATTERS. (a) The execution, delivery and performance by the Company of this Agreement are within the Company's corporate powers, have been duly authorized by all necessary corporate action and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of organization, as amended, or by-laws of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries (except as expressly contemplated hereby). (b) This Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms. (c) There is no action, suit, proceeding or investigation pending, or to the knowledge of the Company threatened, against or affecting the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which in any manner questions the validity of this Agreement. SECTION 4. COVENANTS The Company covenants and agrees with the Administrative Agent and the Banks that, from and after the date of this Agreement until the Obligations shall have been paid in full, no Letter of Credit shall be outstanding and the Commitments shall have terminated: 4.1 DELIVERY OF INSTRUMENTS AND CHATTEL PAPER. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Administrative Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement. 4.2 PAYMENT OF OBLIGATIONS. The Company will pay and discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of income or profits therefrom, as well as all claims of any kind against or with respect to the Collateral, except that no such charge need be paid if the amount or validity thereof is currently being contested in good faith by appropriate proceedings, reserves in conformity with GAAP with respect thereto have been provided on the books of the Company and such proceedings could not reasonably be expected to result in the sale, forfeiture or loss of any of the Collateral or any interest therein. 4.3 MAINTENANCE OF PERFECTED SECURITY INTEREST; FURTHER DOCUMENTATION. (a) The Company shall maintain the security interest created by this Agreement as a perfected security interest, subject only to the Indenture Lien (if any), and shall defend such security interest against the claims and demands, other than those relating to the Indenture Lien (if any), of all Persons whomsoever. (b) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of the Company, the Company will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby. 4.4 CHANGES IN LOCATIONS, NAME, ETC. The Company will not, except upon 15 days' prior written notice to the Administrative Agent and delivery to the Administrative Agent of all additional executed financing statements and other documents reasonably requested by the Administrative Agent to maintain the validity, perfection and priority of the security interests provided for herein: (i) change the location of its chief executive office or sole place of business from that referred to in Section 3.3; or (ii) change its name, identity or corporate structure to such an extent that any financing statement filed by the Administrative Agent in connection with this Agreement would become misleading. 4.5 CONTRACT. (a) The Company will perform and comply in all material respects with all its obligations under the Contract. (b) The Company will not amend, modify, terminate or waive any provision of the Contract. (c) The Company will exercise promptly and diligently each and every material right which it may have under the Contract (other than any right of termination). (d) The Company will deliver to the Administrative Agent a copy of each material demand, notice or document received by it relating in any way to the Contract that questions the validity or enforceability of the Contract. SECTION 5. REMEDIAL PROVISIONS 5.1 COMMUNICATIONS WITH OBLIGORS; COMPANY REMAIN LIABLE. (a) The Administrative Agent in its own name or in the name of others may at any time after the occurrence and during the continuance of an Event of Default communicate with parties to the Contract to verify with them to the Administrative Agent's satisfaction the terms of the Contract. (b) Upon the request of the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, the Company shall notify the parties to the Contract that the Contract has been assigned to the Administrative Agent for the ratable benefit of the Banks and that payments in respect thereof shall be made directly to the Administrative Agent. (c) Anything herein to the contrary notwithstanding, the Company shall remain liable under the Contract to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Administrative Agent nor any Bank shall have any obligation or liability under the Contract by reason of or arising out of this Agreement or the receipt by the Administrative Agent or any Bank of any payment relating thereto, nor shall the Administrative Agent or any Bank be obligated in any manner to perform any of the obligations of the Company under or pursuant to the Contract, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 5.2 PROCEEDS TO BE TURNED OVER TO ADMINISTRATIVE AGENT. If an Event of Default shall occur and be continuing, if requested by the Administrative Agent, all Proceeds received by the Company consisting of cash, checks and other near-cash items shall be held by the Company in trust for the Administrative Agent and the Banks, segregated from other funds of the Company, and shall, forthwith upon receipt by the Company, be turned over to the Administrative Agent in the exact form received by the Company (duly indorsed by the Company to the Administrative Agent, if required). All Proceeds received by the Administrative Agent hereunder shall be held by the Administrative Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Administrative Agent in a Collateral Account (or by the Company in trust for the Administrative Agent and the Banks) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 5.3. 5.3 APPLICATION OF PROCEEDS. If an Event of Default shall have occurred and be continuing, at any time at the Administrative Agent's election, the Administrative Agent may apply all or any part of Proceeds held in any Collateral Account in payment of the Obligations in such order as the Administrative Agent may elect, and any part of such funds which the Administrative Agent elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Administrative Agent to the Company or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Obligations shall have been paid in full, no Letters of Credit shall be outstanding and the Commitments shall have terminated shall be paid over to the Company or to whomsoever may be lawfully entitled to receive the same. 5.4 CODE AND OTHER REMEDIES. If an Event of Default shall occur and be continuing, the Administrative Agent, on behalf of the Banks, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the New York UCC or any other applicable law. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Company or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Administrative Agent or any Bank or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent or any Bank shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Company, which right or equity is hereby waived and released. The Company further agrees, at the Administrative Agent's request, to assemble the Collateral and make it available to the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at the Company's premises or elsewhere. The Administrative Agent shall apply the net proceeds of any action taken by it pursuant to this Section 5.4, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Banks hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Administrative Agent may elect, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the New York UCC, need the Administrative Agent account for the surplus, if any, to the Company. To the extent permitted by applicable law, the Company waives all claims, damages and demands it may acquire against the Administrative Agent or any Bank arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. 