-----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, MsyeCDHiaIqu5tpGFyfaF1pIysKF0cxj6OZhLVdUY0x2savFZpayNm6uxo5NxMgi L3P4CDDdqxtU84uCXSFw5Q== 0000009548-03-000007.txt : 20030328 0000009548-03-000007.hdr.sgml : 20030328 20030328090744 ACCESSION NUMBER: 0000009548-03-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 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: 1934 Act SEC FILE NUMBER: 001-10922 FILM NUMBER: 03622690 BUSINESS ADDRESS: STREET 1: 33 STATE ST CITY: BANGOR STATE: ME ZIP: 04401 BUSINESS PHONE: 2079455621 MAIL ADDRESS: STREET 1: 33 STATE STREET CITY: BANGOR STATE: ME ZIP: 04401 10-K 1 k102002.txt BANGOR HYDRO-ELECTRIC CO. 10-K 2002 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, 2002 Commission File No. 1-10922 ----------------- ------- 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(g) of the Act: Title of each class ------------------- 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 February 1, 2003 of the voting stock held by non-affiliates of the registrant was $5.284 million. This Page Intentionally Left Blank BANGOR HYDRO-ELECTRIC COMPANY TABLE OF CONTENTS ----------------- PART I Page ---- Item 1. Business 4 Item 2. Properties 5 Item 3. Legal Proceedings 6 Item 4. Submission of Matters to a Vote of Security Holders 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 6 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition 10 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26 Item 8. Financial Statements and Supplementary Data 27 Consolidated Statements of Income 27 Consolidated Balance Sheets 28 Consolidated Statements of Capitalization 30 Consolidated Statements of Cash Flows 31 Consolidated Statements of Common Stock Investment 32 Notes to Consolidated to Financial Statements 33 Report of Independent Accountants 60 Item 9. Changes in and Disagreements with Independent Accountants on Accounting and Financial Disclosure 61 PART III Item 10. Directors and Executive Officers of the Registrant 62 Item 11. Executive Compensation 64 Item 12. Security Ownership of Certain Beneficial Owners and Management 69 Item 13. Certain Relationships and Related Transactions 70 Item 14. Controls and Procedures 71 PART IV Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K 71 Signatures 73 Principal Executive Officer's and Chief Financial Officer's Certifications 74 Schedule II - Valuation and Qualifying Accounts and Reserves 77 Exhibits Delivered with this Report 78 Exhibits Incorporated Herein by Reference 79 PART I ------ Item 1 Business - ------ -------- (a) General development of business ------------------------------- Bangor Hydro-Electric Company (the Company) is a public utility incorporated in Maine in 1924. Effective October 10, 2001, pursuant to an Agreement and Plan of Merger, the Company became a wholly owned subsidiary of Emera Inc. of Halifax, Nova Scotia (Emera). For a discussion of general developments that have occurred in the Company's business since January 1, 2002, see Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition - Recent Events Affecting the Company". (a) Regulatory and Rate Matters --------------------------- See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition - Recent Events Affecting the Company" and Item 8, "Notes to Consolidated Financial Statements - Note 10 - Industry Restructuring and Rate Regulation". (b) Financial information about segments ------------------------------------ The Company has no material segments outside of the electric business. (c) Narrative description of business --------------------------------- (i) Principal business ------------------ The Company is a public utility primarily engaged in the transmission and distribution of electric energy, with a service area of approximately 5,275 square miles having a population of approximately 190,000 people. The Company serves approximately 107,000 customers in portions of the counties of Penobscot, Hancock, Washington, Waldo, Piscataquis and Aroostook. On March 1, 2000, the Company's obligation to generate or otherwise supply electric energy terminated as part of the restructuring of the electric utility industry in Maine. Although the Company has no long- term supply responsibility, the Maine Public Utilities Commission (MPUC) can mandate that the Company be the default standard offer provider. In February 2001, the MPUC directed the Company to provide energy services to customers as the standard offer provider for the period March 1, 2001 through February 28, 2002. However, the MPUC has selected third party suppliers to provide energy services to customers as the standard offer provider for the period March 1, 2002 through February 28, 2003. (ii) New product or segment - Not applicable ---------------------- (iii) Sources and availability of raw materials ----------------------------------------- Not applicable. The Company is primarily engaged in the delivery of electric energy. (iv) Franchises - Not applicable ---------- (v) Seasonal business ----------------- Sales of electricity are highest during the winter months primarily due to heating requirements and fewer daylight hours. (vi) Working capital items --------------------- The Company has been granted, through the ratemaking process, an allowance for working capital to operate its ongoing electric utility system. (vii) Single customer - Not applicable --------------- (viii) Backlog of orders - Not applicable ----------------- (ix) Business subject to renegotiation - Not applicable --------------------------------- (x) Competitive conditions ---------------------- The Company is a regulated public utility with an exclusive franchise to provide electricity delivery service within its service territory. (xi) Research and development - Not applicable ------------------------ (xii) Environmental matters --------------------- See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition - Other Matters - Environmental Matters" and Item 8, "Notes to Consolidated Financial Statements - Note 13 - Contingencies" for a discussion of Environmental Matters. (xiii) Number of employees ------------------- As of December 31, 2002, the Company had 313 full time employees. (d) Financial information about geographical areas - Not applicable ---------------------------------------------- Item 2 Properties - ------ ---------- The Company owns approximately 550 miles of transmission lines and approximately 4,200 miles of distribution lines to serve its customers in portions of the counties of Penobscot, Hancock, Washington, Waldo, Piscataquis and Aroostook, Maine. The Company owns a variety of customer and business information systems used to manage its business operations. Other properties consist of office, garage and warehouse facilities at various locations in its service area. Pursuant to the issuance of various first mortgage bond issues, all of the Company's property, real, personal or mixed, including real estate, easements, lines, poles, wires, generating stations, buildings and equipment, is subject to the lien of a Mortgage and Deed of Trust Securing First Mortgage Bonds dated as of July 1, 1936 as supplemented and amended, with Citibank, N.A. (formerly City Bank Farmers Trust Company) as Trustee. Pursuant to the issuance of various additional financings, all of BHE's property, real, personal or mixed, including real estate, easements, lines, poles, wires, generating stations, and buildings is further subject to the lien of a General and Refunding Mortgage Indenture and Deed of Trust dated as of June 1, 1995 as supplemented and amended, with The Chase Manhattan Bank (formerly Chemical Bank) as Trustee. This mortgage presently serves as a "second mortgage" on the Company's property, but is intended to become the Company's first mortgage once all outstanding first mortgage bonds are retired. Item 3 Legal Proceedings - ------ ----------------- See Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition - Recent Events Affecting the Company." See also Item 7, "Management's Discussion and Analysis of Results of Operations and Financial Condition - Other Matters - Environmental Matters " and Item 8, "Notes to Consolidated Financial Statements - Note 13 - Contingencies" 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 the Registrant's Common Equity and Related Stockholder - ------ ----------------------------------------------------------------- Matters - ------- BHE Holdings Inc., a wholly-owned subsidiary of Emera, owns all of the Company's common stock. For information regarding dividends declared see Item 8 - Consolidated Statements of Income; Consolidated Balance Sheets, Consolidated Statements of Capitalization, Consolidated Statements of Cash Flows; and Consolidated Statement of Common Stock Investment. This Page Intentionally Left Blank BANGOR HYDRO-ELECTRIC COMPANY Item 6 Selected Financial Data Six-Year Statistical Summary (Unaudited)
2002 2001 2000 1999 1998 1997 Megawatt Hours (MWH) Generated And Purchased Hydro Generation *** 84,436 65,392 90,719 205,265 275,379 262,377 Oil (Company) 868 2,435 3,142 69,026 96,476 69,580 Biomass/Refuse (Purchased) 154,832 150,401 152,060 137,384 156,051 159,990 NEPOOL/Other Purchases 2,333,428 1,782,797 1,914,615 1,629,643 1,522,125 1,583,093 --------- --------- --------- --------- --------- --------- Total Generated & Purchased 2,573,564 2,001,025 2,160,536 2,041,318 2,050,031 2,075,040 Less Line Losses and Company Use 128,282 130,067 140,470 143,198 139,028 147,298 --------- --------- --------- --------- --------- --------- Remainder-MWH sold 2,445,282 1,870,958 2,020,066 1,898,120 1,911,003 1,927,742 ========= ========= ========= ========= ========= ========= Classification of Sales-MWH Residential 556,462 546,144 558,596 533,566 522,836 533,161 Commercial 571,372 583,829 570,963 545,087 524,292 515,904 Industrial 449,170 462,792 604,959 667,059 662,382 687,365 Lighting 8,719 8,742 8,859 8,911 8,901 8,780 Wholesale 2,925 2,676 2,799 2,716 2,704 3,841 ---------- ---------- ---------- ---------- ---------- ---------- Total MWH Billed to Customers 1,588,648 1,604,183 1,746,176 1,757,339 1,721,115 1,749,051 Unbilled Sales-Net Increase 13,071 4,343 2,629 11,772 1,040 33,011 ---------- ---------- ---------- ---------- ---------- ---------- Total Delivered Sales (MWH) 1,601,719 1,608,526 1,748,805 1,769,111 1,722,155 1,782,062 (Less) Interruptible Sales 55,235 22,305 178,943 230,378 248,091 265,438 ---------- ---------- ---------- ---------- ---------- ---------- Total Firm Delivered Sales (MWH) 1,546,484 1,586,221 1,569,862 1,538,733 1,474,064 1,516,624 Off-System Sales 843,563 262,432 271,261 129,009 188,848 145,680 ---------- ---------- ---------- ---------- ---------- ---------- Total Energy Sales (MWH) 2,445,282 1,870,958 2,020,066 1,898,120 1,911,003 1,927,742 ========== ========== ========== ========== ========== ========== Electric Operating Revenues and Expenses (000's) Electric Operating Revenues Residential $ 52,219 $ 50,264 $ 57,746 $ 73,304 $ 71,396 $ 67,532 Commercial 39,645 37,795 44,329 63,093 60,191 55,391 Industrial 15,879 15,516 23,749 43,560 42,645 41,930 Lighting 1,888 1,837 1,929 2,268 2,207 2,065 Wholesale 18 19 63 220 235 310 ------------ ------------ ------------ ------------ ------------ ------------ Total Revenue from Customers $ 109,649 $ 105,431 $ 127,816 $ 182,445 $ 176,674 $ 167,228 Standard Offer Service Revenue 12,196 84,589 66,134 - - - ------------ ------------ ------------ ------------ ------------ ------------ Total Operating Revenue $ 121,845 $ 190,020 $ 193,950 $ 182,445 $ 176,674 $ 167,228 Unbilled Sales-Net Increase (Decrease) 1,245 815 (5,014) 2,042 481 2,375 ------------ ------------ ------------ ------------ ------------ ------------ Total Revenue $ 123,090 $ 190,835 $ 188,936 $ 184,487 $ 177,155 $ 169,603 (Less) Interruptible Revenue 963 1,687 4,973 10,049 11,064 11,215 ------------ ------------ ------------ ------------ ------------ ------------ Total Firm Revenue $ 122,127 $ 189,148 $ 183,963 $ 174,438 $ 166,091 $ 158,388 Off-System Revenue 39,712 18,952 19,352 12,947 14,630 13,615 ------------ ------------ ------------ ------------ ------------ ------------ Total Electric Operating Revenues $ 162,802 $ 209,787 $ 208,288 $ 197,434 $ 191,785 $ 183,218 ============ ============ ============ ============ ============ ============ Operating Expenses Fuel for Generation and Purchased Power $ 61,670 $ 34,649 $ 44,509 $ 80,748 $ 82,027 $ 92,792 Standard Offer Service Purchased Power 11,508 82,839 65,553 - - - Operating and Maintenance Expense 34,573 36,800 35,311 36,492 34,448 32,471 Depreciation and Amortization 24,537 27,751 28,312 30,565 31,891 35,104 Taxes 11,413 11,752 12,228 14,032 11,642 3,168 ------------ ------------ ------------ ------------ ------------ ------------ Total Operating Expenses $ 143,701 $ 193,791 $ 185,913 $ 161,837 $ 160,008 $ 163,535 ============ ============ ============ ============ ============ ============ Summary of Operations (000's) Operating Revenue $ 167,738 $ 217,408 $ 212,338 $ 197,994 $ 195,144 $ 187,324 Operating Expenses 143,701 193,791 185,913 161,837 160,008 163,535 Other Income (Loss) (including equity AFDC) 1,303 (654) 613 2,806 1,292 1,292 Interest Expense (net of borrowed AFDC) 12,879 14,273 15,936 20,683 24,963 25,467 ------------ ------------ ------------ ------------ ------------ ------------ Net Income (Loss) $ 12,461 $ 8,690 $ 11,102 $ 18,280 $ 11,465 $ (386) Less Preferred Dividends 266 266 266 945 1,244 1,376 ------------ ------------ ------------ ------------ ------------ ------------ Earnings (Loss) on Common Stock $ 12,195 $ 8,424 $ 10,836 $ 17,335 $ 10,221 $ (1,762) ============ ============ ============ ============ ============ ============
BANGOR HYDRO-ELECTRIC COMPANY Item 6 Selected Financial Data Six-Year Statistical Summary (Unaudited)
2002 2001 2000 1999 1998 1997 Selected Financial Data Total Assets (000's) $ 640,731 $ 678,245 $ 532,220 $ 543,950 $ 605,688 $ 600,583 ============ =========== ============ ============ ============ ============ Electric Plant (000's) Total Electric Plant $ 344,382 $ 341,143 $ 327,247 $ 318,435 $ 372,782 $ 358,878 Depreciation Reserve 97,473 93,985 86,684 84,825 101,633 96,595 ------------ ------------ ------------ ------------ ------------ ------------ Net Electric Plant $ 246,909 $ 247,158 $ 240,563 $ 233,610 $ 271,149 $ 262,283 ============ ============ ============ ============ ============ ============ Capitalization (000's) Short-Term Debt $ 16,000 $ 8,000 $ - $ - $ 12,000 $ 34,000 Long-Term Debt 118,059 131,968 161,960 183,300 263,028 221,643 Redeemable Preferred Stock - - - - 7,604 9,137 Preferred Stock 4,734 4,734 4,734 4,734 4,734 4,734 Common Equity 206,266 205,557 137,420 132,722 118,864 106,558 ------------ ---------- ------------ ------------ ------------ ------------ Total $ 345,059 $ 350,259 $ 304,114 $ 320,756 $ 406,230 $ 376,072 ============ ============ ============ ============ ============ ============ Capital Structure Ratios (%) Short-Term Debt 4.6 % 2.3 % - % - % 3.0 % 9.1 % Long-Term Debt 34.2 % 37.7 % 53.2 % 57.1 % 64.7 % 58.9 % Preferred Stock 1.4 % 1.3 % 1.6 % 1.5 % 3.0 % 3.7 % Common Stock 59.8 % 58.7 % 45.2 % 41.4 % 29.3 % 28.3 % ------------ ------------ ------------ ------------ ------------ ------------ Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % ============= ============ ============ =========== ============ ============ Miscellaneous Statistics Shares Outstanding (Average) 7,363,424 7,363,424 7,363,424 7,363,424 7,363,424 7,363,424 Shares Outstanding (Year End) 7,363,424 7,363,424 7,363,424 7,363,424 7,363,424 7,363,424 Number of Common Stockholders (Year End) 1 1 6,222 5,678 6,328 6,868 Basic Earnings (Loss) Per Common Share $ 1.66 $ 1.14 $ 1.47 $ 2.35 $ 1.39 $ (0.24) Diluted Earnings (Loss) Per Common Share $ 1.66 $ 1.08 $ 1.30 $ 2.08 $ 1.33 $ (0.24) Dividends Declared Per Common Share $ 1.29 $ 0.60 $ 0.80 $ 0.45 $ - $ - Book Value Per Common Share $ 17.65 $ 17.26 $ 18.66 $ 18.02 $ 16.14 $ 14.47 Return on Common Equity 9.46 % 6.30 % 7.98 % 13.81 % 9.11 % (1.64)% Ratio of AFDC to Common Stock Earnings 8 % 14 % 3 % (4)% 11 % (48)% Ratio of Earnings to Fixed Charges 2.35 % 1.89 % 2.11 % 2.25 % 1.59 % 0.86 % Payout Ratio 78 % 53 % 54 % 26 % - % - % Percentage of Construction Expenditures Funded Internally 100 % 100 % 100 % 100 % 100 % 100 % ============ ============ ============ ============ ============ ============ Residential Customer Data Average Number of Customers 94,510 93,398 92,656 91,726 90,888 90,433 Kilowatt-Hours per Customer 5,888 5,847 6,029 5,817 5,753 5,896 Revenue per Customer $ 552.52 $ 538.17 $ 623.23 $ 799.16 $ 785.54 $ 746.76 Revenue per Kilowatt-Hour in Cents 9.38 9.20 10.34 13.74 13.65 12.67 ============= ============= ============= ============= ============= ============= Miscellaneous System Data Net System Capability at Time of Peak (MW) Firm* n/a 182.23 98.98 273.72 381.54 344.44 System Peak Demand (MW) 290.26 290.37 304.71 293.08 281.63 277.06 Reserve Margin at Time of Peak** n/a % (37.2)% (67.5)% (6.6)% 35.5 % 24.3 % System Load Factor 68.0 % 68.4 % 70.8 % 74.5 % 75.4 % 79.5 % ============ ============ ============ ============ ============ ============ * The net system capability was reduced subsequent to the generation asset sale, which occurred in May 1999. As of 2002, BHE no longer provides generation capability to serve load. ** While the reserve margin at time of peak in 2001, 2000 and 1999 was negative, the system requirements were met through spot market purchases. As of 2002,BHE no longer provides generation capability to serve load. *** Subsequent to the generation asset sale in May 1999, Hydro generation was purchased.
ITEM 7 - ------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Recent Events Affecting the Company - ----------------------------------- REGULATORY PROCEEDINGS AND CORPORATE REORGANIZATION - As reported in the 2001 Form 10-K, on February 14, 2002, the Company presented to the Maine Public Utilities Commission (MPUC) a proposed resolution of the ongoing Alternative Rate Plan (ARP) proceeding that called for a multi- year freeze in the distribution portion of the Company's rates. The ARP proceeding, as well as proposed proceedings to implement a general increase in the Company's distribution rates and to initiate a management investigation of the Company, were suspended to provide the Company and interested parties additional time to negotiate a potential settlement of these interrelated proceedings. On April 25, 2002, the Company and other parties to the proceeding executed a stipulation to present to the MPUC a single comprehensive ARP applying to the Company's MPUC jurisdictional distribution revenue requirement and rates. On June 6, 2002, the MPUC approved the ARP and also dismissed the pending management investigation of the Company. The terms of the ARP include a rate plan to be in effect through December 31, 2007, with the Company's core distribution rates being adjusted downward on July 1 of each year from 2003 to 2007, at annual rates ranging from 2% to 2 3/4%. The Company is also allowed rate adjustments associated with certain specified categories of costs. The ARP also includes a mechanism whereby distribution returns on common equity outside of a certain range will be shared evenly between the Company and ratepayers. The Company is also required to meet certain customer service quality standards during the term of the ARP, and rate reduction penalties will result from not meeting the various performance measures as set forth in the stipulation. Finally, the ARP provides the Company with an accounting order allowing for the deferral of employee transition costs during 2002 and 2003 in connection with reductions in operating costs, which are discussed below. These deferred costs are being amortized over a ten year period, starting in June 2002. Successful implementation of the ARP necessitated a significant decrease in the Company's operating costs, and as a result, the Company reorganized its operations in 2002. The internal restructuring, which encompasses all aspects of the Company, has reduced operating costs by approximately 20%-25%. The Company is also beginning to transfer a portion of its fixed costs to variable costs, and improve processes to enhance long-term performance. As part of the restructuring, employment levels were reduced by approximately 25% in the second and third quarters of 2002 through early retirement and severance arrangements. Also in connection with the reorganization, the Company has adopted an Asset Management Model in order to improve efficiency and performance as well as lowering its operating costs. This model puts the principal of market based solutions into practice. The total employee transition costs incurred in 2002 were approximately $8.1 million and are recorded as a component of Other Regulatory Assets on the consolidated balance sheets at December 31, 2002. In February 2002, the MPUC issued an Order in connection with changes in the Company's stranded cost rates. As a result of the Order, and to recover the stranded costs created as a result of the restructuring of the electric utility industry in the State of Maine, the Company's stranded cost rates were increased effective March 1, 2002. The stranded cost rate increase resulted in the Company's total electric rates increasing by approximately 6.5%. The stranded cost rates are set for a period not to exceed three years, although the Company has the right to seek adjustments to these rates if certain economic situations occur. Also effective March 1, 2002, the Company is no longer responsible for being the standard-offer service provider. The Company, though, still has a standard-offer related power supply commitment with a third party through February 2004 amounting to approximately $57 million. The power delivered under this contract is being resold to one of the new standard-offer service providers, with estimated revenues to be realized of approximately $40 million. The difference between the cost of the power and the resale revenues are being recovered in the Company's stranded cost rates starting March 1, 2002. As a result of the Company no longer being the standard-offer provider effective in March 2002, and the previously discussed power contract obligation, there is an impact on the comparability of revenues and expenses for the 2002 periods presented in this filing in relation to 2001. REDEMPTION OF PREFERRED STOCK - As reported in its Current Report on Form 8-K dated December 9, 2002, the Company requested MPUC approval for authority to redeem all or a portion of its outstanding preferred stock. This approval was received on December 23, 2002. Also as reported in its Current Report on Form 8-K dated December 9, 2002, the Company was in the process of acquiring all or a portion of the shares through a tender offer and a call of the shares. In the first quarter of 2003 the Company completed the redemption of a significant portion of its outstanding preferred stock, at a total cost of approximately $4.7 million. As a result of these redemption's, the Company will now seek de-registration of its preferred stock. Results of Operations - --------------------- EARNINGS - Basic earnings per common share were $1.66, $1.14, and $1.47, for the years ended 2002, 2001 and 2000, respectively. The earned return on average common equity was 9.5% in 2002, 6.3% in 2001 and 8% in 2000. The increase in earnings in 2002 in relation to 2001 was a result of many factors. The single largest item was the approximately $3.9 million in costs incurred in 2001 associated with the Company's merger with Emera ($.33 reduction in earnings per common share in 2001). Also, principally as a result of the Company's workforce reductions in 2002, labor expense was approximately $1.9 million lower in 2002 as compared to 2001 ($.15 increase in earnings per common share in 2002 as compared to 2001). In 2001, as a result of a settlement of certain issues with the parties participating in the Company's stranded cost rate filing with the MPUC, the Company charged to expense approximately $1.7 million ($.13 reduction in earnings per common share in 2001). Offsetting these year 2002 earnings enhancements to some extent was an approximately $961,000 increase in pension and other postretirement benefit costs in 2002 as compared to 2001 ($.08 reduction in earnings per common share in 2002). The reduction in earnings in 2001 as compared to 2000 was due to several factors, the largest of which being costs associated with the Company's merger with Emera in each year. In 2001, the Company incurred approximately $3.9 million ($.33 reduction in earnings per common share) of such costs as compared to $3 million in 2000 ($.24 reduction in earnings per common share). Also, as previously discussed, in 2001, the Company charged to expense approximately $1.7 million ($.13 reduction in earnings per common share) in connection with the stranded cost rate filing settlement. Finally negatively impacting earnings in 2001 was the establishment of a $615,000 reserve ($.05 reduction in earnings per common share) associated with adjustments to revenue related to filings with the New England Power Pool (NEPOOL). REVENUES - With the implementation of competition in the electric utility industry in the state of Maine starting March 1, 2000, and excluding the provision of standard-offer service through February 2002, the Company no longer sells electricity to customers. The Company's T&D and stranded cost charges to customers, though, continue to be based on customers' electricity usage measured in kilowatt-hours (kWh). Consequently, discussion related to electric operating revenues will continue to have a kWh sales, or hereafter referred to as "energy sales" component. Electric operating revenues are as follows for 2002 as compared to 2001: 2002 2001 Change Residential $ 53,460,057 $ 51,011,678 $2,448,379 Commercial 39,990,493 37,908,435 2,082,058 Industrial 10,335,054 9,895,889 439,165 Other 1,945,380 1,875,277 70,103 ---------------------------------------- Subtotal $105,730,984 $100,691,279 $5,039,705 Large Special Contracts 5,163,127 5,554,793 -391,666 ---------------------------------------- Total Related to Energy Sales $110,894,111 $106,246,072 $4,648,039 Other Miscellaneous Revenues 4,935,070 7,620,164 -2,685,094 ---------------------------------------- Total Electric Operating Revenue $115,829,181 $113,866,236 $1,962,945 ---------------------------------------- Energy sales volume in gigawatt hours is as follows for each of 2002 and 2001: 2002 2001 Change Residential 566.6 554.1 12.5 Commercial 583.5 584.9 -1.4 Industrial 196.5 206.1 -9.6 Other 11.9 11.5 .4 ---------------------------------------- Subtotal 1,358.5 1,356.6 1.9 Large Special Contracts 243.2 251.9 -8.7 ---------------------------------------- Total Energy Sales 1,601.7 1,608.5 -6.8 ---------------------------------------- Electric operating revenue increased by approximately $2 million in 2002 as compared to 2001. The increase was principally the result of the previously discussed 6.54% rate increase associated with stranded cost recovery. Also impacting the increased revenues somewhat in 2002 was a .14% increase in energy sales, which excludes certain large special contract customers. Other miscellaneous revenues were lower in 2002 as a result of a $1.8 million reduction in certain stranded cost related revenue deferrals. The decrease is due to the implementation of new stranded cost rates on March 1, 2002, as well as the impact of the previously discussed loss in 2001 associated with the settlement of the stranded cost rate filing. Also, other revenues associated with charging electric generators for wheeling power over the Company's transmission lines and out of its service territory were approximately $2.1 million lower in 2002 compared to 2001. The decrease is due primarily to the fact that the new standard offer service provider is purchasing power from the Company to resell to standard offer customers in the Company's service territory that, prior to March 1, 2002, was wheeled outside of the service territory. Off-system sales, which are sales related to power pool and inter- connection agreements and resales of purchased power, were approximately $20.8 million greater in 2002 in relation to 2001. The increase is due principally to the previously discussed resale of power associated with the former standard-offer power supply contract. The $72.4 million decrease in standard-offer service revenues in 2002 is due mostly to the Company no longer being the standard-offer provider effective March 1, 2002. With the implementation of retail competition effective March 1, 2000, comparisons of electric operating revenues for 2001 as compared to 2000 are difficult. Total electric operating revenues, including standard- offer service, increased by approximately $5.1 million, or 2.4%, in 2001 in comparison to 2000. Principally as a result of increases in standard-offer service rates as ordered by the MPUC in 2000 and 2001, electric operating revenues attributable to energy sales were approximately $13.6 million higher in the 2001. From the March 1, 2000 through March 1, 2001, the cumulative increase in standard-offer service rates was approximately 60%. This impact of the increased standard-offer rates was offset to some extent by an 8% reduction in total energy sales in 2001, due principally to the shutdown of the Company's largest retail customer, HoltraChem Manufacturing Company (HoltraChem) in September 2000, the weak economy in the Company's service territory and by the impacts of warmer than average weather in 2001. Effective July 1, 2001, and providing for an increase in revenues, the Company entered into a special rate contract with a large industrial customer to provide fully bundled electric service (both T&D and energy) to this customer. Formerly, the Company was only providing T&D service to this customer. The Company entered into a power purchase contract to procure the power necessary to serve this customer under this contract. Principally as a result of the new contract, the Company recognized approximately $2.8 million in greater electric operating revenues associated with this customer in 2001 as compared to 2000. Other revenues, which decreased by approximately $8.3 million in the 2001 period, were most affected by a $11.8 million reduction in revenues associated with the standard-offer service deferral mechanism. In 2001, the Company's energy sales related to standard-offer revenues were greater than the associated costs of providing the standard-offer service, and consequently the Company's recorded reductions in other revenues of approximately $8.8 million. In the 2000 period, starting March 1, the Company recorded additional other revenues of approximately $3 million as a result of standard-offer costs exceeding energy sales related standard-offer revenues. The decreased other revenues in 2001 were offset to some extent by Holtrachem revenue sharing, which was a $1.1 million reduction in revenues in 2000, while, as a result of the Holtrachem plant shutdown, there was no revenue sharing in 2001. As a result of the February 2000 rate order from the MPUC, the Company's overall rates, including the impact of the initial standard- offer prices, were reduced by approximately 2.9% starting March 1, 2000. The Company also implemented various rate changes for its standard-offer service as approved by the MPUC. The result of these standard-offer rate changes for the period from March 1 through October 1, 2000 was an increase in the standard-offer prices of 36% for residential and small commercial customers and 25% for large industrial customers as compared to the prices when initially set by the MPUC on March 1, 2000. EXPENSES - Total fuel for generation and purchased power expense, excluding the standard offer, increased approximately $27 million in 2002 as compared to 2001. The largest item affecting the increased expense was approximately $29.8 million of costs in 2002 associated with the previously discussed former standard-offer power contract obligation. Also, the Company incurred approximately $1.8 million in greater expense in 2002 associated with other power purchases under long-term contracts with small power production facilities, resulting from increased generation in 2002. Offsetting these increases somewhat was an approximately $1.3 million decrease in Maine Yankee costs in 2002. Also there was a $1.2 million decrease in purchased power costs in 2002 in connection with serving a portion of a power sale contract. This reduction was due to decreases in the market prices of power in 2002 as compared to 2001. Finally, effective July 1, 2001, and running through February 28, 2002, the Company entered into a special rate contract with a large industrial customer to provide fully bundled electric service (both T&D and energy) to this customer. Formerly, the Company was only providing T&D service to this customer. The Company entered into a power purchase contract to procure the power necessary to serve this customer under this contact. In the 2001 period the Company incurred approximately $1.5 million in greater purchased power costs associated with serving the customer as compared to the 2002 period. The $71.3 million decrease in standard-offer service purchased power expense in 2002 is due mostly to the Company no longer being the standard-offer provider effective March 1, 2002. Total fuel for generation and purchased power expense, including the standard offer, increased approximately $7.4 million in 2001 as compared to 2000. Standard offer purchased power expense for the comparable periods of March through December of each year was $3.5 million higher in 2001. The increase is due to higher power prices, offset by reductions in standard offer sales. Also, in connection with the previously discussed new special rate contract with a large industrial customer, in 2001 the Company incurred $2.3 million of purchased power expense associated with serving this customer. Further increasing purchased power expense in 2001 was the loss in connection with the stranded cost rate settlement. Also increasing purchased power expense was the recording of a $615,000 reserve associated with adjustments to revenue related to filings with the NEPOOL. Finally, in the first two months of 2001, purchased power costs were also higher, since the Company purchased significantly more power on the spot power market as compared to 2000 as a result of the expiration of the power contracts that had been in place in the 2000 period. Further, the market prices for power were higher due to higher fuel prices and possibly lack of sufficient competition in the generation market. Offsetting these increases to some extent in 2001 were lower transmission related costs, including those associated with NEPOOL. In 2001, the Company also realized reduced transmission costs as a result of the construction of additional qualifying transmission facilities whose costs are recoverable from the other NEPOOL transmission owners. Other operation and maintenance (O&M) expense decreased by approximately $2.2 million in 2002 as compared to 2001. Principally as a result of the workforce reductions in 2002, O&M payroll expense was approximately $1.9 million lower in 2002 relative to 2001. Also, as a result of cost reduction efforts in 2002, other O&M non- labor expenses were generally lower as compared to 2001. Due principally to a refocus of the Company's line clearance program (tree trimming) in 2002, the associated expense was approximately $864,000 lower in 2002 as compared to 2001. These decreases in other O&M expense were offset somewhat by the previously discussed $961,000 increase in pension and other postretirement benefit costs in 2002 as compared to 2001. The increased expense is principally attributable to decreases in the discount rate used to actuarially compute the expense as well as reduced expected returns on plan assets as a result of poor stock market performance. Other O&M expense increased by approximately $1.5 million in 2001 relative to 2000. The single largest item impacting the increased expense was related to pension expense, which was approximately $1.4 million greater in 2001 as compared to 2000. This was due principally to changes in actuarial assumptions used in calculating pension expense and the end of the amortization of the transition pension benefit in 2001. Also in 2001, bad debt expense increased by approximately $610,000 due to the write-off of amounts associated with the Chapter 11 bankruptcy filing of a large industrial customer, a greater level of write-offs of standard offer receivables and in 2000 bad debt expense was reduced by a $200,000 decrease in the reserve for bad debts. These increases were offset to some extent by a reduction in legal and regulatory related costs in 2001, as there was a greater level of regulatory activities in 2000 in relation to 2001. Depreciation and amortization expense increased by approximately $525,000 in 2002 relative to 2001 and by approximately $866,000 in 2001 as compared to 2000 due principally to additions to the Company's electric plant in service in both 2002 and 2001. The Company is in the process of conducting a depreciation study to determine the appropriate useful lives for its plant assets as well as the propriety of the level of the Company's depreciation reserve, with an anticipated completion in 2003. Management cannot predict the results of the study or how the results will be implemented within the context of the Company's ARP. The Company's expenses over the period 2000-2002 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 have been deferred, and appear on the Consolidated Balance Sheets as assets on the strength of the regulatory authority to amortize them and to collect these amounts from customers (thus the term "regulatory assets"). Although there are a number of such authorized amortizations, the major ones include the amortization of purchased power contract buyouts/restructurings, Seabrook investment, deferred asset sale gain, and deferred employee transition costs. For a discussion of these regulatory assets and liabilities, see Notes 7 and 10 to the consolidated financial statements. Effective March 1, 2000, in connection with the implementation of new electric rates associated with the electric utility industry restructuring, the Company began amortizing certain stranded cost related regulatory assets and liabilities that had been previously deferred on the Company's balance sheets. Also, effective March 1, 2002, with the implementation of new stranded cost electric rates, certain of the previous amortizations were adjusted, and also the Company began amortizing new stranded cost related regulatory assets and liabilities that had been previously deferred on the Company's