5.5 WAIVER; DEFICIENCY. The Company waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the New York UCC. The Company shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Administrative Agent or any Bank to collect such deficiency. SECTION 6. THE ADMINISTRATIVE AGENT 6.1 ADMINISTRATIVE AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT, ETC. (a) The Company hereby irrevocably constitutes and appoints the Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Company and in the name of the Company or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Company hereby gives the Administrative Agent the power and right, on behalf of the Company, without notice to or assent by the Company, to do any or all of the following: (i) in the name of the Company or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under the Contract or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Administrative Agent for the purpose of collecting any and all such moneys due under the Contract or with respect to any other Collateral whenever payable; (ii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral; (iii) execute, in connection with any sale provided for in Section 5.4, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and (iv) (A) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (B) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (E) defend any suit, action or proceeding brought against the Company with respect to any Collateral; (F) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Administrative Agent may deem appropriate; and (G) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes, and do, at the Administrative Agent's option and the Company's expense, at any time, or from time to time, all acts and things which the Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the Administrative Agent's and the Banks' security interests therein and to effect the intent of this Agreement, all as fully and effectively as the Company might do. Anything in this Section 6.1(a) to the contrary notwithstanding, the Administrative Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 6.1(a) unless an Event of Default shall have occurred and be continuing. (b) If the Company fails to perform or comply with any of its agreements contained herein, the Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. (c) The expenses of the Administrative Agent incurred in connection with actions undertaken as provided in this Section 6.1, together with interest thereon at a rate per annum equal to the rate per annum at which interest would then be payable on past due Base Rate Loans under the Credit Agreement, from the date of payment by the Administrative Agent to the date reimbursed by the relevant Company, shall be payable by the Company to the Administrative Agent on demand. (d) The Company hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 6.2 DUTY OF ADMINISTRATIVE AGENT. The Administrative Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar property for its own account. Neither the Administrative Agent, any Bank nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Company or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Administrative Agent and the Banks hereunder are solely to protect the Administrative Agent's and the Banks' interests in the Collateral and shall not impose any duty upon the Administrative Agent or any Bank to exercise any such powers. The Administrative Agent and the Banks shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to the Company for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 6.3 EXECUTION OF FINANCING STATEMENTS. Pursuant to Section 9-402 of the New York UCC and any other applicable law, the Company authorizes the Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of the Company in such form and in such offices as the Administrative Agent reasonably determines appropriate to perfect the security interests of the Administrative Agent under this Agreement. A photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction. 6.4 AUTHORITY OF ADMINISTRATIVE AGENT. The Company acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Banks, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Company, the Administrative Agent shall be conclusively presumed to be acting as agent for the Banks with full and valid authority so to act or refrain from acting, and the Company shall not be under any obligation, or entitlement, to make any inquiry respecting such authority. SECTION 7. MISCELLANEOUS 7.1 AMENDMENTS IN WRITING. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Company, the Administrative Agent and the Majority Banks. 7.2 NOTICES. All notices, requests and demands to or upon the Administrative Agent or the Company hereunder shall be effected in the manner provided for in Section 9.1 of the Credit Agreement. 7.3 NO WAIVER BY COURSE OF CONDUCT; CUMULATIVE REMEDIES. Neither the Administrative Agent nor any Bank shall by any act (except by a written instrument pursuant to Section 7.1), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Bank, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Bank would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 7.4 ENFORCEMENT EXPENSES; INDEMNIFICATION. The Company agrees to pay or reimburse each Bank and the Administrative Agent for all its costs and expenses incurred in enforcing or preserving any rights under this Agreement, including, without limitation, the fees and disbursements of counsel to each Bank and of counsel to the Administrative Agent. (a) The Company agrees to pay, and to save the Administrative Agent and the Banks harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement. (b) The Company agrees to pay, and to save the Administrative Agent and the Banks harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement. (c) The agreements in this Section 7.4 shall survive repayment of the Obligations and all other amounts payable under the Credit Agreement and the other Loan Documents. 7.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the successors and assigns of the Company and shall inure to the benefit of the Administrative Agent and the Banks and their successors and assigns; PROVIDED that the Company may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent. 7.6 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 7.7 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7.8 SECTION HEADINGS. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 7.9 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 7.10 RELEASES. (a) At such time as the Loans, the Reimbursement Obligations and the other Obligations shall have been paid in full, the Commitments have been terminated and no Letters of Credit shall be outstanding, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Administrative Agent and the Company hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Company. At the request and sole expense of the Company following any such termination, the Administrative Agent shall deliver to the Company any Collateral held by the Administrative Agent hereunder, and execute and deliver to the Company such documents as the Company shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by the Company in a transaction permitted by the Credit Agreement, then the Administrative Agent, at the request and sole expense of the Company, shall execute and deliver to the Company all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. IN WITNESS WHEREOF, each of the undersigned has caused this Security Agreement to be duly executed and delivered as of the date first above written. BANGOR HYDRO-ELECTRIC COMPANY By: --------------------- Title: SCHEDULE 1 FILINGS AND OTHER ACTIONS REQUIRED TO PERFECT SECURITY INTERESTS UNIFORM COMMERCIAL CODE FILINGS Filing of a UCC-1 Financing Statement with the Secretary of State of Maine EX-4 5 BANGOR HYDRO-ELECTRIC COMPANY FORM 10-K EXHIBIT 4(c) ------------- EXECUTION COPY THIRD AMENDMENT, dated as of November 20, 1997 (this "AMENDMENT"), to the CREDIT AGREEMENT, dated as of June 30, 1995, as amended by the First Amendment thereto dated as of October 2, 1995 and the Second