balance sheets since March 1, 2000. The following summarizes the components of the regulatory amortizations for 2002, 2001 and 2000: 2002 2001 2000 Contract buyouts and restructuring $20,274,191 $22,557,124 $22,311,448 Seabrook investment 1,699,050 1,699,050 1,699,050 Deferred asset sale gain (4,681,324) (8,076,133) (6,393,038) Other stranded cost related regulatory assets and liabilities (4,921,047) 386,908 382,295 Distribution related regulatory assets and liabilities 1,159,530 1,159,530 1,153,687 Employee transition costs 458,021 - - ------------------------------------- Total Regulatory Amortizations $13,988,421 $17,726,479 $19,153,442 ------------------------------------- The decrease in property and other taxes in 2002 in comparison to 2001 was principally due to a reduction in payroll taxes, resulting from the previously discussed corporate downsizing in 2002. This was offset somewhat by increased property taxes in 2002 caused by increases to electric plant in service and higher property tax rates. In December 2002, the Company filed with the Internal Revenue Service (IRS) a request for a change in the accounting for costs capitalized for income tax reporting purposes. This request, if accepted, could result in an approximately $6.7 million reduction in current income tax obligations. Management cannot predict the outcome of this filing with the IRS. The increase in property and other taxes in 2001 relative to 2000 was due primarily to higher property taxes, resulting from electric plant additions and increased property tax rates. The decrease in total federal and state income taxes in 2002 relative to 2001 was principally a function of the impact of $183,000 in additional income tax expense in 2001 in connection with disallowed investment tax credits, as well as adjustments in 2002 as a result of filing the year 2001 income tax returns. These decreases were offset by higher earnings in 2002. See Footnote 3 to the Consolidated Financial Statements for a reconciliation of the Company's effective income tax rate. The decrease in total federal and state income taxes for 2001 as compared to 2000 was principally a function of lower earnings in 2001 as compared to 2000. OTHER INCOME AND (DEDUCTIONS) AND INTEREST EXPENSE - Allowance for funds used during construction (AFDC), which includes carrying costs on certain regulatory assets and liabilities, decreased by approximately $219,000 in 2002 relative to 2001. The decrease was primarily a result of the implementation of new stranded cost rates on March 1, 2002, whereby the rate recovery of various regulatory assets began and the accrual of carrying costs ended. AFDC increased by $835,000 in 2001 relative to 2000 due mainly to approximately $526,000 in carrying costs being recorded on the deferred asset sale gain in 2000. The Company also recorded increased carrying costs on exercised Penobscot Energy Recover Company (PERC) common stock warrants in 2001 relative to 2000. Offsetting these increases to some extent was less AFDC associated with lower levels of construction in 2001. Other income, net of income taxes increased by approximately $2.1 million in 2002 compared to 2001. The increase is due mostly to the previously discussed $3.9 million in merger related costs incurred in 2001. Other income, net of income taxes decreased by approximately $1.7 million in 2001 in comparison to 2000 principally as a result of a $1.2 million gain on the sale of the Company's formerly wholly-owned subsidiary Penobscot Gas in 2000. Also merger related costs were $3.9 million in 2001 as compared to $3 million in 2000. Finally, investment income was lower in 2001 due principally to reductions in the Company's available cash balances from the 1999 generation asset sale. Long-term debt interest expense decreased $1.7 million in 2002 relative to 2001 due principally to repayments on the Company's long-term debt in each year. In June 2002 and 2001, the Company made $16.1 million and $15.1 million in principal payments, respectively, on the Company's Finance Authority of Maine (FAME) Revenue Notes. Also, monthly principal payments on the $24.8 million medium term notes, which were fully repaid in July 2002, amounted to approximately $5.5 million and $6.2 million, respectively, in 2002 and 2001. Also reducing 2002 long- term debt interest expense was the retirement of the $20 million in 7.38% first mortgage bonds at the end of July 2002. These decreases were offset to some extent by additional interest expense in 2002 resulting from the issuance of a $13.7 million note in October 2001 with the Municipal Review Committee (MRC) in connection with the exercise of common stock warrants. Long-term debt interest expense decreased $1.4 million in 2001 in relation to 2000 due primarily to the 2001 repayments on the Company's long-term debt discussed above, as well as debt repayments in 2001. In June 2000, the Company made a $14 million principal payment on the FAME Revenue Notes. Also, monthly principal payments on the $24.8 million medium term notes amounted approximately $5.5 million in 2000. These were offset to some extent by interest expense in 2001 associated with the $13.7 million MRC note issued in October 2001. Other interest expense increased approximately $170,000 in 2002 relative to 2001 principally to higher interest expense as a result of increased borrowings under the Company's revolving credit facility. Weighted average borrowings outstanding were approximately $21.8 million in 2002 as compared to $3 million in 2001. The increased borrowings were necessitated to some extent by the funding of debt service payments ($16.1 million in principal plus interest) on the FAME Revenue Notes at the end of June 2002 and the retirement of $20 million in 7.38% first mortgage bonds in July 2002. Also, other interest expense was impacted somewhat by a $125,000 reduction in amortization of debt issuance costs in 2002 due to the expiration of certain amortizations and lower short-term interest rates in 2002. Other interest expense increased by approximately $116,000 in 2001 in relation to 2000 due principally to borrowings and fees under the Company's revolving credit facility. In 2000 there were no borrowings under the revolving credit facility. This was offset to some extent by a reduction in the amortization of debt issuance costs in 2001 as a result of the end of the amortization period of certain deferred debt issuance costs in June 2001 and June 2000. Liquidity, Capital Requirements, and Capital Resources - ------------------------------------------------------ The Consolidated Statements of Cash Flows reflect events for the years ended December 2002, 2001 and 2000 as they affect the Company's liquidity. Net cash provided by operations was approximately $33.9 million in 2002, $25.3 million in 2001 and $37.6 million in 2000. The approximately $8.6 million increase in operating cash flows in 2002 relative to 2001 was due to several factors. The single largest item affecting the comparability of operating cash flows in the two years was approximately $14.2 million in payments in 2001 in connection with the exercise of the Company's common stock warrants (See Note 7 to the Consolidated Financial Statements). Also increasing operating cash flows in 2002 as compared to 2001 was the impact of the approximately $3.9 million in incremental merger related costs that were incurred in 2001. Operating cash flows are also impacted in each period by the standard-offer service. In 2002, the Company's standard-offer service costs exceeded revenues by approximately $2.1 million, while in 2001, revenues exceeded associated costs by approximately $8.8 million. Changes in accounts receivable and accounts payable in the statement of cash flows are also greatly impacted by the standard-offer related revenues and purchased power obligations. Negatively impacting operating cash flows in 2002 was $3.5 million in payments associated with benefits provided to terminated employees in connection with the previously discussed cost reduction efforts. The approximately $12.3 million reduction in operating cash flows in 2001 in relation to 2000 was the result of several factors. The largest single item impacting this change was cash payments to the PERC common stock warrant holders in connection with the exercise of warrants in each period. In 2001 approximately $14.2 million in payments were made to the holders of the warrants, while in 2000 these payments amounted to only $2.1 million. Cash flows from operations were further impacted in 2001 by lower earnings as compared to the year 2000. Operating cash flows are also impacted in both 2001 and 2000 by the standard-offer service. In 2001, the Company's standard-offer service revenues exceeded associated costs by approximately $8.8 million, while in 2000, the costs exceeded revenues by approximately $3 million. Changes in accounts receivable and accounts payable in the statement of cash flows are also greatly impacted by the standard-offer related revenues and purchased power obligations. Also cash flows were negatively impacted by a $.008/kWh rate reduction provided to certain large customers starting in April 2001. While the earnings impact of the rate discounts is negated by additional asset sale gain amortization to offset the rate discounts, cash flows are negatively impacted by providing the $2.5 million in rate discounts over the 10 1/2 month period the reduced rates were in effect. Enhancing cash flows to some extent in 2001 was the receipt in October 2001 of $2.6 million associated with the settlement of a dispute regarding the sale of a jointly owned property in which the Company had an interest. See Note 10 to the Consolidated Financial Statements for a discussion of this transaction. The following summarizes the Company's capital expenditures for each of 2002, 2001 and 2000: ($000's) 2002 2001 2000 Electric distribution system $ 7,916 $ 9,513 $ 8,188 Electric transmission system 1,415 1,590 4,184 Other, including general property and software 763 5,245 4,309 -------------------------------- Total capital expenditures $10,094 $16,348 $16,681 -------------------------------- Other capital expenditures in 2001 and 2000 included significant amounts in connection with customer information system changes necessitated by the restructuring of the electric industry on March 1, 2000. The Company expects its capital expenditures to total between $35 and $40 million over the next three years, although it may be necessary to adjust the budget for capital expenditures on a year-to- year basis. As previously discussed, in July 2000 the Company received $1.25 million in connection with the sale of Penobscot Gas. In 2002, the Company made $9.5 million in common dividend payments to its parent company, Emera, while in 2001, four quarterly common dividend payments of $.20 per share were paid to previous common shareholders. The increase in dividends paid on common stock in 2001 as compared to 2000 was due to an increase in the common dividend from $.15 to $.20 per share in March 2000. The increase in payments on long-term debt in 2002 was due principally to higher monthly principal payments on the $24.8 million medium term notes in 2002 as compared to 2001, and at the end of June 2002 the Company made a $16.1 million principal payment on the FAME revenue notes, as compared to a $15.1 million principal payment at the end of June 2001. Also, in July 2002 the Company retired $20 million of 7.38% first mortgage bonds. Finally, the Company made approximately $1.5 million of principal payments in 2002 on the $13.7 million MRC note as compared to approximately $433,000 in payments in 2001. In 2000, the Company made $19.5 million in repayments on long-term debt, including a $14 million principal payment at the end of June 2000 on the FAME Revenue Notes and $5.5 million in payments on the $24.8 million medium term notes. In connection with the final principal and interest payment on the $24.8 million medium term notes in 2002, the Company utilized $1.5 million of funds that had been maintained in a capital reserve fund since this debt had been issued in 1998. As discussed in Note 5 to the consolidated financial statements, in December 2002, the Company received $20 million in proceeds in connection with the issuance of 6.09% senior unsecured notes. The proceeds were utilized to paydown outstanding amounts under the Company's revolving credit facility. The Company had maintained full borrowing capacity under its revolving credit facility from the second quarter of 1999 through June 2001, but it became necessary to renew borrowings under the revolving line in June 2001 to fund the required FAME debt payment of $15.1 million. The Company's utilization of the line of credit was also impacted by the merger costs in 2001 and the cash payments to common stock warrant holders. The Company's borrowings under this arrangement amounted to $8 million at December 31, 2001. On June 29, 2001, the Company extended the revolving credit agreement until October 1 and then until March 31, 2002, and the agreement was further extended until June 30, 2003 with some modifications. The facility was increased to $60 million to accommodate the certain debt retirements in 2002, another pricing level was added to recognize the Company's improved credit and certain modifications were made to some of the financial covenants. Also, the Company entered into a promissory note that allows the Company to borrow up to an additional $10 million. This unsecured facility is used by the Company to manage working capital needs, and the interest rate setting mechanism and other major terms of the note are similar to terms in the revolving credit agreement. The Company's outstanding borrowings under these short-term borrowing facilities amounted to $16 million at December 31, 2002. Capital and operating needs in 2002, 2001 and 2000 were met through internally generated funds, the Company's revolving credit line and generation asset sale proceeds. Under the current projections of cash needs, the new credit facilities discussed above should provide adequate borrowing capacity or other longer-term financing vehicles. The Company has approximately $81.2 million of first mortgage bonds and other long-term debt maturities in the period 2003-2007. CONTRACTUAL CASH OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS - The following tables quantify the Company's future contractual obligations and commercial commitments as of December 31, 2002 ($ in 000's): Payments Due by Period ---------------------- Less than After 5 Contractual Obligations: Total 1Year 1-3 years 4-5 years years - ----------------------- ----- ----- --------- --------- ----- Long-term Debt $152,196 $34,137 $43,661 $ 5,276 $ 69,122 Operating Leases 2,242 860 993 389 - Long-term Purchased Power Commitments 278,992 22,516 35,541 31,365 189,570 -------- ------- ------- -------- ------- Total Contractual Cash Obligations $433,430 $57,513 $80,195 $37,030 $258,692 ======== ======= ======= ======= ======== See Notes 5 and 7 to the consolidated financial statements for a discussion of the Company's long-term debt obligations and long-term purchased power contract commitments. Amount of Committed Expiration per Period ----------------------------------------- Total Other Commercial Amounts Less than After 5 Commitments: Committed 1Year 1-3 years 4-5 years years ----------- --------- ----- --------- --------- ----- Lines of Credit $54,000 $54,000 $ - $ - $ - ------- ------- -------- -------- ------- Total Commercial Commitments $54,000 $54,000 $ - $ - $ - ======= ======= ======== ======== ======= See Note 5 to the consolidated financial statements for a discussion of the Company's short-term credit facilities. Other Matters MAINE YANKEE - TERMINATION OF DECOMMISSIONING OPERATIONS CONTRACT - In May 2000 Maine Yankee terminated its decommissioning operations contract with Stone & Webster Engineering Corp. (Stone & Webster) pursuant to the terms of the contract. Stone & Webster disputed Maine Yankee's grounds for the termination. In June 2000 Stone & Webster filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code with the United States Bankruptcy Court for the District of Delaware. Upon the contract termination Maine Yankee temporarily assumed the general contractor role and entered into interim agreements with Stone & Webster and obtained assignments of several subcontracts in order to allow decommissioning work to continue and to avoid the adverse consequences of an abrupt or inefficient demobilization from the Plant site. After assessing its long-term alternatives for safely and efficiently completing the decommissioning, including evaluating proposals from prospective successor general contractors, on January 26, 2001 Maine Yankee announced that it would continue to manage the project itself. In June 2000 Federal Insurance Company (Federal), which had provided performance and payment bonds in the amount of approximately $38.5 million each in connection with the decommissioning operations contract, filed a declaratory- judgment complaint against Maine Yankee in the Bankruptcy Court in Delaware, which was subsequently transferred to the United States District Court in Maine. The complaint alleged that Maine Yankee had improperly terminated the decommissioning operations contract with Stone & Webster and had failed to give proper notice of the termination to Federal under the contract, and that Federal had no further obligations under the bonds. After extensive discovery and resolution of certain preliminary issues by the court, in December 2001 Maine Yankee and Federal entered into a settlement agreement pursuant to which Federal paid Maine Yankee $44 million on January 18, 2002. The settlement was reflected on Maine Yankee's 2001 financial statements. That amount represented full payment under the performance bond, plus an additional amount under the payment bond reflecting certain payments previously made by Maine Yankee to subcontractors and suppliers who had not been fully paid by Stone & Webster. Maine Yankee deposited the payment in its decommissioning trust fund to offset past and future expenses resulting from the failures of Stone & Webster. In addition, Maine Yankee has continued to pursue its claims for damages that was originally filed against Stone & Webster and its parent corporations in August 2000 in the Bankruptcy Court in Delaware. After recognizing the payment from Federal, Maine Yankee asserted a right to recover an additional $21 million in that court from the bankrupt estates. In February 2002 Stone & Webster filed a claim for approximately $7 million against Maine Yankee in the Bankruptcy Court in Delaware for alleged breaches of contract and to subordinate any Maine Yankee claims. On May 30, 2002, the court concluded extensive hearings and argument by allowing a claim in favor of Maine Yankee under section 502(c) of the Bankruptcy Code, in the estimated amount of $20.8 million against each of the three principal bankrupt estates (jointly and severally). The Court's ruling also effectively precluded approximately $4 million of Stone & Webster's February 2002 claim against Maine Yankee, while offering no opinion or findings on the remainder, the resolution of which will, if necessary, be the subject of further proceedings. The actual cash amount to be recovered by Maine Yankee on this allowed claim remains contingent on a number of factors beyond Maine Yankee's control, including without limitation the extent to which the bankrupt estates ultimately have assets available to pay the claim, the final disposition of Stone & Webster's February 2002 claim, and possible reconsideration of the ruling in the future based on actual expenses of completing the decommissioning. Maine Yankee therefore cannot predict the final outcome of the Bankruptcy Court proceeding. MAINE YANKEE - NUCLEAR FUEL STORAGE - Federal legislation enacted in 1987 directed the Department of Energy (DOE) to proceed with the studies necessary to develop and operate a permanent high-level waste (spent fuel) repository at Yucca Mountain, Nevada. The project has encountered delays, and the DOE has indicated that the permanent disposal site is not expected to open before 2010, although originally scheduled to open in 1998. In accordance with the process set forth in the legislation, in February 2002 the Secretary of Energy recommended the Yucca Mountain site to the President for the development of a nuclear waste repository, and the President then recommended development of the site to the Congress. As provided in the statutory procedure, the State of Nevada formally objected to the site in April 2002, and in July 2002 the Congress overrode the objection. Construction of the repository requires the approval of the Nuclear Regulatory Commission (NRC), upon application of the DOE and after a public adjudicatory hearing, as well as a second NRC approval after completion of construction to operate the facility. The Company cannot predict the timing or results of those proceedings. In November 1997 the U.S. Court of Appeals for the District of Columbia Circuit confirmed the obligation of the DOE under the Nuclear Waste Policy Act of 1982 to take