Amendment thereto dated as of June 6, 1997 (as further amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among Bangor Hydro-Electric Company, a Maine corporation (the "COMPANY"), the several banks from time to time parties to the Credit Agreement (individually, a "BANK" and collectively, the "BANKS"), The Chase Manhattan Bank (formerly known as Chemical Bank), as administrative agent for the Banks, and Fleet Bank of Maine and The First National Bank of Boston, as co-agents (in such capacity, the "CO-AGENTS"). Terms defined in the Credit Agreement shall be used in this Amendment with their defined meanings unless otherwise defined herein. W I T N E S S E T H : ------------------- WHEREAS, pursuant to Waivers with respect to the Credit Agreement, dated as of September 30, 1997 and November 13, 1997, respectively, the Banks parties thereto temporarily waived compliance by the Company with Section 6.8 of the Credit Agreement for the period of four consecutive fiscal quarters ended September 30, 1997; and WHEREAS, the Company has requested the Banks to (i) permanently waive, subject to certain conditions, compliance by the Company with Section 6.8 of the Credit Agreement and the other financial covenants contained in the Credit Agreement for the periods of four consecutive fiscal quarters ended September 30, 1997 and December 31, 1997, (ii) provide for the restructuring of the PERC Contract as further described below, (iii) permit the UNITIL Contract to be monetized as further described below and (iv) to make certain other changes to the Credit Agreement on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows: I. AMENDMENTS. ---------- 1. The definition of "Applicable Base Rate Margin" contained in Section 1.1 of the Credit Agreement is hereby amended by adding a new column at the end thereof as follows: Level VI STATUS -------- 2.50% 2. The definition of "Applicable Eurodollar Margin" contained in Section 1.1 of the Credit Agreement is hereby amended by adding a new column at the end thereof as follows: Level VI STATUS 3.50% 3. The definition of "Commitment Fee Rate" contained in Section 1.1 of the Credit Agreement is hereby amended by adding a new row at the end thereof as follows: Level VI Status 0.75% 4. Each of the definitions contained in Section 1.1 of the Credit Agreement and set forth below is hereby amended and restated in its entirety as follows: "LEVEL V STATUS": exists at any date if, at such date, neither Level I Status, Level II Status, Level III Status nor Level IV Status exists and the Company has a long-term senior secured debt rating (whether or not published) of BB- or better by S&P AND, unless the Company is then unrated by Moody's, Ba3 or better by Moody's. "STATUS": the existence of Level I Status, Level II Status, Level III Status, Level IV Status, Level V Status or Level VI Status, as the case may be. 5. The following new definitions are hereby added to Section 1.1 of the Credit Agreement in the appropriate alphabetical order: "LEVEL VI STATUS": exists at any date if, at such date, none of Level I Status, Level II Status, Level III Status, Level IV Status or Level V Status exists. "PERC": Penobscot Energy Recovery Company. "PERC CONTRACT RESTRUCTURING": a series of transactions involving the Company, the Municipal Review Committee, Inc., Energy National, Inc., PERC Management Company, The Prudential Insurance Company of America and PERC, regarding the restructuring of an Agreement dated as of June 21, 1984 between the Company and PERC and amended on March 24, 1986. The transactions are substantially outlined in a letter from PERC dated June 30, 1997, attached as Annex A to the Third Amendment to this Agreement, and include provisions for periodic payments to the Company out of the net profits from operations of PERC (the "PERC Rebates"). "PERC REBATES": as defined in the definition of "PERC Contract Restructuring". "UNITIL MONETIZATION": a transaction, consummated on or prior to January 15, 1998, pursuant to which (a) the UNITIL Contract will be transferred to a special purpose Subsidiary of the Company that will hold no other assets (the "UNITIL SPC"), (b) the UNITIL SPC will incur Debt (the "UNITIL SPC Debt") secured by the UNITIL Contract and distribute the proceeds thereof to the Company and (c) the Company shall receive net cash proceeds therefrom of at least $25,000,000. "UNITIL MONETIZATION DATE": the date of consummation of the UNITIL Monetization. "UNITIL SPC": as defined in the definition of "UNITIL Monetization". "UNITIL SPC Debt": as defined in the definition of "UNITIL Monetization". 6. Section 1.2 of the Credit Agreement is hereby amended by adding the following paragraph to the end thereof: "(c) Notwithstanding anything to the contrary in this Agreement, if the Company is required to write off (the "Maine Yankee Write-off") the unamortized "Deferred Maine Yankee Refueling Cost" (those costs relating to the 1997 scheduled Maine Yankee refueling outage which were deferred by the Company for future recovery in electric rates and which are classified as "Deferred Maine Yankee Refueling Cost" on the Company's financial records), then, for the purposes of calculating the financial covenants contained in Sections 6.7, 6.8 and 6.9 as at any date during the Company's 1998 fiscal year, (i) Consolidated Adjusted EBIT shall be increased (without duplication of any other increase) to the extent the Maine Yankee Write-off is reflected as a charge in the relevant statement of Consolidated Net Income for the relevant period and (ii) any reduction in Consolidated Net Worth or the amount described in clause (b) of the definition of "Consolidated Total Capitalization" resulting from the Maine Yankee Write-off shall be disregarded; PROVIDED, that in each case the amount of any such adjustment shall not exceed $2,000,000." 7. The sentences added to paragraph (b) of Section 2.11 of the Credit Agreement pursuant to the Second Amendment to the Credit Agreement are hereby amended and restated in their entirety as follows: "In addition, in the event that the UNITIL Monetization shall be consummated, the Revolving Credit Commitments shall be automatically and permanently reduced (a) on the date thereof, in the aggregate amount of $19,000,000, and (b) on the earlier of (i) December 31, 1998 and (ii) the date of consummation of the UNITIL Transfer, in the aggregate amount of $6,000,000. In addition, in the event that the UNITIL Transfer shall be consummated, the Revolving Credit Commitments shall be automatically and permanently reduced on the first anniversary thereof in the aggregate amount of 25% of the excess, if any, of the Net Cash Proceeds of the UNITIL Transfer received by the Company or the UNITIL SPC OVER the Base Amount (as defined below) and (c) on the second anniversary thereof in the aggregate amount of 25% of the excess, if any, of the Net Cash Proceeds of the UNITIL Transfer received by the Company or the UNITIL SPC OVER the Base Amount. As used herein, "Base Amount" means, as of any date, an amount equal to (i) $40,000,000 MINUS (ii) the product of $300,000 TIMES the number of calendar months commencing after September 30, 1997 and ending prior to such date. Each reduction in the Revolving Credit Commitments pursuant to the preceding sentences shall be accompanied by a prepayment of the Revolving Credit Loans in an aggregate amount equal to the amount of such commitment reduction." 8. Section 6.3 of the Credit Agreement is hereby amended by amending and restating paragraph (g) thereof, and adding new paragraphs (h) and (i) to the end thereof, as follows: "(g) Unsecured Debt incurred by the Company in connection with the restructuring of the PERC Contract so long as the aggregate principal amount of Debt incurred pursuant to this paragraph (g) does not exceed $6,000,000; (h) Guarantees of the Company of the UNITIL SPC Debt; and (i) Guarantees of the Company of scheduled payments of principal and interest (not to exceed $4,200,000 in the aggregate in any fiscal year of the Company) in respect of Debt of PERC, but only on the scheduled dates, and at the rates, as originally in effect (it being understood that the making of such Guarantee shall be subject to prior review by the Administrative Agent of the documentation in respect thereof for the purpose of establishing compliance with the requirements of this paragraph)." 9. Section 6.5 of the Credit Agreement is hereby amended by adding a new paragraph (o) to the end thereof which shall read in its entirety as follows: "(o) Liens on the PERC Rebates securing Debt incurred pursuant to Section 6.3(g), so long as such Debt is incurred on or prior to December 31, 1998" 10. Effective on the UNITIL Monetization Date, the tables set forth in Sections 6.7, 6.8 and 6.9 shall automatically be replaced with the following tables SECTION 6.7: ----------- Period Ratio ------ ----- UNITIL Monetization Date - 6/30/98 0.73 to 1.0 7/1/98 - 12/31/98 0.72 to 1.0 1/1/99 to and including - 12/31/99 0.70 to 1.0 1/1/00 and thereafter 0.68 to 1.0 SECTION 6.8: ----------- Period Ratio ------ ----- UNITIL Monetization Date - 3/31/98 No test required 4/1/98 - 6/30/98 0.95 to 1.0 7/1/98 - 9/30/98 1.05 to 1.0 10/1/98 - 12/31/98 1.25 to 1.0 1/1/99 - 12/31/99 1.40 to 1.0 1/1/00 and thereafter 1.50 to 1.0 SECTION 6.9: ----------- Period Amount ------ ------ UNITIL Monetization Date - 3/31/98 $103,000,000 4/1/98 - 9/30/98 $104,000,000 10/1/98 - 12/31/98 $105,000,000 1/1/99 - 12/31/99 $107,000,000 1/1/00 and thereafter $110,000,000 11. The first sentence added to Section 6.12 of the Credit Agreement pursuant to the Second Amendment thereto is hereby amended and restated in its entirety as follows: "Neither the Company nor any of its Subsidiaries shall sell, assign, transfer or otherwise dispose of (other than pursuant to the Security Agreement or the UNITIL Monetization) all or any part of its rights or interests under the UNITIL Contract (the "UNITIL Transfer") unless (a) the UNITIL Transfer is consummated after the UNITIL Monetization has been consummated, (b) the consideration paid to the UNITIL SPC in connection with the UNITIL Transfer is entirely in the form of cash and (c) the Net Cash Proceeds of the UNITIL Transfer received by the Company pursuant to Section 6.17(b) equal at least $6,000,000." 12. Article VI of the Credit Agreement is hereby amended by adding a new Section 6.17 to the end thereof which shall read in its entirety as follows: "SECTION 6.17 UNITIL SPC DISTRIBUTIONS. The Company shall cause the UNITIL SPC (a) on the last Business Day of each calendar month, to dividend to the Company all proceeds of the UNITIL Contract not otherwise required to pay principal and interest in respect of the UNITIL SPC Debt (but, in each case, only on the original scheduled dates, and at the rates, as initially in effect), or to fund a debt reserve account (in an aggregate amount not to exceed $1,500,000 at any one time) in respect of the UNITIL SPC Debt, during such month and (b) in the event that the UNITIL SPC consummates the UNITIL Transfer, to dividend to the Company on the date of the UNITIL Transfer all cash proceeds thereof, net of the amount of such proceeds applied to repay the UNITIL SPC Debt and pay related transaction costs (which net amount shall, in any event, be sufficient to repay the amounts required to be repaid by the Company pursuant to Section 2.11(b))." II. WAIVER. ------ The parties hereto hereby agree that, until but excluding January 15, 1998 (the "WAIVER EXPIRATION DATE"), no Default or Event of Default shall be deemed to have occurred under the Credit Agreement as a result of any default (a "FINANCIAL COVENANT DEFAULT") in the observance of the covenants contained in Sections 6.7, 6.8 and 6.9 of the Credit Agreement for the periods of four consecutive fiscal quarters ending September 30, 1997 and December 31, 1997. It is understood that an Event of Default as a result of any such Financial Covenant Default shall be deemed to have occurred and be continuing from and after the Waiver Expiration Date unless (a) such Event of Default shall have been waived by the Majority Banks in accordance with Section 9.5 of the Credit Agreement or (b) the UNITIL Monetization Date shall have occurred on or prior to the Waiver Expiration Date (in which case this waiver shall become permanent). II. MISCELLANEOUS. ------------- 1. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants as of the date hereof that, after giving effect to this Amendment, (a) no Default or Event of Default has occurred and is continuing and (b) all representations and warranties of the Company contained in the Loan Documents are true and correct in all material respects with the same effect as if made on and as of such date. 2. EXPENSES. The Company agrees to pay or reimburse the Administrative Agent on demand for all its reasonable out-of-pocket costs and expenses incurred in connection with the preparation and execution of this Amendment, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent. 3. NO CHANGE. Except as expressly provided herein, no term or provision of the Credit Agreement shall be amended, modified or supplemented, and each term and provision of the Credit Agreement shall remain in full force and effect. 4. EFFECTIVENESS. This Amendment shall become effective as of the date hereof upon (a) receipt by the Administrative Agent of counterparts hereof duly executed by the Company and the Banks, (b) receipt by the Administrative Agent of an amended and restated Security Agreement in form and substance satisfactory to it, which shall provide for (i) the release of the security interest in the UNITIL Contract effective on the UNITIL Monetization Date, (ii) a first priority assignment (subject only to any Lien permitted by Section 6.5(o)) of the PERC Rebates, and (iii) a first priority pledge of the Company's equity interest (including all dividends and other proceeds in respect thereof) in the UNITIL SPC, and (c) receipt by the Administrative Agent of an amendment fee in the aggregate amount of $125,000, to be distributed by the Administrative Agent to the Banks PRO RATA based on the amounts of their respective Revolving Credit Commitments and Term Loans. 5. COUNTERPARTS. This Amendment may be executed by the parties hereto in any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 6. GOVERNING LAW. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the date first above written. BANGOR HYDRO-ELECTRIC COMPANY By: /s/ Frederick S. Samp ---------------------- Title: Vice President THE CHASE MANHATTAN BANK, as Administrative Agent and as a Bank By:________________________________ Title: THE FIRST NATIONAL BANK OF BOSTON By:________________________________ Title: THE BANK OF NEW YORK By:________________________________ Title: FLEET BANK OF MAINE By:________________________________ Title: KEY BANK By:________________________________ Title: THE TORONTO-DOMINION BANK By:________________________________ Title: EX-4 6 BANGOR HYDRO-ELECTRIC COMPANY FORM 10-K EXHIBIT 4(d) ------------- EXECUTION COPY AMENDED AND RESTATED SECURITY AGREEMENT SECURITY AGREEMENT, dated as of June 6, 1997, as amended and restated as of November 20, 1997, made by BANGOR HYDRO-ELECTRIC COMPANY (the "COMPANY"), in favor of THE CHASE MANHATTAN BANK, as Administrative Agent (in such capacity, the "ADMINISTRATIVE AGENT") for the banks and other financial institutions (the "BANKS") from time to time parties to the Credit Agreement, dated as of June 30, 1995 (as amended, supplemented or otherwise modified from time to time, the "CREDIT AGREEMENT"), among the Company, the Banks and the Administrative Agent. W I T N E S S E T H: ------------------- WHEREAS, pursuant to the Third Amendment, dated as of November 20, 1997 (the "THIRD AMENDMENT"), to the Credit Agreement, the Banks have agreed to amend the Credit Agreement upon the terms and subject to the conditions set forth in the Third Amendment; WHEREAS, the Company previously entered into a Security Agreement dated as