responsibility for spent nuclear fuel from commercial reactors in January 1998. After an unsuccessful effort by Maine Yankee in the same court to compel the DOE to take Maine Yankee's spent fuel, in June 1998 Maine Yankee filed a claim for money damages in the U.S. Court of Federal Claims for the costs associated with the DOE's default. In November 1998 the Court granted summary judgment in favor of Maine Yankee, ruling that the DOE had violated its contractual obligations, but leaving the amount of damages incurred by Maine Yankee for later determination by the Court. Since then the parties have been engaged in extensive discovery and resolution of pre-trial issues in the damages phase of the proceeding. Maine Yankee is pursuing its claim for determination of damages vigorously, but cannot predict the outcome or timing of the determination. At the same time, as an interim measure until the DOE meets its contractual obligation to dispose of Maine Yankee's spent fuel at Yucca Mountain or elsewhere, the Company constructed an independent spent fuel storage installation (ISFSI), utilizing dry-cask storage, on the Plant site and is in the process of transferring the spent fuel from the spent-fuel pool to the individual casks and the casks to the ISFSI. The company's total cost of maintaining the ISFSI will be substantially affected by heightened security costs and by the length of time it is required to operate the ISFSI before the DOE honors its contractual obligation to take the fuel from the site. The Company's current decommissioning cost estimated is based on an assumption that its operation of the ISFSI will end in 2023, but the actual period of operation and cost may vary. On January 15, 2003, the Company notified NAC International (NAC), the contractor responsible for providing for the fabrication of the spent- fuel casks and transferring the fuel to the casks and the casks to the ISFSI, that the Company was terminating its contract with NAC pursuant to the terms of the contract. NAC had been experiencing financial difficulties and had requested relief from the terms of the contract. Maine Yankee believes that NAC had also failed to perform its contractual obligations in accordance with the terms of the contract and provide adequate assurance of its ability to do so in the future. NAC has indicated that it disputes Maine Yankee's basis for terminating the contract and has served Maine Yankee with a demand to arbitrate the dispute, while at the same time the parties have been in negotiations to resolve the situation. In the meantime, Maine Yankee has entered into contracts with the major subcontractors and resumed the transfer of fuel to the ISFSI under its own management. Maine Yankee believes that its termination of the NAC contract was legally justified, but cannot predict the outcome of the negotiations or arbitration proceeding. In connection with the state of Maine's electric industry restructuring law, the Company was allowed the recovery of Maine Yankee decommissioning costs as a component of its stranded costs. In the Company's stranded cost rate orders from the MPUC that became effective on March 1, 2000 and 2002, the Company was allowed to defer the amount of any future FERC ordered changes in Maine Yankee's decommissioning collections. Consequently, management does not believe that Maine Yankee's decommissioning contractor difficulties or nuclear fuel storage issues will have a material adverse impact on the Company's results of operations, financial condition or cash flows. 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 (DEP) under various Maine environmental statutes. The Company is actively engaged in complying with these federal and state acts and statutes, and it has not, to date, encountered material difficulties in connection with such compliance. In 1992, the Company received notice from the DEP 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 those sites on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act and would pursue potentially responsible parties. With respect to this site, the Company is one of a number of waste generators under investigation. 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 this waste disposal site. 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, 2002, the liability recorded by the Company for its estimated environmental remediation costs amounted to approximately $411,000. The Company's actual future environmental remediation costs may be different as additional factors become known. In 2002 the Company expended approximately $171,000 in operations to comply with environmental standards for air, water and hazardous materials. NEW ACCOUNTING PRONOUNCEMENT - In June 2002, the Financial Accounting Standards Board issued Statement No. 143, "Accounting for Asset Retirement Obligations". This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long- lived assets that result from acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management does not believe that the implementation of this Statement will materially impact the Company's financial position, earnings or cash flows, principally as a result of the regulatory accounting utilized by the Company. In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" (FIN 45). Along with new disclosure requirements, FIN 45 requires guarantors to recognize at the inception of certain guarantees a liability for the fair value of the obligation undertaken in issuing the guarantee. This differs from the current practice to record a liability only when a loss is probable and reasonably estimable. The recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The adoption of FIN 45 is not expected to have a material effect on the Company's results of operations or financial position. In December 2002, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from the other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired before February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Management is currently evaluating the impact of the adoption of FIN 46 and does not anticipate that it will have a material effect on the Company's result of operations or financial position. CRITICAL ACCOUNTING POLICIES - We prepare our financial statements in conformity with accounting principles generally accepted in the United States. Judgments and uncertainties about the application of these accounting policies along with estimates and other assumptions may affect reported results. Regulation - As a regulated electric utility, the Company prepares its financial statements in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation", (SFAS No. 71) for its regulated business. In order for a Company to report under SFAS No. 71, the Company's rates must be designed to recover its costs of providing service and must be able to collect those rates from customers. If rate recovery becomes unlikely or uncertain, whether due to competition or regulatory action, this accounting standard would no longer apply to the Company's regulated operations. In the event the Company determines that it no longer meets the criteria for applying SFAS No. 71, the accounting impact would be an extraordinary non-cash charge to operations of an amount that could be material. Management periodically reviews these criteria to ensure the continuing application of SFAS No. 71 is appropriate. Based on a current evaluation of the various factors and conditions that are expected to impact future cost recovery, Management believes future recovery of its regulatory assets are probable. Pension and Other Postretirement Benefits - Assumptions used in determining projected benefit obligations and the fair values of plan assets for the Company's pension plans and other postretirement benefit plans are evaluated periodically by management in consultation with outside actuaries. Changes in assumptions are based on relevant company data, such as rate of increase in compensation levels and the long-term rate of return on plan assets. Critical assumptions, such as the discount rate used to measure the benefit obligations, the expected long-term rate of return on plan assets and health care cost projections, are evaluated and updated annually. The Company has assumed that the expected long-term rate of return on plan assets will be 8%, a 1% reduction from the assumption utilized in 2001. At the end of each year, the Company determines the discount rate that reflects the current rate at which pension liabilities could be effectively settled. This rate should be in line with rates for high quality fixed income investments available for the period to maturity of the pension benefits, and changes as long-term interest rates change. At year-end 2002, we determined this rate to be 6.75%. Postretirement benefit plan discount rates are the same as those used by our defined benefit pension plan in accordance with the provisions of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions". In the fourth quarter of 2002, the Company recorded a non-cash adjustment to equity through other comprehensive loss of approximately $2 million to reflect additional minimum pension liability. Based on the current assumptions, as well as the impact of recent market declines in the value of pension assets, the Company estimates that the pension expense for 2003 will increase approximately $1.5 million over the 2002 expense. Also, the Company will be required to start making contributions to its pension plan in 2003, amounting to approximately $2.1 million. The trend in health care costs is difficult to estimate and it has an important effect on postretirement liabilities. The 2002 health care cost trend rate, which is the weighted average annual projected rate of increase in the per capita cost of covered benefits, was 9%. This rate is assumed to decrease to 5% by 2008 and then remain at that level. Other - 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. We reserve an estimate for potential uncollectible customer accounts based on historical uncollectible experience and specific customer identification where practical. Depreciation of electric plant is provided using the straight-line method at rates designed to allocate the original cost of properties over their estimated service lives. Income taxes are recorded in accordance with SFAS No. 109, "Accounting for Income Taxes." FORWARD LOOKING STATEMENTS - 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, the Company's merger with Emera, future economic conditions, relationships with lenders, earnings retention and dividend payout policies, developments in the legislative, regulatory and competitive environments in which the Company operates and other circumstances that could affect revenues and costs. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's major financial market risk exposure is changing interest rates. Changes in interest rates will affect interest paid on variable rate debt and the fair value of fixed rate debt. The Company manages interest rate risk through a combination of both fixed and variable rate debt instruments. The Company also was a party to an interest rate swap associated with the variable rate medium term notes (See Note 13 to the 2001 Form 10-K). This debt was fully repaid in July 2002. Item 8 - ------ Financial Statements & Supplementary Data - ----------------------------------------- BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31,
Predecessor ----------- Period From Period From January 1, Acquisition 2001 Date to Through December 31, Acquisition 2002 2001 Date 2000 ---- ---- ---- ---- Electric Operating Revenues: Electric operating revenue (Note 1) $ 115,829,181 $ 29,919,908 $ 83,946,328 $ 126,852,407 Off-system sales (Note 7) 39,712,482 4,234,118 14,718,171 19,351,606 Standard offer service (Note 10) 12,195,953 17,476,348 67,112,864 66,133,532 ------------- ------------ ------------- ------------- $ 167,737,616 $ 51,630,374 $ 165,777,363 $ 212,337,545 ------------- ------------ ------------- ------------- Operating Expenses: Fuel for generation and purchased power (Notes 1 and 4) $ 61,670,112 $ 8,670,095 $ 25,978,835 $ 44,509,554 Standard offer service purchased power (Note 10) 11,507,606 16,945,383 65,893,732 65,552,980 Other operation and maintenance (Notes 1 and 6) 34,572,636 9,502,542 27,297,029 35,310,660 Depreciation and amortization (Note 1) 10,549,148 2,198,158 7,826,371 9,158,885 Regulatory amortizations (Notes 7, 8 and 10) 13,988,421 4,345,577 13,380,902 19,153,442 Taxes - Local property and other 4,859,734 1,181,771 3,817,948 4,795,698 Income (Note 3) 6,553,102 2,038,384 4,713,760 7,432,261 ------------- ------------ ------------- ------------- $ 143,700,759 $ 44,881,910 $ 148,908,577 $ 185,913,480 ------------- ------------ ------------- ------------- Operating Income $ 24,036,857 $ 6,748,464 $ 16,868,786 $ 26,424,065 Other Income And (Deductions): Allowance for equity funds used during construction (Note 1) 497,920 139,532 464,541 158,698 Other, net of applicable income taxes (Notes 2 and 3) 805,363 157,452 (1,416,135) 454,715 ------------- ------------ ------------- ------------- Income Before Interest Expense $ 25,340,140 $ 7,045,448 $ 15,917,192 $ 27,037,478 ------------- ------------ ------------- ------------- Interest Expense: Long-term debt (Note 5) $ 12,145,601 $ 3,393,733 $ 10,429,419 $ 15,211,905 Other (Note 5) 1,179,320 286,443 722,586 893,455 Allowance for borrowed funds used during construction (Note 1) (446,083) (135,676) (423,431) (169,929) ------------- ------------ ------------- ------------- $ 12,878,838 $ 3,544,500 $ 10,728,574 $ 15,935,431 ------------- ------------ ------------- ------------- Net Income $ 12,461,302 $ 3,500,948 $ 5,188,618 $ 11,102,047 Dividends On Preferred Stock (Note 4) 265,570 66,429 199,141 265,570 ------------- ------------ ------------- ------------- Earnings Applicable To Common Stock $ 12,195,732 $ 3,434,519 $ 4,989,477 $ 10,836,477 ============= ============ ============= ============= Weighted Average Number Of Shares Outstanding (Note 4) 7,363,424 7,363,424 7,363,424 7,363,424 ------------- ------------ ------------- ------------- Earnings Per Common Share (Note 4): Basic $ 1.66 $ .47 $ .67 $ 1.47 Diluted 1.66 .47 .61 1.30 ------------- ------------ ------------- ------------- Dividends Declared Per Common Share $ 1.29 $ - $ .60 $ .80 ------------- ------------ ------------- ------------- The accompanying notes are an integral part of these consolidated financial statements.
Item 8 - ------ Financial Statements & Supplementary Data - ----------------------------------------- BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS December 31,
Assets 2002 2001 ---- ---- Investment In Utility Plant: Electric plant in service, at original cost (Note 11) $ 333,410,221 $ 328,559,986 Less - Accumulated depreciation and amortization (Note 1) 97,473,295 93,984,836 ------------- ------------- $ 235,936,926 $ 234,575,150 Construction work in progress (Note 1) 5,933,988 7,307,837 ------------- ------------- $ 241,870,914 $ 241,882,987 Investments in corporate joint ventures: (Notes 1 and 7) Maine Yankee Atomic Power Company $ 4,033,846 $ 4,421,884 Maine Electric Power Company, Inc. 1,004,473 853,562 ------------- ------------- $ 246,909,233 $ 247,158,433 ------------- ------------- Other Investments, at cost (Note 9) $ 3,590,720 $ 3,497,681 ------------- ------------- Funds held by trustee, at cost (Notes 5 and 9) $ 21,191,940 $ 22,694,648 ------------- ------------- Current Assets: Cash and cash equivalents (Notes 1 and 9) $ 988,752 $ 884,617 Accounts receivable, net of reserve ($1,085,052 in 2002 and $761,000 in 2001) 21,027,291 19,268,889 Unbilled revenue receivable (Note 1) 8,318,821 15,379,708 Inventories, at average cost: Material and supplies 2,466,988 2,531,853 Fuel oil 44,860 53,320 Prepaid expenses 285,212 671,267 ------------- ------------- Total current assets $ 33,131,924 $ 38,789,654 ------------- ------------- Regulatory Assets and Deferred Charges: Goodwill-EMERA Acquisition (Note 2) $ 82,537,291 $ 82,537,291 Investment in Seabrook nuclear project, net of accumulated amortization of $36,969,396 in 2002 and $35,270,346 in 2001 (Notes 8 and 10) 21,872,679 23,571,729 Costs to terminate/restructure purchased power contracts, net of accumulated amortization of $166,003,281 in 2002 and $145,729,090 in 2001 (Notes 7 and 10) 72,675,931 92,057,206 Maine Yankee decommissioning costs (Notes 7 and 10) 31,101,273 37,306,576 Above-market purchased power contract obligation (Notes 10 and 13) 63,341,000 73,954,000 Other regulatory assets (Notes 3, 5, 6, 7 and 10) 57,843,677 52,657,562 Other deferred charges (Note 6) 6,535,328 4,019,969 ------------- ------------- Total regulatory assets and deferred charges $ 335,907,179 $ 366,104,333 ------------- ------------- Total Assets $ 640,730,996 $ 678,244,749 ============= ============= The accompanying notes are an integral part of these consolidated financial statements.
Item 8 - ------ Financial Statements & Supplementary Data - ----------------------------------------- BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS December 31,
Stockholders' Investment and Liabilities 2002 2001 ---- ---- Capitalization: (see accompanying statement) Common stock investment (Notes 4 and 6) $ 206,266,149 $ 205,556,673 Preferred stock (Note 4) 4,734,000 4,734,000 Long-term debt, net of current portion (Notes 5 and 9) 118,058,636 131,967,827 ------------- ------------- Total capitalization $ 329,058,785 $ 342,258,500 ------------- ------------- Current Liabilities: Notes payable - banks (Note 5) $ 16,000,000 $ 8,000,000 ------------- ------------- Other current liabilities - Current portion of long-term debt (Notes 5 and 9) $ 34,137,342 $ 43,245,891 Accounts payable 20,281,376 22,491,785 Dividends payable 66,429 66,429 Accrued interest 2,092,608 2,663,225 Customers' deposits 572,291 572,867 Current income taxes (refundable) payable (355,008) 1,916,892 ------------- ------------- Total other current liabilities $ 56,795,038 $ 70,957,089 ------------- ------------- Total current liabilities $ 72,795,038 $ 78,957,089 ------------- ------------- Regulatory and Other Long-term Liabilities (Note 3) Deferred income taxes - Seabrook $ 11,337,954 $ 12,223,523 Other accumulated deferred income taxes 48,947,440 47,405,476 Maine Yankee decommissioning liability (Note 7) 31,101,273 37,306,576 Deferred gain on asset sale (Note 10) 9,888,574 14,574,316 Above-market purchased power contract obligation (Note 13) 63,341,000 73,954,000 Other regulatory liabilities (Notes 7 and 10) 11,264,848 18,961,715 Unamortized investment tax credits 1,185,596 1,311,928 Accrued pension and postretirement benefit costs (Note 6) 50,494,119 39,655,265 Other long-term liabilities (Notes 7 and 11) 11,316,369 11,636,361 ------------- ------------- Total regulatory and other long-term liabilities $ 238,877,173 $ 257,029,160 ------------- ------------- Total Stockholders' Investment and Liabilities $ 640,730,996 $ 678,244,749 ============= ============= The accompanying notes are an integral part of these consolidated financial statements.
Item 8 - ------ Financial Statements & Supplementary Data - ----------------------------------------- BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION December 31,
2002 2001 ---- ---- Common Stock Investment (Notes 1, 2 and 4) Common stock, no par value, stated value $5 per share- $ 36,817,120 $ 36,817,120 Authorized -- 10,000,000 shares Outstanding -- 7,363,424 shares Amounts paid in excess of par value 165,352,312 165,352,312 Accumulated other comprehensive loss (Note 6) (2,033,534) (47,278) Retained earnings 6,130,251 3,434,519 ------------- ------------- Total common stock investment $ 206,266,149 $ 205,556,673 Preferred Stock, Non-participating, cumulative, par value $100 per share, ------------- ------------- authorized 600,000 shares (Note 4): Not redemable or redeemable solely at the option of the issuer- 7%, Noncallable, 25,000 shares authorized and outstanding $ 2,500,000 $ 2,500,000 4.25%, 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 Long-Term Debt (Notes 5 and 9) ------------- ------------- First Mortgage Bonds- 10.25% Series due 2020 $ 30,000,000 $ 30,000,000 8.98% Series due 2022 20,000,000 20,000,000 7.30% Series due 2003 15,000,000 15,000,000 7.38% Series due 2002 - 20,000,000 ------------- ------------- $ 65,000,000 $ 85,000,000 Other Long-Term Debt- ------------- ------------- Finance Authority of Maine - Taxable Electric Rate Stabilization Revenue Notes, 7.03% Series 1995A, due 2005 $ 55,400,000 $ 71,500,000 Medium Term Notes, Variable interest rate-LIBO rate plus 1.125%, due 2002 - 5,460,000 Municipal Review Committee Note, 5%, due 2008 11,780,660 13,234,394 Senior unsecured note, 6.09%, due 2012 20,000,000 - Other miscellaneous notes payable, 3.90%, due 2006 15,318 19,324 ------------- ------------- $ 87,195,978 $ 90,213,718 Less: Current portion of long-term debt 34,137,342 43,245,891 ------------- ------------- $ 53,058,636 $ 46,967,827 ------------- ------------- Total Long-Term Debt $ 118,058,636 $ 131,967,827 ------------- ------------- Total Capitalization $ 329,058,785 $ 342,258,500 ============= ============= The accompanying notes are an integral part of these consolidated financial statements.