of June 6, 1997 (the "EXISTING SECURITY AGREEMENT"); and WHEREAS, it is a condition precedent to the effectiveness of the Third Amendment that the Company shall have agreed to amend and restate the Existing Security Agreement pursuant to this Agreement; NOW, THEREFORE, in consideration of the premises and to induce the Administrative Agent and the Banks to enter into the Third Amendment, the Company hereby agrees that the Existing Security Agreement shall be amended and restated in its entirety as follows: SECTION 1. DEFINED TERMS 1.1 DEFINITIONS. (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement, and the following terms which are defined in the Uniform Commercial Code in effect in the State of New York on the date hereof are used herein as so defined: Chattel Paper and Instruments. (b) The following terms shall have the following meanings: "AGREEMENT": this Security Agreement, as the same may be amended, supplemented or otherwise modified from time to time. "COLLATERAL": as defined in Section 2. "COLLATERAL ACCOUNT": any collateral account established by the Administrative Agent as provided in Section 5. "CONTRACT": the UNITIL Contract, as the same may be amended, supplemented or otherwise modified from time to time, including, without limitation, (i) all rights of the Company to receive moneys due and to become due to it thereunder or in connection therewith, (ii) all rights of the Company to damages arising thereunder and (iii) all rights of the Company to perform and to exercise all remedies thereunder. "INDENTURE": the Mortgage and Deed of Trust, dated as of July 1, 1936, made by the Company in favor of the Trustee named therein, as the same may be amended, supplemented or otherwise modified from time to time. "INDENTURE LIEN": any Lien created under the Indenture in respect of the Collateral. "NEW YORK UCC": the Uniform Commercial Code as from time to time in effect in the State of New York. "OBLIGATIONS": the collective reference to the unpaid principal of and interest on the Loans and Reimbursement Obligations and all other obligations and liabilities of the Company (including, without limitation, interest accruing at the then applicable rate provided in the Credit Agreement after the maturity of the Loans and Reimbursement Obligations and interest accruing at the then applicable rate provided in the Credit Agreement after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company, whether or not a claim for post- filing or post-petition interest is allowed in such proceeding) to the Administrative Agent or any Bank, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Credit Agreement, this Agreement, the other Loan Documents or any Letter of Credit or any other document made, delivered or given in connection therewith, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative Agent or to the Banks that are required to be paid by the Company pursuant to the terms of any of the foregoing agreements). "PLEDGED STOCK": all outstanding shares of Capital Stock of the UNITIL SPC. "PROCEEDS": all "proceeds" as such term is defined in Section 9- 306(1) of the Uniform Commercial Code in effect in the State of New York on the date hereof and, in any event, shall include, without limitation, all dividends or other income from the Pledged Stock, collections thereon or distributions or payments with respect thereto. 1.2 OTHER DEFINITIONAL PROVISIONS. (a) The words "hereof", "herein", "hereto" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section and Schedule references are to this Agreement unless otherwise specified. (b) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. SECTION 2. GRANT OF SECURITY INTEREST The Company hereby grants to the Administrative Agent, for the ratable benefit of the Banks, a security interest in the Contract, the PERC Rebates, the Pledged Stock and all Proceeds thereof (collectively, the "COLLATERAL"), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations. SECTION 3. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Banks to enter into the Third Amendment, the Company hereby represents and warrants to the Administrative Agent and each Bank, on the date hereof and on the date of creation of each additional item of Collateral, that: 3.1 TITLE; NO OTHER LIENS. Except for (a) the security interest granted to the Administrative Agent for the ratable benefit of the Banks pursuant to this Agreement, (b) in the case of the Contract, the Indenture Lien (if any) and (c) in the case of the PERC Rebates, any Lien permitted by Section 6.5(o) of the Credit Agreement, the Company owns each item of the Collateral free and clear of any and all Liens or claims of others. No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed (i) in favor of the Administrative Agent, for the ratable benefit of the Banks, pursuant to this Agreement, (ii) in the case of the Contract, in connection with the Indenture Lien (if any) or (iii) in the case of the PERC Rebates, any Lien permitted by Section 6.5(o) of the Credit Agreement. 3.2 PERFECTED LIENS. The security interests granted pursuant to this Agreement, upon completion of the filings and other actions specified on SCHEDULE 1 (which, in the case of all filings and other documents referred to on said Schedule, have been delivered to the Administrative Agent in completed and duly executed form), will constitute valid perfected security interests (subject only to (a) in the case of the Contract, the Indenture Lien (if any) and (b) in the case of the PERC Rebates, any Lien permitted by Section 6.5(o) of the Credit Agreement) in all of the Collateral in favor of the Administrative Agent, for the ratable benefit of the Banks, as collateral security for the Obligations, enforceable in accordance with the terms hereof against all creditors of the Company and any Persons purporting to purchase any Collateral from the Company. Except as specified above in this paragraph, no approval, consent or authorization of or filing with any governmental or public regulatory body or authority is required in connection with the execution, delivery and performance of this Agreement. 3.3 CHIEF EXECUTIVE OFFICE. The Company's jurisdiction of organization is the State of Maine and the location of the Company's chief executive office or sole place of business is 33 State Street, Bangor, Maine 04401. 3.4 CONSENTS, ETC. (a) No consent of any party (other than the Company) to the Contract, the PERC Contract, or of any participant in the PERC Contract Restructuring or the UNITIL Monetization, is required, or purports to be required, in connection with the execution, delivery and performance of this Agreement. (b) The Contract is in full force and effect and constitutes a valid and legally enforceable obligation of the parties thereto, subject to the effects of bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. (c) No consent or authorization of, filing with or other act by or in respect of any Governmental Authority is required in connection with the execution, delivery, performance, validity or enforceability of the Contract by any party thereto other than those which have been duly obtained, made or performed, are in full force and effect and do not subject the scope of any the Contract to any material adverse limitation, either specific or general in nature. (d) Neither the Company nor (to the best of the Company's knowledge) any other party to the Contract is in default in the performance or observance of any of the terms thereof. (e) The right, title and interest of the Company in, to and under the Contract are not subject to any defenses, offsets, counterclaims or claims. (f) The Company has delivered to the Administrative Agent a complete and correct copy of the Contract, including all amendments, supplements and other modifications thereto. (g) No amount payable to the Company under or in connection with the Contract is evidenced by any Instrument or Chattel Paper which has not been delivered to the Administrative Agent. (h) None of the parties to the Contract is a Governmental Authority. 