Item 8 - ------ Financial Statements & Supplementary Data - ----------------------------------------- BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31,
Predecessor ----------- Period From Period From Acquisition January 1, Date to 2001 Through December 31, Acquisition 2002 2001 Date 2000 -------------- ------------ ------------- ------------- Cash Flows From Operating Activities: Net income $ 12,461,302 $ 3,500,948 $ 5,188,618 $ 11,102,047 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 10,549,148 2,198,158 7,826,371 9,158,885 Amortization of Seabrook nuclear project (Note 8) 1,699,050 424,763 1,274,287 1,699,050 Amortization of contract buyouts and restructuring (Note 7) 20,274,191 5,639,281 16,917,843 22,311,448 Amortization of deferred asset sale gain (Note 10) (4,681,324) (2,105,076) (5,971,057) (6,393,038) Other amortizations (3,330,048) 375,024 1,193,607 1,896,179 Allowance for equity funds used during construction (Note 1) (497,920) (139,532) (464,541) (158,698) Deferred income tax provision and amortization of investment tax credits (Note 3) 1,625,652 (212,917) (5,976,077) (2,765,264) Gain on sale of subsidiary - - - (1,205,727) Deferred Maine Yankee replacement power cost write-off (Note 7) - - - 1,992,848 Changes in assets and liabilities: Costs to restructure purchased power contract (Note 7) (750,000) (250,000) (750,000) (1,000,000) Deferred standard-offer service costs (Note 10) (2,138,380) 4,265,218 4,580,779 (2,988,823) Deferred special rate contract revenues (Note 10) (115,711) (910,954) (1,404,194) (1,368,948) Employee transition costs (Note 10) (3,535,097) - - - Exercise of PERC warrants-cash paid in lieu of issuing shares (Note 7) - (4,951,550) (9,225,892) (2,129,387) Deferred Wyman#4 litigation settlement proceeds (Note 10) - 2,592,294 - - Deferred incremental Maine Yankee costs (Note 7) - - - 807,616 Deferred costs associated with generation asset sale (Note 10) - - - 107,765 Accounts receivable, net and unbilled revenue 5,302,485 (1,291,684) 1,298,321 (5,113,248) Accounts payable (3,759,662) (1,032,699) (1,359,942) 10,609,785 Accrued interest (570,617) (703,043) 837,030 (23,521) Current and deferred income taxes (2,271,900) (293,705) 2,253,111 (10,093) Accrued pension and postretirement benefit costs (Note 6) 4,294,357 840,025 2,183,113 823,049 Other current assets and liabilities, net 458,802 (257,941) 580,127 202,486 Other, net (1,086,422) (256,505) (1,150,926) 65,770 -------------- ------------ ------------- ------------- Net Increase in Cash From Operating Activities: $ 33,927,906 $ 7,430,105 $ 17,830,578 $ 37,620,181 Cash Flows From Investing Activities: -------------- ------------ ------------- ------------- Construction expenditures $ (10,094,378)$ (6,264,489) $ (10,083,839) $ (16,680,501) Allowance for borrowed funds used during construction (Note 1) (446,083) (135,676) (423,431) (169,929) Proceeds from sale of subsidiary - - - 1,250,000 -------------- ------------ ------------- ------------- Net Decrease in Cash From Investing Activities $ (10,540,461)$ (6,400,165) $ (10,507,270) $ (15,600,430) Cash Flows From Financing Activities: -------------- ------------ ------------- ------------- Dividends on preferred stock $ (265,570)$ (66,380) $ (199,190) $ (265,570) Dividends on common stock (9,500,000) (1,472,685) (4,418,054) (5,522,567) Payments on long-term debt (Note 5) (43,017,740) (2,054,457) (19,720,645) (19,460,000) Capital reserve funds used in repayment on long-term debt 1,500,000 - - - Proceeds from issuance of long-term debt (Note 5) 20,000,000 - - - Short-term debt, net (Note 5) 8,000,000 2,000,000 6,000,000 - -------------- ------------ ------------- ------------- Net Decrease in Cash From Financing Activities $ (23,283,310)$ (1,593,522) $ (18,337,889) $ (25,248,137) -------------- ------------ ------------- ------------- Net Increase (Decrease) in Cash and Cash Equivalents $ 104,135 $ (563,582) $ (11,014,581) $ (3,228,386) Cash and Cash Equivalents at Beginning of Year 884,617 1,448,199 12,462,780 15,691,166 -------------- ------------ ------------- ------------- Cash and Cash Equivalents at End of Year $ 988,752 $ 884,617 $ 1,448,199 $ 12,462,780 ============== ============ ============= ============= The accompanying notes are an integral part of these consolidated financial statements.
Item 8 - ------ Financial Statements & Supplementary Data - ----------------------------------------- BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCK INVESTMENT
Accumulated Amounts Paid Other Total Common Common in Excess of Retained Comprehensive Stock Stock Par Value Earnings Loss Investment ------------- ------------- ------------- ---------------- ------------- Balance December 31, 1999 $36,817,120 $ 58,890,342 $37,014,433 $ - $132,721,895 Net income - - 11,102,047 - 11,102,047 Cash dividends declared on- Preferred stock - - (265,570) - (265,570) Common stock - - (5,890,738) - (5,890,738) Exercise of warrants-cash paid in lieu of issuing shares (Note 4) - (247,975) - - (247,975) ----------- ------------ ----------- -------------- ------------- Balance December 31, 2000 $36,817,120 $ 58,642,367 $41,960,172 $ - $137,419,659 Net income - - 8,689,566 - 8,689,566 Other comprehensive loss net of taxes: Unrealized loss on interest rate swap - - - (47,278) (47,278) ------------ Total comprehensive income 8,642,288 ------------ Merger transactions (net) (Note 2) - 120,890,928 (42,531,595) - 78,359,333 Cash dividends declared on- Preferred stock - - (265,570) - (265,570) Common stock - - (4,418,054) - (4,418,054) Exercise of warrants-cash paid in lieu of issuing shares (Note 4) - (14,180,983) - - (14,180,983) ----------- ------------ ----------- ------------ ------------ Balance December 31, 2001 $36,817,120 $165,352,312 $ 3,434,519 $ (47,278) $205,556,673 Net income - - 12,461,302 12,461,302 Other comprehensive loss net of taxes: Unrealized gain on interest rate swap - - - 47,278 47,278 Minimum pension liability (Note 6) - - - (2,033,534) (2,033,534) ------------ Total comprehensive income 10,475,046 Cash dividends declared on- ------------ Preferred stock - - (265,570) - (265,570) Common stock - - (9,500,000) - (9,500,000) ----------- ------------ ----------- ------------ ------------ Balance December 31, 2002 $36,817,120 $165,352,312 $ 6,130,251 $ (2,033,534) $206,266,149 =========== ============ =========== ============= ============ The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 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 transmission and distribution of electric energy and other energy related services, with a service area of approximately 5,275 square miles having a population of approximately 190,000 people. The Company serves approximately 107,000 customers in portions of the Maine counties of Penobscot, Hancock, Washington, Waldo, Piscataquis, and Aroostook. The Company's regulated operations are 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 rates for transmission services. The Company is a member of the New England Power Pool (NEPOOL), 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, Bangor Var Co., Inc. (BVC), Bangor Energy Resale, Inc. (BERI), CareTaker, Inc. (CareTaker), Bangor Fiber Co., Inc. (Bangor Fiber), and Bangor Line Co., Inc. (Bangor Line). BERI 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 (see Note 5 for a discussion of this financing arrangement). CareTaker was incorporated in 1997 and provides security alarm services on a retail basis to residential and commercial customers. Bangor Fiber was formed in 2000 to supply fiber optic communications cable to communications companies and cable service providers and other related activities. Bangor Line was formed in 2001 to provide engineering, permitting and design, geographic information system and construction services to third parties. See Note 7 for additional information with respect to BVC. All significant 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 7 for additional information with respect to these investments. ELECTRIC OPERATING REVENUE - Electric Operating Revenue, including that associated with standard offer service (See Note 10) 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. As of March 1, 2000, the Company bills customers for the energy supplied by competitive energy providers (See Note 10). Competitive energy providers are paid only after the funds are collected from customers. The Company records accounts receivable for the amounts billed to competitive energy customers and a corresponding accounts payable for the amounts due to the energy supplier. No revenue is recognized as the Company is acting as an agent. Also, effective March 1, 2002, as a result of new bids received from competitive energy providers, the Company is no longer serving as the standard offer service provider. The Company is, though, serving as the billing and collection agent under the standard offer program. 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 properties over their estimated service lives. The composite depreciation rate (excluding intangible assets), expressed as a percentage of average depreciable plant in service was approximately 2.9% in each of 2002, 2001 and 2000. 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 $7.8 million in 2002, $10.1 million in 2001 and $10 million in 2000. GOODWILL -In connection with the acquisition of the Company's common stock by Emera, Inc. (Emera) in October 2001 (see Note 2), the excess of the cost over the fair value of the net assets of the Company has been recorded as goodwill on the Company's consolidated balance sheet. In accordance with the implementation of Statement of Financial Accounting Standards No. 141, "Business Combinations", goodwill is no longer amortized. The Company assesses the recoverability of goodwill by using discounted cash flow analysis. 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. In addition, carrying costs on certain regulatory assets and liabilities, including the deferred asset sale gain (see Note 10), were also capitalized and included in AFDC in the Consolidated Statements of Income. The average AFDC (carrying costs) rates computed by the Company were 8.8% in 2002, 9.1% for 2001 and 9.3% in 2000. 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 $12.6 million, $14.1 million and $15.1 million in 2002, 2001 and 2000, respectively. Cash paid for income taxes was approximately $9.6 million, $10.4 million and $10 million in 2002, 2001 and 2000, respectively. Non-cash financing activity: In October 2001 the Company issued a $13,667,550 note payable in connection with the exercise of common stock warrants. See Notes 5 and 7 for a discussion of the note payable and the common stock warrants. RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS - The Company's major financial market risk exposure is changing interest rates. Changing interest rates will affect interest paid on variable rate debt and the fair value of fixed rate debt. The Company manages interest rate risk through a combination of both fixed and variable rate debt instruments and an interest rate swap which terminated in 2002 (see Note 5). The Company does not hold or issue derivatives for trading purposes. The Company's accounting for derivatives used to manage risk is in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". In November 2002 the Company purchased a weather hedge for the 2002- 2003 heating season. The hedge is designed to protect against the negative impacts of warmer than normal weather on the Company's electric operating revenues. The cost of the weather hedge is being amortized over the 2002- 2003 heating season. No income was recognized for this weather hedge in 2002 due to the colder than normal weather. See Note 12. RECLASSIFICATIONS-Certain prior year amounts have been reclassified to conform with the presentation used in the 2002 Consolidated Financial Statements. Note 2. Merger with Emera, Inc. - -------------------------------- On October 10, 2001, Emera, Inc. (Emera) completed the acquisition of all of the outstanding common stock of the Company for US$26.806 per share in cash. Emera also owns Nova Scotia Power, a fully integrated electric utility that supplies substantially all of the generation, transmission and distribution of electricity in Nova Scotia; and has an interest in the Maritimes & Northeast Pipeline, which transports Sable natural gas through Maine to Boston. The acquisition transaction was accounted for using purchase accounting. The cost in excess of the fair value of the net assets acquired, amounting to approximately $82.5 million is recorded as goodwill on the consolidated balance sheets. As previously discussed, the goodwill is not being amortized, but instead is subject to an impairment test at least annually in accordance with the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets". Goodwill associated with the Emera acquisition was not adjusted for any impairment losses in 2002 or 2001. As a result of the merger, and as required under purchase accounting by generally accepted accounting principles, retained earnings of the Company were reset to zero and moved to amounts paid in excess of par value. Also in connection with merger related activities, the Company incurred approximately $3.9 million and $3 million in incremental costs in 2001 and 2000, respectively. These were recorded as a component of Other Income (Expense) in the Consolidated Statements of Income for 2001 and 2000. Note 3. Income Taxes - --------------------- In accordance with Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (FAS 109), the Company recorded cumulative net additional deferred income tax liabilities of approximately $10.5 million as of December 31, 2002 and $10.3 million as of December 31, 2001. 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 ($15.7 million and $16.0 million as of December 31, 2002 and 2001, 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 ($4.5 million and $4.9 million as of December 31, 2002 and 2001, respectively), and the establishment of deferred tax assets on unamortized investment tax credits ($701,000 and $776,000 as of December 31, 2002 and 2001, respectively). These latter amounts have been recorded in Other Regulatory Liabilities at December 31, 2002 and 2001. 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, 2002 and 2001: 2002 2001 ------------ ------------- Deferred Income Tax Liabilities: Costs to terminate/restructure purchased power contracts $ 18,877,652 $ 26,362,744 Excess book over tax basis of electric plant in service 42,237,261 37,117,206 Investment in jointly-owned companies 1,676,838 1,476,037 Other regulatory assets 4,177,045 2,547,116 Other 93,100 138,374 ------------ ------------ $ 67,061,896 $ 67,641,477 ------------ ------------ Deferred Income Tax Assets: Deferred asset sale gain $ 4,255,984 $ 5,901,889 Accrued pension and postretirement benefit costs 7,486,547 5,734,119 Other regulatory liabilities 2,312,651 5,369,662 Other 4,059,274 3,230,331 ------------ ------------ $ 18,114,456 $ 20,236,001 ------------ ------------ Total other accumulated deferred income taxes $ 48,947,440 $ 47,405,476 ============ ============ The individual components of federal and state income taxes reflected in the Consolidated Statements of Income for 2002, 2001 and 2000 are stated in the table below. Year Ended December 31, 2002 2001 2000 - ------------------------------------------------------------------------ Current Income Tax Provision $ 5,481,256 $12,258,263 $10,366,395 Deferred Income Tax Provision 1,751,984 (6,048,863) (2,625,596) Investment Tax Credits, Net (126,332) 42,951 (139,668) ----------- ----------- ----------- Total Provision $ 7,106,908 $ 6,252,351 $ 7,601,131 Allocated to Other Income (553,806) 499,793 (168,870) ----------- ----------- ----------- Charged to Operating Expense $ 6,553,102 $ 6,752,144 $ 7,432,261 ============ ============ =========== The Company's effective tax rate differed from the statutory rate of 35% due to the following: 2002 2001 2000 --------------------------------------------- (Dollars in Thousands) Amount % Amount % Amount % --------------------------------------------- Federal income tax provision at statutory rate $6,849 35.0% $5,230 35.0% $6,546 35.0% Less (Plus) permanent differences in tax expense resulting from statutory exclusions from taxable income: Asset sale gain permanent differences (201) (1.0) (349) (2.3) (276) (1.5) Amortization of equity component of AFDC on recoverable Seabrook investment (160) (.8) (160) (1.0) (160) (.8) Other 468 2.3 246 1.6 334 1.7 --------------------------------------------- Federal income tax provision before effect of timing differences $6,742 34.5% $5,493 36.7% $6,648 35.6% 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) (.7) (151) (1.0) (151) (.8) State income tax liability deducted for federal income tax purposes 591 3.0 424 2.8 550 2.8 Reversal of excess deferred income taxes 319 1.6 230 .5 147 .8 Amortization of investment tax credits 126 .6 140 .9 140 .8 Other (18) - (375) (2.5) (67) (.2) --------------------------------------------- Federal income tax provision $5,875 30.0% $5,225 35.0% $6,029 32.2% ============================================= Note 4. Common and Preferred Stock and Earnings Per Share - ---------------------------------------------------------- COMMON STOCK - In connection with the Company's merger with Emera on October 10, 2001, Emera owns all of the Company's outstanding common shares. The common stock has general voting rights of one vote per twelve shares owned. PREFERRED STOCK - Authorized but unissued shares of 552,660 (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. 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. 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. EXERCISE OF COMMON STOCK WARRANTS - In 2001, the remaining 1,437,215 of outstanding common stock warrants were exercised, which were issued in connection with the PERC purchased power contract restructuring, were exercised at market prices ranging from $25.625 to $26.806 per share. For a complete discussion of the PERC contract restructuring and the issuance of warrants, see Note 7. For 736,315 of the warrants, the Company exercised its option to pay cash to the holders of the warrants instead of actually issuing shares of common stock. These payments amounted to approximately $14.2 million. For 700,900 of unexercised warrants associated with the Municipal Review Committee (MRC), the Company and the MRC entered into an agreement whereby the Company, instead of issuing shares or paying cash, established a note payable to the MRC in the amount of $13,667,550, at an interest rate of 5% and a term of seven years. See Note 5 for a discussion of the MRC debt. Since the common shares were not issued, and the Company had recorded the estimated fair value of these warrants when issued in June 1998 as a $1.4 million addition to paid-in capital, an adjustment has been made in connection with the cash payments option and the MRC note payable to reduce paid-in capital by this amount as of December 31, 2001. Also as a result of the exercise of the warrants in 2001, the MPUC, in connection with its order approving the Company's merger with Emera, established a cap on the value of the warrants that could be recorded as a regulatory asset for exercises in 2001. Since all of the warrant exercises in 2001 were in excess of this cap, the Company was required to write-off this excess amount to paid-in capital. The charges, which reduced paid-in capital, amounted to approximately $12.6 million in 2001. See Note 7 for a complete discussion of the impact of the MPUC's orders concerning the PERC warrants. EARNINGS PER SHARE - The following table reconciles basic and diluted earnings per common share assuming all outstanding common stock warrants were converted to common shares (see Note 7 for discussion of warrants issued in connection with the PERC purchased power contract restructuring). For 2001 the Predecessor period is from January 1, 2001 through the acquisition date, and the Successor period is from the acquisition date to December 31, 2001. Successor Predecessor 2002 2001 2001 2000 ----------- ---------- ---------- ----------- Earnings applicable to common stock $12,195,732 $3,434,519 $4,989,477 $10,836,477 ----------- ---------- ---------- ----------- Average common shares outstanding 7,363,424 7,363,424 7,363,424 7,363,424 Plus: incremental shares from assumed conversion of outstanding warrants - - 791,745 990,099 ----------- ---------- ---------- ----------- Average common shares outstanding plus assumed warrants converted 7,363,424 7,363,424 8,155,169 8,353,523 ----------- ---------- ---------- ----------- Basic earnings per common share $1.66 $.47 $.67 $1.47 ----------- ---------- ---------- ----------- Diluted earnings per common share $1.66 $.47 $.61 $1.30 =========== ========== ========== =========== Note 5. Lending Agreements - --------------------------- 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, which began on July 1, 1998. The amount held in the capital reserve fund will be used to pay the final installment 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 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. 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. 