3.5 CORPORATE AND OTHER MATTERS. (a) The execution, delivery and performance by the Company of this Agreement are within the Company's corporate powers, have been duly authorized by all necessary corporate action and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of organization, as amended, or by-laws of the Company or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Company or result in the creation or imposition of any Lien on any asset of the Company or any of its Subsidiaries (except as expressly contemplated hereby). (b) This Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms. (c) There is no action, suit, proceeding or investigation pending, or to the knowledge of the Company threatened, against or affecting the Company or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official which in any manner questions the validity of this Agreement. SECTION 4. COVENANTS The Company covenants and agrees with the Administrative Agent and the Banks that, from and after the date of this Agreement until the Obligations shall have been paid in full, no Letter of Credit shall be outstanding and the Commitments shall have terminated: 4.1 DELIVERY OF INSTRUMENTS AND CHATTEL PAPER. If any amount payable under or in connection with any of the Collateral shall be or become evidenced by any Instrument or Chattel Paper, such Instrument or Chattel Paper shall be immediately delivered to the Administrative Agent, duly indorsed in a manner satisfactory to the Administrative Agent, to be held as Collateral pursuant to this Agreement. 4.2 PAYMENT OF OBLIGATIONS. The Company will pay and discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all taxes, assessments and governmental charges or levies imposed upon the Collateral or in respect of income or profits therefrom, as well as all claims of any kind against or with respect to the Collateral, except that no such charge need be paid if the amount or validity thereof is currently being contested in good faith by appropriate proceedings, reserves in conformity with GAAP with respect thereto have been provided on the books of the Company and such proceedings could not reasonably be expected to result in the sale, forfeiture or loss of any of the Collateral or any interest therein. 4.3 MAINTENANCE OF PERFECTED SECURITY INTEREST; FURTHER DOCUMENTATION. (a) The Company shall maintain the security interest created by this Agreement as a perfected security interest, subject only to the Indenture Lien (if any), or, in the case of the PERC Rebates, any Lien permitted by Section 6.5(o) of the Credit Agreement, and shall defend such security interest against the claims and demands, other than those relating to the Indenture Lien (if any), or, in the case of the PERC Rebates, any Lien permitted by Section 6.5(o) of the Credit Agreement, of all Persons whomsoever. (b) At any time and from time to time, upon the written request of the Administrative Agent, and at the sole expense of the Company, the Company will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code (or other similar laws) in effect in any jurisdiction with respect to the security interests created hereby. 4.4 CHANGES IN LOCATIONS, NAME, ETC. The Company will not, except upon 15 days' prior written notice to the Administrative Agent and delivery to the Administrative Agent of all additional executed financing statements and other documents reasonably requested by the Administrative Agent to maintain the validity, perfection and priority of the security interests provided for herein: (i) change the location of its chief executive office or sole place of business from that referred to in Section 3.3; or (ii) change its name, identity or corporate structure to such an extent that any financing statement filed by the Administrative Agent in connection with this Agreement would become misleading. 4.5 CONTRACT. (a) The Company will perform and comply in all material respects with all its obligations under the Contract. (b) The Company will not amend, modify, terminate or waive any provision of the Contract. (c) The Company will exercise promptly and diligently each and every material right which it may have under the Contract (other than any right of termination). (d) The Company will deliver to the Administrative Agent a copy of each material demand, notice or document received by it relating in any way to the Contract that questions the validity or enforceability of the Contract. 4.6 PLEDGED STOCK. (a) If the Company shall become entitled to receive or shall receive any stock certificate (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the Capital Stock of the UNITIL SPC, whether in addition to, in substitution of, as a conversion of, or in exchange for, any shares of the Pledged Stock, or otherwise in respect thereof, the Company shall accept the same as the agent of the Administrative Agent and the Lenders, hold the same in trust for the Administrative Agent and the Lenders and deliver the same forthwith to the Administrative Agent in the exact form received, duly indorsed by the Company to the Administrative Agent, if required, together with an undated stock power covering such certificate duly executed in blank by the Company and with, if the Administrative Agent so requests, signature guaranteed, to be held by the Administrative Agent, subject to the terms hereof, as additional collateral security for the Obligations. Any sums paid upon or in respect of the Pledged Stock upon the liquidation or dissolution of the UNITIL SPC shall be paid over to the Administrative Agent to be held by it hereunder as additional collateral security for the Obligations, and in case any distribution of capital shall be made on or in respect of the Pledged Stock or any property shall be distributed upon or with respect to the Pledged Stock pursuant to the recapitalization or reclassification of the capital of the UNITIL SPC or pursuant to the reorganization thereof, the property so distributed shall, unless otherwise subject to a perfected security interest in favor of the Administrative Agent, be delivered to the Administrative Agent to be held by it hereunder as additional collateral security for the Obligations. If any sums of money or property so paid or distributed in respect of the Pledged Stock shall be received by the Company, the Company shall, until such money or property is paid or delivered to the Administrative Agent, hold such money or property in trust for the Lenders, segregated from other funds of the Company, as additional collateral security for the Obligations. (b) Without the prior written consent of the Administrative Agent, the Company will not (i) vote to enable, or take any other action to permit, the UNITIL SPC to issue any stock or other equity securities of any nature or to issue any other securities convertible into or granting the right to purchase or exchange for any stock or other equity securities of any nature of the UNITIL SPC, (ii) sell, assign, transfer, exchange, or otherwise dispose of, or grant any option with respect to, the Pledged Stock or Proceeds thereof (except pursuant to a transaction expressly permitted by the Credit Agreement), (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Pledged Stock or Proceeds thereof, or any interest therein, except for the security interests created by this Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of the Company or the Administrative Agent to sell, assign or transfer any of the Pledged Stock or Proceeds thereof. SECTION 5. REMEDIAL PROVISIONS 5.1 COMMUNICATIONS WITH OBLIGORS; COMPANY REMAIN LIABLE. (a) The Administrative Agent in its own name or in the name of others may at any time after the occurrence and during the continuance of an Event of Default communicate with parties to the Contract to verify with them to the Administrative Agent's satisfaction the terms of the Contract. (b) Upon the request of the Administrative Agent at any time after the occurrence and during the continuance of an Event of Default, the Company shall notify the parties to the Contract that the Contract has been assigned to the Administrative Agent for the ratable benefit of the Banks and that payments in respect thereof shall be made directly to the Administrative Agent. (c) Anything herein to the contrary notwithstanding, the Company shall remain liable under the Contract to observe and perform all the conditions and obligations to be observed and performed by it thereunder, all in accordance with the terms of any agreement giving rise thereto. Neither the Administrative Agent nor any Bank shall have any obligation or liability under or in respect of the Contract or the other Collateral by reason of or arising out of this Agreement or the receipt by the Administrative Agent or any Bank of any payment relating thereto, nor shall the Administrative Agent or any Bank be obligated in any manner to perform any of the obligations of the Company under or in respect of the Contract or the other Collateral, to make any payment, to make any inquiry as to the nature or the sufficiency of any payment received by it or as to the sufficiency of any performance by any party thereunder, to present or file any claim, to take any action to enforce any performance or to collect the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. 5.2 PLEDGED STOCK. (a) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given notice to the Company of the Administrative Agent's intent to exercise its corresponding rights pursuant to Section 5.2(b), the Company shall be permitted to receive all cash dividends paid in respect of the Pledged Stock and to exercise all voting and corporate rights with respect to the Pledged Stock; PROVIDED, HOWEVER, that no vote shall be cast or corporate right exercised or other action taken which, in the Administrative Agent's reasonable judgment, would impair the Collateral or which would be inconsistent with or result in any violation of any provision of the Credit Agreement, this Agreement or any other Loan Document. (b) If an Event of Default shall occur and be continuing and the Administrative Agent shall give notice of its intent to exercise such rights to the Company, (i) the Administrative Agent shall have the right to receive any and all cash dividends, payments or other Proceeds paid in respect of the Pledged Stock and make application thereof to the Obligations in such order as the Administrative Agent may determine, and (ii) any or all of the Pledged Stock shall be registered in the name of the Administrative Agent or its nominee, and the Administrative Agent or its nominee may thereafter exercise (x) all voting, corporate and other rights pertaining to such Pledged Stock at any meeting of shareholders of the UNITIL SPC or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Stock as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Stock upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate structure of the UNITIL SPC, or upon the exercise by the Company or the Administrative Agent of any right, privilege or option pertaining to such Pledged Stock, and in connection therewith, the right to deposit and deliver any and all of the Pledged Stock with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Administrative Agent may determine), all without liability except to account for property actually received by it, but the Administrative Agent shall have no duty to the Company to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing. (c) The Company hereby authorizes and instructs the UNITIL SPC to (i) comply with any instruction received by it from the Administrative Agent in writing that (x) states that an Event of Default has occurred and is continuing and (y) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from the Company, and the Company agrees that the UNITIL SPC shall be fully protected in so complying, and (ii) unless otherwise expressly permitted hereby, pay any dividends or other payments with respect to the Pledged Stock directly to the Administrative Agent. 5.3 PROCEEDS TO BE TURNED OVER TO ADMINISTRATIVE AGENT. If an Event of Default shall occur and be continuing, if requested by the Administrative Agent, all Proceeds received by the Company consisting of cash, checks and other near-cash items shall be held by the Company in trust for the Administrative Agent and the Banks, segregated from other funds of the Company, and shall, forthwith upon receipt by the Company, be turned over to the Administrative Agent in the exact form received by the Company (duly indorsed by the Company to the Administrative Agent, if required). All Proceeds received by the Administrative Agent hereunder shall be held by the Administrative Agent in a Collateral Account maintained under its sole dominion and control. All Proceeds while held by the Administrative Agent in a Collateral Account (or by the Company in trust for the Administrative Agent and the Banks) shall continue to be held as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 5.3. 5.4 APPLICATION OF PROCEEDS. If an Event of Default shall have occurred and be continuing, at any time at the Administrative Agent's election, the Administrative Agent may apply all or any part of Proceeds held in any Collateral Account in payment of the Obligations in such order as the Administrative Agent may elect, and any part of such funds which the Administrative Agent elects not so to apply and deems not required as collateral security for the Obligations shall be paid over from time to time by the Administrative Agent to the Company or to whomsoever may be lawfully entitled to receive the same. Any balance of such Proceeds remaining after the Obligations shall have been paid in full, no Letters of Credit shall be outstanding and the Commitments shall have terminated shall be paid over to the Company or to whomsoever may be lawfully entitled to receive the same. 5.5 CODE AND OTHER REMEDIES. If an Event of Default shall occur and be continuing, the Administrative Agent, on behalf of the Banks, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the New York UCC or any other applicable law. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Company or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker's board or office of the Administrative Agent or any Bank or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent or any Bank shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in the Company, which right or equity is hereby waived and released. The Company further agrees, at the Administrative Agent's request, to assemble the Collateral and make it available to the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at the Company's premises or elsewhere. The Administrative Agent shall apply the net proceeds of any action taken by it pursuant to this Section 5.5, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the Banks hereunder, including, without limitation, reasonable attorneys' fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Administrative Agent may elect, and only after such application and after the payment by the Administrative Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the New York UCC, need the Administrative Agent account for the surplus, if any, to the Company. To the extent permitted by applicable law, the Company waives all claims, damages and demands it may acquire against the Administrative Agent or any Bank arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least 10 days before such sale or other disposition. 