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. On October 10, 2001, the Company issued a unsecured promissory note to the MRC for the amount of $13,667,550 (MRC Promissory Note). The Company and the MRC agreed to terms and conditions of the MRC Promissory Note under which the Company shall make a series of cash payments to the MRC upon the exercise of warrants on the closing of the merger with Emera, Inc. (See Notes 4 and 7 for a discussion of the PERC common stock warrants). The MRC Promissory Note has a term of seven years, a fixed interest rate of 5%, and payments of interest and principal on a quarterly basis. The MRC has the right to defer some or all of any of the quarterly payments within the same Note Year (August 1 to July 31), upon at least a 14 days' prior written notice to the Company. On December 20, 2002, the Company received proceeds from the private placement issuance of a $20 million senior unsecured note. The note has a term of ten years, a fixed interest rate of 6.09% and payments of interest on a semiannual basis. The $20 million principal borrowing is to be paid at maturity. Current maturities of the first mortgage bonds and other long-term debt for the five years subsequent to December 31, 2002, amounting to $81,239,236, are $34,137,342 in 2003, $20,314,371 in 2004, $21,830,717 in 2005, $2,318,969 in 2006, and $2,637,837 in 2007. On June 29, 1998, the Company entered into an Amended and Restated Revolving Credit and Term Loan Agreement with a new group of lenders that provided a two-year term loan of $45 million and a three year revolving credit commitment of $30 million. The amended credit agreement is secured by $82.5 million of non-interest bearing First Mortgage Bonds. The term loan was fully repaid in May of 1999, and the First Mortgage Bonds have expired. On June 29, 2001, the Company extended the revolving credit agreement until October 1 and then until March 31, 2002, and the agreement was further extended until June 30, 2003 with some modifications. The facility was increased to $60 million to accommodate the certain debt retirements in 2002, another pricing level was added to recognize the Company's improved credit and certain modifications were made to some of the financial covenants. By the terms of the credit agreement, the Company may borrow, at its option, at rates, as defined in the agreement, based on the London Interbank Offered (LIBO) rate, or the base rate, which is the higher of the agent bank's defined base rate or one-half of one percent (1/2%) above the federal funds interest rate. The applicable risk premium based on the Company's corporate credit rating is added to the core interest rate, which results in the total combined interest rate for borrowing under the agreement. A required commitment fee, based on the Company's available revolving credit commitment, is also priced according to the Company's corporate credit rating. On June 29, 2001, the Company, as permitted under the Amended and Restated Credit and Term Loan Agreement, entered into a Promissory Note with a financial institution that allows the Company to borrow up to an additional $10 million. This unsecured facility is used by the Company to manage working capital needs, and the interest rate setting mechanism and other major terms of the Note are similar to terms in the Amended and Restated Credit and Term Loan Agreement. The original facility expired on October 1, 2001, but has also subsequently been extended to June 30, 2003. In connection with debt agreements the Company must comply with certain financial covenants related to the Company's debt ratio, fixed charge coverage, net worth, and limitation on the payment of common dividends. The Company in compliance with all covenants associated with its lending agreements. Certain information related to the Company's short-term credit facilities is as follows: 2002 2001 2000 ----------- ----------- ----------- Total credit available at end of period $70,000,000 $40,000,000 $30,000,000 Unused credit at end of period $54,000,000 $32,000,000 $30,000,000 Borrowings outstanding at end of period $16,000,000 $ 8,000,000 - Effective interest rate (exclusive of fees) on borrowings outstanding at end of period 2.4% 4.4% -% Average daily outstanding borrowings for the period $21,782,192 $ 3,031,507 $ - Weighted daily average annual interest rate (exclusive of fees) 2.8% 4.4% -% Highest level of borrowings outstanding at any month-end during the period $45,000,000 $ 8,000,000 $ - =========== ============ ======== Note 6. Postretirement Benefits - ------------------------------- The Company has a noncontributory pension plan covering substantially all of its employees. 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 Company also has an unfunded noncontributory supplemental non-qualified pension plan that provides additional retirement benefits to certain former senior executives. There were no employer contributions to the noncontributory pension plan in 2002, 2001 or 2000. The plan's assets are composed of fixed income securities, equity securities and cash equivalents. In 2002, as a result of a corporate restructuring, the Company implemented an early retirement program which provided for enhanced pension benefits for the early retirees. The following tables detail the funded status of the plan, the amounts recognized in the Company's Consolidated Financial Statements, the components of pension (income) expense for 2002, 2001 and 2000 and the major assumptions used to determine these amounts (includes both the funded and unfunded plans). Total pension expense (income) included the following components: 2002 2001 2000 ----------- ---------- ---------- Service cost-benefits earned during the period $ 916,726 $1,387,841 $1,186,910 Interest cost on projected benefit obligation 3,920,015 3,622,633 3,479,260 Expected return on plan assets (3,925,587) 4,260,894) (4,460,416) Amortization of unrecognized asset and gains (losses) (568,643) (6,958) (664,911) ----------- ---------- ---------- Total pension expense (income) $ 342,511 $ 742,622 $ (459,157) =========== ========== ========== The following table sets forth the plans' funded status at December 31, 2002 and 2001: 2002 2001 ------------- ------------- Change in Projected Benefit Obligation Balance as of December 31, 2001 and 2000 $ 53,382,582 $ 47,951,796 Service cost 916,726 1,387,841 Interest cost 3,920,015 3,622,633 Benefits paid (3,396,922) (2,863,257) Amendments 2,054,108 - (Gains) and losses 2,278,722 3,283,569 Other - Special termination charge 1,612,956 - ------------- ------------- Balance as of December 31, 2002 and 2001 $ 60,768,187 $ 53,382,582 ------------- ------------- Change in Plan Assets Balance as of December 31, 2001 and 2000 $ 41,430,955 $ 48,425,866 Employer contributions 130,441 54,142 Benefits paid (3,396,922) (2,863,257) Actual return, less expenses (3,700,541) (4,185,796) ------------- ------------- Balance as of December 31, 2002 and 2001 $ 34,463,933 $ 41,430,955 ------------- ------------- Funded status $ (26,304,254) $ (11,951,627) Unrecognized prior service cost 2,474,374 - Unrecognized (gain) or loss 8,872,460 (1,180,767) ------------- ------------- Accrued pension at December 31, 2002 and 2001 $ (14,957,420) $ (13,132,394) ============= ============= Amounts recognized in the statement of financial position consist of: Accrued benefit liability $ (20,866,817) $ (13,132,394) Intangible asset 2,474,374 - Accumulated other comprehensive income 3,435,023 - ------------- ------------- Net amount recognized $ (14,957,420) $ (13,132,394) ============= ============= The discount rate and rate of increase in future compensation levels used to determine pension obligations, effective January 1, 2003, are 6.75% and 4%, respectively, and were used to calculate the plans' funded status at December 31, 2002. Significant assumptions used to determine the pension expense (income) for each year were as follows: 2002 2001 2000 ------- ----------- ----- Discount rate* 7.25% 7.75%/7.25% 8.0% Rate of increase in future compensation levels 4.0% 4.0% 4.0% Expected long-term rate of return on plan assets 8.0% 9.0% 9.0% * In 2001, a 7.75% discount rate was used prior to the acquisition, and 7.25% was subsequent to the acquisition. The provisions of Financial Accounting Standards Board Statement No. 87, "Employers' Accounting for Pensions", requires the Company to record an additional minimum liability of $5,909,397 at December 31, 2002. This liability represents the amount by which the accumulated benefit obligation exceeds the sum of the fair market value of plan assets and accrued amounts previously recorded. The additional liability may be offset by an intangible asset to the extent of previously unrecognized prior service cost. The intangible asset of $2,474,374 at December 31, 2002 is included in Other Deferred Charges on the Consolidated Balance Sheets. The remaining amount of $3,435,023 is recorded as a component of stockholders' equity, net of related tax benefits of $1,401,489, is included in Accumulated Other Comprehensive Loss on the Consolidated Statement of Common Stock Investment at December 31, 2002. As a result of regulatory accounting as approved in the Company's Alternative Rate Plan (See Note 10), the Company deferred $1,612,956, as a regulatory asset, related to this special termination charge. As a result of this accounting, the pension expense for 2002 was unaffected, while the pension liability was increased at December 31, 2002. In 2001, as a result of purchase accounting, all unrecognized actuarial gains and losses, prior service cost and the net transition asset were eliminated as of the merger with Emera. As a result of regulatory accounting, a regulatory asset of $10.4 million, equal to these unrecognized amounts, was established at the merger date. The Company is amortizing this balance over the same period at which the corresponding gains and losses were being amortized when they were a component of pension expense. Amortization expense amounted to $1,214,065 in 2002 and $211,670 in 2001 for the period subsequent to the merger. The accumulated benefit obligation for the unfunded supplemental pension plan with accumulated benefit obligations in excess of plan assets was $2,501,699 and $2,201,171 as of December 31, 2002 and 2001, respectively. 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 Company maintains 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 amounted to approximately $864,000 in 2002 and $1.3 million in 2001. 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 2002, 2001 and 2000 and the major assumptions used to determine these amounts are shown in the following tables: 2002 2001 2000 ----------- ----------- ----------- Service cost of benefits earned $ 583,496 $ 632,590 $ 573,740 Interest cost on accumulated postretirement benefit obligation 2,043,548 1,848,813 1,716,563 Actual return on plan assets (16,190) (37,836) (22,002) Amortization of unrecognized transition obligation - 375,900 501,200 Other deferrals, net (8,810) 271,727 280,255 ---------- ---------- ---------- Net periodic postretirement benefit cost $2,602,044 $3,091,194 $3,049,756 ========== ========== ========== The following table sets forth the benefit plan's funded status at December 31, 2002 and 2001. 2002 2001 ------------ ------------ Change in Accumulated Postretirement Benefit Obligation Balance as of December 31, 2001 and 2000 $ 27,488,444 $ 23,874,192 Service cost 583,496 632,590 Interest cost 2,043,548 1,848,813 Claims paid (1,053,187) (979,648) Gains and losses 1,532,744 2,112,497 Other - Special termination charge 1,366,357 - ------------ ------------ Balance as of December 31, 2002 and 2001 $ 31,961,402 $ 27,488,444 ------------ ------------ Change in Plan Assets Balance as of December 31, 2001 and 2000 $ 1,014,038 $ 879,734 Employer contributions 863,969 1,250,743 Retiree contributions 81,529 44,038 Claims/benefit payments and administrative fees (1,053,187) (1,198,313) Actual return 16,190 37,836 ------------- ------------ Balance as of December 31, 2002 and 2001 $ 922,539 $ 1,014,038 ------------- ------------ Funded status $(31,038,863) $(26,474,406) Unrecognized (gain) loss 1,411,561 (48,465) ------------ ------------ Accrued postretirement benefit cost at December 31, 2002 and 2001 $(29,627,302) $(26,522,871) ============ ============ The discount rate and near-term and long-term health care cost trend rates used to determine postretirement benefit obligations, effective January 1, 2003, and the Plan's funded status at December 31, 2002, were 6.75%, 9% and 5%, respectively. Significant assumptions used to determine the net periodic postretirement benefit cost for each year were as follows: 2002 2001 2000 ------ ------------- -------- Discount rate * 7.25% 7.75%/7.25% 8.0% Health care cost trend rate, employees less than age 65- Near-term 9.0% 7.5% 7.0% Long-term 5.0% 5.0% 5.0% Health care cost trend rate, employees greater than age 65- Near-term 9.0% 7.5% 7.0% Long-term 5.0% 5.0% 5.0% Rate of return on plan assets 5.0% 5.0% 5.0% * In 2001, a 7.75% discount rate was used prior to the acquisition, and 7.25% was subsequent to the acquisition. As a result of purchase accounting, all unrecognized actuarial gains and losses, prior service cost and the unrecognized net transition obligation were eliminated as of October 10, 2001, the merger date with Emera. As a result of regulatory accounting, a regulatory asset of $14.6 million, equal to these unrecognized amounts, was established at the merger date. The Company is amortizing this balance over the same period at which the corresponding gains and losses were being amortized when they were a component of the net periodic postretirement benefit cost. Amortization expense amounted to approximately $1.13 million in 2002 and $283,000 in 2001 for the period subsequent to the merger. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point change in assumed health care cost trend rates would have the following effect: 1% Increase 1% Decrease ------------ ------------- Effect on total of service and interest cost components $ 508,177 $ (396,482) Effect on postretirement benefit obligation 5,906,425 (4,639,789) The estimates of the Company's accrued pension and postretirement benefit costs involve the utilization of significant assumptions. Changes in any one of 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 $271,000 in 2002, $363,000 in 2001 and $370,000 in 2000. Note 7. 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 (the 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. Plant Shutdown and Rate Case Settlement - On August 6, 1997, the board of directors of Maine Yankee voted to permanently cease power operations at the Plant and to begin decommissioning the Plant. The Plant had experienced a number of operational and regulatory problems and did not operate after December 6, 1996. The decision to close the Plant permanently was based on an economic analysis of the costs, risks and uncertainties associated with operating the Plant compared to those associated with closing and decommissioning it. The Plant's operating license from the Nuclear Regulatory Commission was scheduled to expire in 2008. The entire output of the Plant had been sold at wholesale by Maine Yankee to ten New England electric utilities, which collectively own all of the common equity of Maine Yankee; a portion of that output (approximately 6.2%) was in turn resold by certain of the owner utilities to 29 municipal and cooperative utilities in New England (the Secondary Purchasers). Maine Yankee recovered, and since the shutdown decision has continued to recover, its costs of providing service through a formula rate filed with the FERC and contained in Power Contracts with its utility purchasers, which, as amended, are also filed with the FERC. In November 1997, Maine Yankee submitted for filing certain amendments to the Power Contracts (the Amendatory Agreements) and revised rates to reflect the decision to shut down the Plant and to request approval of an increase in the decommissioning component of its formula rates. Maine Yankee's submittal also requested certain other rate changes, including recovery of unamortized investment (including fuel) and certain changes to its billing formula, consistent with the nonoperating status of the Plant. During 1998 and early 1999, the parties to the FERC proceeding, including, among others, the MPUC staff, the Maine Office of the Public Advocate and the Secondary Purchasers, engaged in extensive discovery and negotiations, which resulted in the filing of a settlement agreement with the FERC in January 1999. A separately negotiated settlement filed with the FERC in February 1999 resolved the issues raised by the Secondary Purchasers by limiting the amounts of their payments for decom-missioning the Plant and by settling other points of contention affecting individual Secondary Purchasers. Both settlements were found to be in the public interest and were approved by the FERC on June 1, 1999. The settlements constitute a full settlement of all issues raised in the FERC proceeding, including decommissioning cost issues and the issues pertaining to the prudence of the management, operation, and decision to permanently cease operation of the Plant. The primary settlement provides for Maine Yankee to recover amounts intended to cover the costs of decommissioning and those associated with the construction and maintenance of an of an off-site independent spent fuel storage installation (ISFSI). The settlement also provides for recovery of the unamortized investment (including fuel) in the Plant, together with a return on equity of 6.50% on limited equity balances. The Settling Parties also agreed not to contest the effectiveness of the Amendatory Agreements submitted to FERC as part of the original filing, subject to certain limitations including the right to challenge any accelerated recovery of unamortized investment under the terms of the Amendatory Agreements after a required informational filing with the FERC by Maine Yankee. In addition, Maine Yankee agreed to file with the FERC a rate proceeding that will have an effective date of no later than January 1, 2004, when major decommissioning activities are expected to be nearing completion. As a separate part of the settlement, the three Maine Sponsors of Maine Yankee, the MPUC Staff, and the Office of the Public Advocate entered into a further agreement (Maine Agreement) resolving retail rate issues and other issues specific to the Maine parties, including those that had been raised concerning the prudence of the operation and shutdown of the Plant. The Company believes that the settlement, including the Maine Agreement, constituted a reasonable resolution of the issues raised in the Maine Yankee FERC proceeding, and eliminated significant uncertainties concerning the Company's future financial performance. Under the Maine Agreement, the Company would continue to recover its Maine Yankee costs, although the allowed return on equity associated with the Company's equity balance in Maine Yankee was set at 6.50%. The final major provision of the Maine Agreement required the Maine owners, for the period from March 1, 2000, through December 1, 2004, to hold their Maine retail ratepayers harmless from the amounts by which the replacement power costs for Maine Yankee exceeded the replacement power costs assumed in the report to the Maine Yankee board of directors that served as a basis for the Plant shutdown decision. As part of a further settlement, the Company's liability was fixed at approximately $2.2 million to be reflected as a reduction in stranded costs effective March 1, 2002. The Company charged to fuel and purchased power expense and recorded as a regulatory liability $2 million in December 2000 representing the net present value of this future obligation. Maine Yankee's most recent estimate of the total costs of decommissioning and plant closure, for the period from 2002 to 2008, excluding funds already collected, is approximately $502 million (undiscounted). The Company's share of the estimated cost at December 31, 2002 is approximately $31.1 million and is recorded as a regulatory asset and decommissioning liability. The regulatory asset was recorded for the full amount of the decommissioning and plant closure costs due to the state's industry restructuring legislation (see Note 10) 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 February 2002 rate order for Maine Yankee non-decommissioning plant closure costs. Accumulated decommissioning funds at December 31, 2002 had an adjusted market value of $109.1 million of which the Company's share was approximately $7.6 million. Maine Yankee, starting in 2001, began a program of systematically redeeming its common stock from its owners. In 2001, the Company received approximately $703,000 in proceeds associated with the redemption of 5,264 common shares, while in 2002 the Company received an additional $525,000 in connection with the redemption of 3,955 common shares. At December 31, 2002, the Company holds 25,781 common shares of Maine Yankee. 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 later in Note 6. In connection with the Company's generation asset sale in May 1999 (see Note 11), the Company sold certain of its rights to MEPCO transmission capacity. Summary Financial Information for Maine Yankee and MEPCO is as follows (dollars in thousands): - ----------------------------------------------------------------------- Maine Yankee MEPCO - ---------------------------------------------------------------------------- 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ---- Operations: As reported by investee- Operating revenues $ 58,924 $ 61,994 $ 43,813 $4,365 $4,514 $4,029 ======== ======== ======== ====== ====== ====== Earnings applicable to common stock $ 3,947 $ 4,371 $ 4,640 $1,068 $1,192 $1,381 ======== ======== ======== ====== ====== ====== Amounts reported by the Company- Purchased power costs $ 4,068 $ 5,198 $ 5,013 $ - $ - $ - Equity in net income (280) (310) (320) ( 168) (195) (157) -------- -------- -------- ------ ------- ------ Net purchased power expense $ 3,788 $ 4,888 $ 4,693 $ (168) $ (195) $ (157) ======== ======== ======== ======= ====== ====== Financial Position: As reported by investee- Total assets $679,975 $802,118 $915,097 $7,680 $6,870 $5,873 Less- Preferred stock - - 15,000 - - - Long-term debt 21,600 31,200 40,800 - - - Other liabilities and deferred credits 600,656 707,643 788,703 608 770 863 -------- -------- -------- ------ ------ ------ Net assets $ 57,719 $ 63,275 $ 70,594 $7,072 $6,100 $5,010 ========= ======== ======== ====== ====== ====== Company's reported equity- Equity in net assets $ 4,040 $ 4,429 $ 4,942 $1,004 $ 866 $ 711 Adjust Company's estimated to actual (6) (7) 8 - (12) (38) --------- -------- -------- ------ ------ ------ Equity in net assets as reported $ 4,034 $ 4,422 $ 4,950 $1,004 $ 854 $ 673 ========= ======== ======== ====== ====== ====== BANGOR VAR CO. - 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 in 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. 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 connection with the generation asset sale in May 1999, the Company sold its rights as a participant in the regional utilities agreement with Hydro-Quebec (see Note 11). The Company, though, is still required to pay its share of the costs of ownership and operation of the Hydro-Quebec intertie. Also in connection with the asset sale, PP&L Global (PP&L) has agreed to pay the Company $400,000 per year to partially offset the Company's on-going Hydro-Quebec support payments. Since the Company still has an obligation for the costs of the Hydro-Quebec intertie, but it has sold the rights to the benefits as a participant, an approximately $5.6 million liability (included in Other Long-term Liabilities) and corresponding regulatory asset (included in Other Regulatory Assets) have been recorded as of December 31, 2002 on the Consolidated Balance Sheet representing the present value of the Company's estimated future payments (net of the $400,000 to be received from PP&L) for costs of ownership and operation of the Hydro-Quebec intertie. POWER SUPPLY COMMITMENTS - As of the end of 2002, the Company had long- term power supply 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. As discussed below, the power purchased under these contracts are resold to third parties under a separate contracts. West Enfield Project - In 1986, the Company entered into a joint venture with a development subsidiary of Pacific Lighting Corporation for 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. The Company's purchased power expense under this contract was approximately $6.3 million in 2002, $5.7 million in 2001 and $6.7 million in 2000, and is projected to be approximately $6.8 million in each of 2003 and 2004 and to steadily decrease over the remainder of the contract down to approximately $4 million in the last full year, 2023. In late July 1999, in connection with the generation asset sale, the Company sold PHC to PP&L and received $10 million in proceeds. The sale resulted in a gain of approximately $5.2 million, of which $4.7 million was deferred as part of the deferred asset sale gain (see Note 11). The remaining $.5 million of the gain related to the portion of the gain on sale of PHC which was allocable to shareholders. PERC - 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, and, in the Company's opinion, is likely to remain so. A portion of the PERC output is resold to a third party under a power sales contract that ends in February 2003 (discussed below). The Company's purchased power expense under this contract was approximately $20.2 million in 2002, $19.3 million in 2001 and $19.1 million in 2000, and is projected to be approximately $17.2 million in 2003, $17.6 million in 2004, and to increase over the remainder of the contract up to $22 million in the last full year, 2017. Also as a result of a 1998 contract restructuring (discussed below), PERC will share the net revenues generated by the facility on a pro rata basis with the Company and the MRC, which represents over 130 Maine municipalities receiving waste disposal service from PERC. In 2002, 2001 and 2000 the Company realized $3.6 million, $3.5 million and $3.5 million, respectively, in savings associated with its share of PERC net revenues. The Company expects to realize similar levels of savings through the term of the PERC contract. Other Power Supply Commitments - The Company entered into a contract, which started on March 1, 2001, for the delivery of up to 160 MW of power from a third party, ending February 28, 2004. The energy delivered in connection with the contract was used to serve a portion of the standard offer service customer load through February 28, 2002. Subsequent to this date, the Company has resold this power to one of the new standard offer service providers in the Company's service territory. The Company's purchased power expense under this contract was approximately $37.5 million in 2002 and $21 million in 2001, and is estimated to be approximately $24.1 million in 2003 and $3.5 million in 2004. The non-standard offer related revenues associated with the resale of power amounted to $20.2 million in 2002 and is estimated to be approximately $17.1 million in 2003 and $2.7 million in 2004. This resale of power is recorded as a component of Off-system Sales in the Consolidated Statements of Income for 2002. See Note 10 for a discussion of the standard offer service. In late 1999 the Company selected the winning bidder for all of the capacity and energy from its six purchased power contracts being auctioned off pursuant to Chapter 307 of the MPUC's rules for regulation of electric utilities. The contract commenced March 1, 2000, the date when retail customer choice for power supply commenced in Maine, and continued through February 28, 2002. The Company recorded $1.4 million, $4.4 million and $4.5 million in revenues from the resale of power under this contract in 2002, 2001 and 2000, respectively. These revenues are recorded as a component of Off-system Sales in the Consolidated Statements of Income. In the fall of 2001, the MPUC selected the winning bidder to supply the small customer class of standard offer service starting in March 2002. Their bid was contingent upon being selected as buyer of all of the capacity and energy from the Company's previously discussed six purchased power contracts, two-year standard offer related energy supply contract and the output of the Company's diesel units. The period of sale commenced on March 1, 2002, and will continue for a period of three years. The revenues realized under this contract (excluding the portion related to the two-year standard offer related energy supply contract discussed above), as well as the final two months in 2002 of the previous Chapter 307 sales related contract, were approximately $5.8 million in 2002, and are estimated to be $8.5 million in 2003, $8.4 million 2004 and $1.4 million in 2005. This resale of power is recorded as a component of Off-system Sales in the Consolidated Statements of Income for 2002. The Company is also party to a power sales contract with another utility that ends in February 2003. The source of the power to supply this customer is from a portion of the PERC purchased power contract and from market purchases. The portion of the power sales contract associated with market purchases ended in August 2002. The Company realized $12.3 million, $14.5 million and $14.7 million of revenues under this contract in 2002, 2001 and 2000, and these amounts are reflected recorded as a component of Off-system Sales in the Consolidated Statements of Income. Rate Recovery - For a discussion of the rate recovery associated with these power supply commitments, see Note 10. PURCHASED POWER CONTRACT BUYOUTS AND RESTRUCTURING - During the 1990's, the Company attempted to alleviate the adverse impact of high-cost contracts with small power production facilities. One method for doing so was 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. 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 were secured by a mortgage on the property of the Beaver Wood facility. In each of the years from 1994 through 1997 the Company received its $1 million payment. The Company was entitled to receive the final two payments totaling $2 million in 1998 and 1999 from Beaver Wood. However, in July 1998, Beaver Wood indicated that it would not be making the payment due at that time and requested the Company agree to a lower payment. After assessing the potential costs and benefits of foreclosing on the mortgage, the Company determined that accepting a payment of $1.75 million would be a better alternative. This $1.75 million payment was received in February 1999. The Company has recorded the $250,000 shortfall as a regulatory asset as of December 31, 2001, and this amount will be recovered from customers in connection with the Company's stranded cost recovery. The Company established a regulatory asset associated with the cost of the buyout, and 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. This regulatory asset is being amortized at an annual rate of $3.9 million through February 2003. 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, which was financed entirely by new debt instruments (See Note 5) was approximately $170 million, including transaction costs. The buyback costs were deferred and recorded as a regulatory asset and are being amortized and collected over a ten-year period, beginning July 1, 1995, at an annual expense of $17 million. Effective with the implementation of new stranded cost rates on March 1, 2002, the amortization period for this regulatory asset was extended until February 28, 2006, and the annual expense was reduced to $14.2 million. In June 1998 the Company successfully completed a major restructuring of its obligations under various agreements with PERC. It is anticipated that the restructuring will result in a substantial savings for the Company. As previously discussed, in connection with this restructuring, PERC will share the net revenues generated by the facility on a pro rata basis with the Company and the MRC over the remaining term of the PERC contract. which represents over 130 Maine municipalities receiving waste disposal service from PERC. The Company also made a one-time payment of $6 million to PERC in June 1998 and made additional quarterly payments, starting in October 1998, of $250,000 for four years totaling $4 million. These amounts are recorded were regulatory assets when the payments were made. Finally, in connection with the PERC contract restructuring in 1998, the Company issued two million warrants to purchase common stock, one million each to PERC and the MRC. Each warrant entitled the warrant holder to acquire one share of the Company's common stock at a price of $7 per share. No warrants could be exercised within the first nine months after their issuance, and they were 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 had 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 established a cap on ratepayers' exposure to the cost of the warrants. Ratepayer costs were 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. This cap was further modified by the MPUC in 2001 in connection with the approval of the Company's merger with Emera. For any warrants which were exercised after the merger approval in January 2001, the cap on the ratepayers' exposure was set at $10.50 per share ($17.50 per share less the $7 exercise price). The Company will not recover any costs above the cap from ratepayers, and as previously discussed, these amounts were charged against paid-in capital in 2001. As previously discussed in Note 4, in 2001, the remaining 1,437,215 of outstanding common stock warrants were exercised. For 736,315 of these warrants, the Company exercised its option to pay cash to the holders of the warrants instead of actually issuing shares of common stock. These payments amounted to approximately $14.2 million. For 700,900 of unexercised warrants associated with the MRC, the Company and the MRC entered into an agreement whereby the Company, instead of issuing shares or paying cash, established the previously discussed note payable to the MRC. As a result of the exercise of the warrants in 2001 and the affects of the cap on the ratepayers' exposure as set by the MPUC, the Company increased its regulatory asset associated with the PERC contract restructuring by approximately $13.7 million in 2001. In 2000 and 1999, 212,786 and 349,999 common stock warrants were exercised (at a market prices below the book value per common share at the time of the exercise), respectively, and the Company exercised its option to pay cash to the holders of the warrants instead of actually issuing shares of common stock. These payments amounted to approximately $2.5 million in 2000 and $3.3 million in 1999. As a result of the exercise of the warrants in 2000 and 1999 and the cap on the ratepayers'exposure as set by the MPUC, the Company increased its regulatory asset associated with the PERC contract restructuring by approximately $1.9 million in 2000 and $2.9 million in 1999. As of December 31, 2002, the Company has deferred, as a regulatory asset, approximately $27.6 million in costs associated with the PERC contract restructuring. In its stranded cost rates, the Company is recovering, over the remaining term of the PERC contract, the full amount of deferred PERC restructuring costs, including the value of warrants exercised and the additional $250,000 quarterly payments discussed above, amounting to an annual amortization of $1.7 million per year. Note 8. 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. The regulatory asset is being recovered as a component of the Company's stranded costs, and the annual amortization expense amounts to approximately $1.7 million. Note 9. Fair Value of Financial Instruments - ------------------------------------------- The following represents the estimated fair value at December 31, 2002 of each class of financial instrument for which it is practical to estimate the value: Cash and cash equivalents-including money market funds and repurchase agreements: the carrying amount of $988,752 approximates fair value. Funds held by trustees, associated with miscellaneous special deposits- U.S. Treasury Bills: the carrying amount of $1,007,252 approximates fair value. The fair values of other financial instruments at December 31, 2002 based upon similar issuances of comparable companies are as follows: (In Thousands) Carrying Amount Fair Value --------------- ---------- Funds held by trustee-guaranteed investment contract $21,191 $23,421 First Mortgage Bonds 65,000 83,917 FAME Revenue Notes 55,400 59,693 Senior Unsecured Note 20,000 20,172 Municipal Review Committee Note Payable 11,781 11,769 Short-term debt 16,000 16,000 Note 10. Industry Restructuring and Rate Regulation - --------------------------------------------------- In 1997, the Maine legislature enacted a comprehensive law providing for the restructuring of the electric industry in Maine. The principal aspects of the law were as follows: - - Effective March 1, 2000, retail consumers of electricity had the right to purchase energy supply directly from competitive electricity suppliers; - - Electric utilities were required to divest of their generating assets and restrictions were imposed limiting their participation in generation and marketing activities; - - Electric utilities were provided with the opportunity to recover their prudently incurred stranded costs; and - - The MPUC was directed to conduct a competitive solicitation process to select a standard-offer provider to serve the needs of customers unable to find a competitive supplier or uninterested in doing so. The Maine restructuring law has essentially been fully implemented. As a result of the industry restructuring, the Company has been primarily engaged in the transmission and distribution of electric energy. Electric rates for the Company's customers are divided into four components, which are discussed below, (i) transmission, (ii) distribution, (iii) stranded costs, and (iv) energy service. The rates charged to customers for transmission, distribution and stranded costs are established in distinct regulatory proceedings. The Company's revenues are generated by a delivery charge encompassing transmission, distribution and stranded costs, and the Company is not presently involved in supplying energy to retail customers. The delivery charge, though, continues to be based on customers electricity usage measured in kilowatt hours ("kWh"). Sales of the Company's Generating Assets - In September 1998, the Company sold certain property and equipment at its Graham Station site in Veazie, Maine, to Casco Bay Energy for $6.2 million. On May 27, 1999, the Company completed most of the transaction for the sale of its electric generating assets and certain transmission rights to PP&L. The purchase price for the assets transferred was $79 million. The sale involved all but one of the Company's hydroelectric plants on the Penobscot, Piscataquis, and Union rivers and Bangor Hydro's 8.33% ownership interest in the Wyman Unit #4 oil-fired plant in Yarmouth, Maine-a total base load capacity of 83 megawatts. The sale also involved a transfer by the Company of rights to transmit power over the MEPCO transmission facilities connecting NEPOOL to New Brunswick Canada; the Company's rights as a participant in the regional utilities' agreement with Hydro-Quebec pursuant to an agency agreement; and the Company's rights to develop a second high voltage transmission line that will connect NEPOOL to New Brunswick, Canada. The Company realized a net gain on the sale related to these sales of approximately $29.8 million, and $29.3 million of this amount was recorded as a deferred liability at February 29, 2000, on the Consolidated Balance Sheets. As discussed in Note 7, the other $.5 million of the gain on the sale of Penobscot Hydro that was allocable to shareholders, pursuant to orders of the MPUC, was recorded as other income in 1999. Effective with the March 1, 2000 rate change, the Company began amortizing the deferred asset sale gain over a 70-month period. The annual amortization amounts are being recorded in an uneven manner in order to levelize the Company's revenue requirement over this period. As a result of an increase in the Company's FERC regulated transmission rates on June 1, 2000, and the desire to not increase rates to its retail customers so close to the implementation of electric industry restructuring, which occurred on March 1, 2000, the Company agreed to reduce its MPUC jurisdictional distribution rates in an amount equal to the increase in its transmission rates. The reduction in the distribution rates was accomplished by accelerating the amortization of the deferred asset sale gain through May 2001 by an annualized total of $2.5 million. Effective April 15, 2001, and through February 28, 2002, in an effort to mitigate the effects of increased energy prices for the Company's large customers, the MPUC ordered the Company to reduce its distribution and stranded cost electric rates to certain large customers by $.008/kWh. To fund this rate reduction and corresponding decrease in revenues, the MPUC ordered the Company to accelerate the amortization of the deferred asset sale gain in an amount necessary to offset the estimated decrease in revenues caused by the rate reduction. The asset sale gain amortization was increased by approximately $2.5 million over the 10 1/2 month period the reduced rates was in effect. Also, the Company's FERC jurisdictional transmission rates changed on June 1, 2001. Consistent with 2000, the Company reduced its distribution rates via an adjustment to the asset sale gain amortization to offset the change in the transmission rates effective June 1, 2001. The annualized accelerated amortization associated with the transmission rate change amounts to approximately $1.6 million and ends in May 2002. In April 1999 Central Maine Power Company (CMP), sold all of its interest in the Wyman generating units and ancillary property, including its 59% interest in Unit 4. On August 31, 1999, 11 minority owners of Wyman #4, including Bangor Hydro, served a Demand for Arbitration on CMP with respect to the sale of Wyman #4. The Demand asserted that the minority owners were entitled to a share of the proceeds from CMP's sale of Wyman. On April 23, 2001, CMP and the minority owners reached a settlement agreement to dispose of all claims raised in the Demand for Arbitration. Under the terms of the agreement, CMP agreed to pay the minority owners $12 million in exchange for a full release from all claims arising from CMP's sale of Wyman. In July 2001 the MPUC issued an order approving the settlement agreement, and in October 2001 the Company received its share of the settlement from CMP amounting to approximately $2.6 million. This amount was deferred as a regulatory liability per the MPUC order, and the Company began returning this amount to customers starting March 1, 2002 over a two year period in connection with a change in its stranded cost rates. DISTRIBUTION SERVICE Distribution revenues represent approximately 50% of the Company's total electric operating revenues. On June 6, 2002, the MPUC approved an Alternative Rate Plan (ARP) and dismissed a pending management investigation of the Company. The terms of the ARP include a rate plan to be in effect through December 31, 2007, with the Company's core distribution rates being adjusted downward on July 1 of each year from 2003 to 2007, at annual rates ranging from 2% to 2 3/4%. The Company is also allowed rate adjustments associated with certain specified categories of costs. The ARP also includes a mechanism whereby distribution returns on common equity below 17% and above 5% in any given year will be retained by the Company. Earnings in excess of this range and earnings shortfalls below the range will be shared evenly between the Company and ratepayers. The Company is also required to meet certain customer service quality standards during the term of the ARP, and rate reduction penalties will result from not meeting the various performance measures as set forth in the stipulation. Finally, the ARP provides the Company with an accounting order allowing for the deferral and ten year amortization of employee transition costs during 2002 and 2003 in connection with reductions in the cost of operations. Successful implementation of the ARP necessitated a significant decrease in the Company's operating costs, and as a result, the Company reorganized its operations in 2002. The internal restructuring, which encompasses all aspects of the Company, has reduced operating costs by approximately 20%-25%. The Company is also beginning to transfer a portion of its fixed costs to variable costs, and improve processes to enhance long-term performance. As part of the restructuring, employment levels were reduced by approximately 25% in the second and third quarters of 2002 through early retirement and severance arrangements. The total employee transition costs incurred in 2002 were approximately $8.1 million and are recorded as a component of Other Regulatory Assets on the consolidated balance sheets at December 31, 2002. These deferred costs are being amortized over a ten-year period, starting in June 2002. STRANDED COST SERVICE Stranded cost revenues represent approximately 40% of the Company's total electric operating revenues. Pursuant to the Maine restructuring law, electric utilities are entitled to recover all prudently incurred stranded costs that cannot reasonably be mitigated. In February 2002, the MPUC issued an order allowing the Company to increase its rates to recover the stranded costs created as a result of the restructuring of the electric utility industry in the State of Maine. The stranded cost rate increase, effective March 1, 2002, resulted in the Company's total electric rates increasing by approximately 6.5%. The stranded cost rates are set for a period not to exceed three years, although the Company has the right to seek adjustments to these rates if certain economic situations occur. 