5.6 WAIVER; DEFICIENCY. The Company waives and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the New York UCC. The Company shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Administrative Agent or any Bank to collect such deficiency. SECTION 6. THE ADMINISTRATIVE AGENT 6.1 ADMINISTRATIVE AGENT'S APPOINTMENT AS ATTORNEY-IN-FACT, ETC. (a) The Company hereby irrevocably constitutes and appoints the Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Company and in the name of the Company or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Company hereby gives the Administrative Agent the power and right, on behalf of the Company, without notice to or assent by the Company, to do any or all of the following: (i) in the name of the Company or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under the Contract or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Administrative Agent for the purpose of collecting any and all such moneys due under the Contract or with respect to any other Collateral whenever payable; (ii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral; (iii) execute, in connection with any sale provided for in Section 5.5, any indorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and (iv) (A) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (B) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (E) defend any suit, action or proceeding brought against the Company with respect to any Collateral; (F) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Administrative Agent may deem appropriate; and (G) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent were the absolute owner thereof for all purposes, and do, at the Administrative Agent's option and the Company's expense, at any time, or from time to time, all acts and things which the Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the Administrative Agent's and the Banks' security interests therein and to effect the intent of this Agreement, all as fully and effectively as the Company might do. Anything in this Section 6.1(a) to the contrary notwithstanding, the Administrative Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 6.1(a) unless an Event of Default shall have occurred and be continuing. (b) If the Company fails to perform or comply with any of its agreements contained herein, the Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement. (c) The expenses of the Administrative Agent incurred in connection with actions undertaken as provided in this Section 6.1, together with interest thereon at a rate per annum equal to the rate per annum at which interest would then be payable on past due Base Rate Loans under the Credit Agreement, from the date of payment by the Administrative Agent to the date reimbursed by the Company, shall be payable by the Company to the Administrative Agent on demand. (d) The Company hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released. 6.2 DUTY OF ADMINISTRATIVE AGENT. The Administrative Agent's sole duty with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the New York UCC or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar property for its own account. Neither the Administrative Agent, any Bank nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of the Company or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Administrative Agent and the Banks hereunder are solely to protect the Administrative Agent's and the Banks' interests in the Collateral and shall not impose any duty upon the Administrative Agent or any Bank to exercise any such powers. The Administrative Agent and the Banks shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to the Company for any act or failure to act hereunder, except for their own gross negligence or willful misconduct. 6.3 EXECUTION OF FINANCING STATEMENTS. Pursuant to Section 9-402 of the New York UCC and any other applicable law, the Company authorizes the Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of the Company in such form and in such offices as the Administrative Agent reasonably determines appropriate to perfect the security interests of the Administrative Agent under this Agreement. A photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction. 6.4 AUTHORITY OF ADMINISTRATIVE AGENT. The Company acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Banks, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Company, the Administrative Agent shall be conclusively presumed to be acting as agent for the Banks with full and valid authority so to act or refrain from acting, and the Company shall not be under any obligation, or entitlement, to make any inquiry respecting such authority. SECTION 7. MISCELLANEOUS 7.1 AMENDMENTS IN WRITING. None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except by a written instrument executed by the Company, the Administrative Agent and the Majority Banks. 7.2 NOTICES. All notices, requests and demands to or upon the Administrative Agent or the Company hereunder shall be effected in the manner provided for in Section 9.1 of the Credit Agreement. 7.3 NO WAIVER BY COURSE OF CONDUCT; CUMULATIVE REMEDIES. Neither the Administrative Agent nor any Bank shall by any act (except by a written instrument pursuant to Section 7.1), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Administrative Agent or any Bank, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Administrative Agent or any Bank of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Bank would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by law. 7.4 ENFORCEMENT EXPENSES; INDEMNIFICATION. The Company agrees to pay or reimburse each Bank and the Administrative Agent for all its costs and expenses incurred in enforcing or preserving any rights under this Agreement, including, without limitation, the fees and disbursements of counsel to each Bank and of counsel to the Administrative Agent. (a) The Company agrees to pay, and to save the Administrative Agent and the Banks harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement. (b) The Company agrees to pay, and to save the Administrative Agent and the Banks harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement. (c) The agreements in this Section 7.4 shall survive repayment of the Obligations and all other amounts payable under the Credit Agreement and the other Loan Documents. 7.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the successors and assigns of the Company and shall inure to the benefit of the Administrative Agent and the Banks and their successors and assigns; PROVIDED that the Company may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent. 7.6 COUNTERPARTS. This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. 7.7 SEVERABILITY. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 7.8 SECTION HEADINGS. The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof. 7.9 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 7.10 RELEASES. (a) At such time as the Loans, the Reimbursement Obligations and the other Obligations shall have been paid in full, the Commitments have been terminated and no Letters of Credit shall be outstanding, the Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Administrative Agent and the Company hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Collateral shall revert to the Company. At the request and sole expense of the Company following any such termination, the Administrative Agent shall deliver to the Company any Collateral held by the Administrative Agent hereunder, and execute and deliver to the Company such documents as the Company shall reasonably request to evidence such termination. (b) If any of the Collateral shall be sold, transferred or otherwise disposed of by the Company in a transaction permitted by the Credit Agreement, then the Administrative Agent, at the request and sole expense of the Company, shall execute and deliver to the Company all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral. IN WITNESS WHEREOF, each of the undersigned has caused this Security Agreement to be duly executed and delivered as of the date first above written. BANGOR HYDRO-ELECTRIC COMPANY By: /s/ Frederick Samp ------------------------- Title: Vice President SCHEDULE 1 FILINGS AND OTHER ACTIONS REQUIRED TO PERFECT SECURITY INTERESTS UNIFORM COMMERCIAL CODE FILINGS ------------------------------- Filing of a UCC-1 Financing Statement with the Secretary of State of Maine -----END PRIVACY-ENHANCED MESSAGE-----