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. In connection with the Company's stranded cost rate proceeding with the MPUC the principal regulatory assets and liabilities being recovered from/returned to customers as stranded costs are as follows: - - Maine Yankee decommissioning and other closure costs (See Note 7) - - Obligations associated with Hydro-Quebec (See Note 7) - - The cost of energy and capacity associated with the power purchase contracts, net of revenues from resale (See Note 7) - - Purchased power contract buyout and restructuring costs (See Note 7) - - Seabrook investment (See Note 8) - - Deferred special rate contract revenues (See below in Note 10) - - Deferred asset sale gain (See Above in Note 10) - - Deferred standard offer costs (See Below in Note 10) - - Deferred Maine Yankee replacement power cost write-off (See Note 7) Deferred Special Rate Contract Revenues - Also in connection with the February 2000 rate order from the MPUC, and starting March 1, 2000, the Company was granted a deferral mechanism for the difference in actual revenues realized from customers under special rate contracts as compared to the estimated revenues from these customers utilized in setting the Company's new electric rates starting March 1, 2000. Under this deferral mechanism, the Company recorded a regulatory asset and additional revenues of approximately $1.4 million for the period from March 1, 2000 through December 31, 2000. In 2001, the Company's special rate contract revenue deferrals amounted to approximately $1.6 million, of which $2.3 million was recorded as additional revenue and $700,000 was recorded as an increase in goodwill. The increase in goodwill was a result of certain adjustments to the deferrals approved by the MPUC in the Company's recent stranded cost rate proceeding. In 2002, for January and February, the Company recorded a regulatory asset and additional revenues of approximately $.6 million. Effective March 1, 2002, with the implementation of new stranded cost rates, these deferrals ceased, and the Company began amortizing the deferred special rate contract revenue regulatory asset balance over a four year period. Effective March 1, 2002, the Company began recording new special rate contract revenue deferrals in connection with a new rate contract with a large industrial customer. The Company is realizing stranded cost related revenues from this customer that are in excess of amounts assumed in the latest stranded cost rate proceeding. As a result, and as ordered by the MPUC, the Company is recording a reduction in the deferred special rate contract revenue regulatory asset and a reduction in revenues. The revenue deferrals associated with this customer amounted to $.5 million for the period from March 2002 to December 2002. The net deferred special rate contract revenue regulatory asset amounts to $2.5 million at December 31, 2002 and is included as a component of Other Regulatory Assets in the Consolidated Balance Sheets. TRANSMISSION SERVICE Transmission revenues represent approximately 10% of the Company's total electric operating revenue. The regulation of electric transmission has also been undergoing substantial restructuring. In New England, these changes have included the restructuring of NEPOOL and the formation of the New England Independent System Operator, ISO-New England (ISO-NE) in March 1997. ISO-NE is an independent entity operating under contract with NEPOOL to manage the New England region's electric bulk power generation and transmission systems and administering the region's open access transmission tariff. The Company's transmission facilities are already under the operational control of ISO-New England and rates for retail transmission service are subject to FERC jurisdiction. In February 2001, the FERC last issued an order approving transmission rates for service provided on or after March 1, 2000. Under the FERC Order approving these transmission rates, a "formula" rate was approved, allowing the Company to adjust its rates annually to reflect changes in the Company's costs and its sales volume during the preceding calendar year. The Company's transmission rate formula will be subject to review by FERC during 2003. In addition, ongoing FERC initiatives to restructure the transmission industry may ultimately result in a different transmission cost recovery structure. ENERGY SERVICE The Company is not presently engaged in selling energy to customers. Pursuant to the Maine restructuring law, all customers have the right to select a competitive energy supplier to serve their energy requirements. For customers unable to do so, or uninterested in doing so, standard offer service is provided by default. The MPUC is responsible for selecting a standard offer provider through a competitive solicitation process. The solicitation process is anticipated to be conducted every three years for residential and small commercial customers and every year for large commercial and industrial customers. For the period March 2000 through February 2002, the MPUC rejected results of the competitive solicitation process for the Company's customers and directed the Company to arrange for standard offer service. The MPUC established the schedule of rates the Company could charge for this service starting March 1, 2000. The Company entered into arrangements with third parties to purchase the energy to serve the standard- offer customers. The Company was allowed by the MPUC to defer, for future ratemaking treatment, the difference between revenues realized from the standard-offer sales and the costs incurred to provide this service, including carrying costs on the deferred balance. Since March 1, 2000, when new rates went into effect, on a cumulative basis, the revenues realized from standard offer customers exceeded the costs of providing the standard offer service, and consequently, the Company recorded a regulatory liability. Effective March 1, 2002, with the implementation of new stranded cost rates as approved by the MPUC, the Company began amortizing the deferred standard offer liability balance over a two year period. The deferred balance amounted to approximately $1 million as of December 31, 2002 (which is included in Other regulatory liabilities on the Consolidated Balance Sheets). Also, as previously discussed, effective March 1, 2002, as a result of new bids received from competitive energy providers, the Company is no longer serving as the standard offer service provider. The Company is, though, serving as the billing and collection agent under the standard offer program. As a result of the previously discussed reconciliation mechanism, standard-offer related revenues and expenses do not have any impact on the Company's earnings, although they do result in increases in both categories in the Company's Consolidated Statements of Income. Consequently, the Consolidated Statement of Income for 2002, 2001 and 2000 has been modified to reflect the separate presentation of standard-offer service revenues and purchased power expenses. Regulatory Assets and Meeting the Requirements of SFAS 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" (SFAS 71). SFAS 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, 2002, the Company has regulatory assets, net of regulatory liabilities, of approximately $225.7 million. The Company continues to meet the requirements of SFAS 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 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. The final rate orders from the MPUC effective March 1, 2000 and March 1, 2002 did not result in the Company writing off any stranded costs, but if the Company had not been 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 SFAS 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 T&D company. The Company anticipates, based on current generally accepted accounting principles, that SFAS 71 will continue to apply to the regulated T&D segments of its business. If the Company failed to meet the requirements of SFAS 71, due to legislative or regulatory initiatives, the Company would be required to apply Statement of Financial Accounting Standards No. 101, "Regulated Enterprises-Accounting for the Discontinuation of Application of FASB No. 71" (SFAS 101). If legislative or regulatory changes and/or competition result in electric rates which do not fully recover the Company's costs, a write-down of regulatory assets would be required. The Company does not anticipate any write-down of assets at this time. Note 11. Construction of Facilities for Casco Bay Energy - -------------------------------------------------------- The Company entered into an agreement with Casco Bay whereby the Company agreed to construct various transmission facilities required to allow a generating facility being constructed in Veazie, Maine to interconnect with the Company's electrical system and deliver its output to the New England Power Pool Transmission Facility (PTF) grid. Under this agreement, Casco Bay agreed to advance funds necessary to pay for such construction. Pursuant to a FERC order approving an amendment to the NEPOOL Agreement, approximately 50% of the construction funds advanced are being refunded to Casco Bay by customers of NEPOOL over an approximately 30-year period. The Company began refunding such construction costs to Casco Bay starting in June 2000. The refunds amounted to approximately $582,000 in 2002, $513,000 in 2001 and $300,000 in 2000. At the end of 2002, the Company had recorded approximately $4 million of electric plant in service for these PTF facilities and a corresponding long-term payable of $3.8 million. The long-term payable is included on the Consolidated Balance Sheets as a component of Other Long-term Liabilities. Note 12. Derivative Financial Instruments - ------------------------------------------- Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138. This new accounting standard requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The effect of adopting this standard was not material to the Company's consolidated financial statements. The accounting for derivative financial instruments can change based on guidance received from the Derivatives Implementation Group (DIG). The DIG identifies practice issues that arise from applying the requirements of SFAS 133 and advises the Financial Accounting Standards Board on how to resolve those issues. PURCHASED POWER CONTRACTS - In the second quarter of 2001, the DIG reached a conclusion as to the interpretation of clearly and closely related contracts that qualify for the normal purchase and sales exception under SFAS 133. The conclusion of the DIG was that for contracts with prices indexed to the Consumer Price Index (CPI), these would not qualify for the normal purchase and sale exception under SFAS 133 and would need to be accounted for as derivatives under this statement effective July 1, 2001. The Company has two power contracts (one purchase and one sale) with prices indexed to a broad price measure similar to the CPI, that were excluded from the scope of SFAS 133 on January 1, 2001, as a result of the normal purchase and sale exception. Given the DIG's conclusion, the Company, effective July 1, 2001, began to account for these power contracts as derivatives in accordance with SFAS 133 and recorded them at fair value on the Company's consolidated balance sheet in the third quarter of 2001. The fair value of the above-market portion of these contracts as of December 31, 2002 and 2001 represents a liability of approximately $63.3 million and $74 million, respectively. The Company has recorded a regulatory asset to offset this liability, since the Company is currently recovering the net above-market cost of these contracts as part of its stranded cost recovery. As a result of this regulatory accounting, the recording of these contracts on the Company's consolidated balance sheet does not result in an impact on earnings. WEATHER HEDGE - In November 2002 the Company purchased a weather hedge for the 2002-2003 heating season. The hedge is designed to protect against the negative impacts of warmer than normal weather on the Company's electric operating revenues. The cost of the weather hedge was approximately $87,000 which is being amortized over the 2002- 2003 heating season. No income was recognized for this weather hedge in 2002 due to the colder than normal weather. The fair value of this financial instrument at December 31, 2002 is de minimis. Note 13. Contingencies - ---------------------- ENVIRONMENTAL MATTERS - 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. 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 this waste disposal site. 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, 2002, the liability recorded by the Company for its estimated environmental remediation costs amounted to approximately $411,000. The Company's actual future environmental remediation costs may be different as additional factors become known. Note 14. New Accounting Pronouncement - -------------------------------------- In June 2002, the Financial Accounting Standards Board issued Statement No. 143, "Accounting for Asset Retirement Obligations". This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management does not believe that the implementation of this Statement will materially impact the Company's financial position, earnings or cash flows, principally as a result of the regulatory accounting utilized by the Company. Note 15. Unaudited Quarterly Financial Data - ------------------------------------------- Unaudited quarterly financial data pertaining to the results of operations are shown below (Dollars in thousands except for per share amounts): Quarters Ended ------------------------------------------- Mar. 31, June 30, Sept. 30, Dec. 31, --------- -------- --------- -------- 2002 - ---- Operating Revenues $ 48,645 $ 38,285 $ 40,881 $ 39,927 Operating Income 6,292 4,559 7,008 6,178 Net Income 3,028 1,765 4,301 3,367 Basic Earnings Per Share of Common Stock $ .40 $ .23 $ .58 $ .45 ======== ======== ======== ======== 2001 - ---- Operating Revenues $ 56,204 $ 54,003 $ 55,570 $ 51,631 Operating Income 7,627 3,169 6,099 6,722 Net Income (Loss) 4,584 (201) 3,062 1,244 Basic Earnings (Loss) Per Share of Common Stock $ .61 $ (.04) $ .41 $ .16 ======== ======== ======== ======== 2000 - ---- Operating Revenues $ 50,121 $ 48,563 $ 58,641 $ 55,012 Operating Income 8,307 4,652 6,535 6,930 Net Income 3,937 1,339 3,940 1,885 Basic Earnings Per Share of Common Stock $ .53 $ .17 $ .53 $ .25 ======== ======== ======== ======== ERNST & YOUNG Ernst & Young LLP Phone: (617) 266-2000 200 Clarendon Street Fax: (617) 266-5843 Boston, Massachusetts 02116-5072 www.ey.com Report of Independent Auditors To the Stockholders and Directors of Bangor Hydro-Electric Company We have audited the consolidated financial statements listed in the index appearing under Item 14(a) and the financial statement schedule appearing under Item 14(b) as of December 31, 2002 and 2001, and for the years then ended. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 and 2001 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bangor Hydro-Electric Company at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 1 to the consolidated financial statements, in 2002 the Company adopted Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" and Financial Accounting Standards No. 141, "Business Combinations". February 5, 2003 /s/ Ernst & Young LLP Ernst & Young LLP is a member of Ernst & Young International, Ltd. Item 9 Changes in and Disagreements with Independent Accountants on Financial Disclosure - --------------------------------------------------------------------- At a regularly scheduled meeting of the Board of Directors held on November 21, 2001, the Board appointed Ernst & Young LLP, P.O. Box 2007, Station CRO, 13th Floor, 1959 Upper Water Street, Halifax, N.S. B3J 2Z1 to serve as the Company's Independent Public Accountants for the Company's 2001 and 2002 fiscal years, thereby discontinuing the Company's retention of PricewaterhouseCoopers, LLP, One Post Office Square, Boston, Massachusetts 02109, in this capacity. The decision to change accountants was approved by the Audit Committee of the Board. Ernst & Young serves as independent auditors to Emera Inc., a parent of the Company. PricewaterhouseCoopers report on the financial statements for 2000 did not contain any adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. During the Company's 2000 fiscal year and during 2001 prior to the retention of Ernst & Young, the Company had no disagreements with PricewaterhouseCoopers on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement(s), if not resolved to the satisfaction of the former accountant, would have caused it to make reference to the subject matter of the disagreement(s) in connection with its report. During the two most recently completed fiscal years or during 2001, PricewaterhouseCoopers (A) did not advise the Company that the internal controls necessary for the Company to develop reliable financial statements do not exist; (B) did not advise the Company that information had come to their attention that had led them to no longer be able to rely on management's representations, or that had made them unwilling to be associated with the financial statements prepared by management; (C) did not advise the Company of the need to expand significantly the scope of its audit, or that information had come to their attention during the two most recently completed fiscal years or during 2001, that if further investigated may: (i) materially impact the fairness or reliability of either: a previously issued audit report or the underlying financial statements; or the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that may prevent it from rendering an unqualified audit report on those financial statements), or (ii) cause them to be unwilling to rely on management's representations or be associated with the Company's financial statements, and therefore the discontinuation of the retention of PricewaterhouseCoopers did not prevent such an expansion of the scope of their audit or their ability to conduct such further investigation; and (D)(1) did not advise the Company that information had come to their attention that they had concluded materially impacted the fairness or reliability of either (i) a previously issued audit report or the underlying financial statements, or (ii) the financial statements issued or to be issued covering the fiscal period(s) subsequent to the date of the most recent financial statements covered by an audit report (including information that, unless resolved to PricewaterhouseCoopers' satisfaction, would prevent them from rendering an unqualified audit report on those financial statements), and therefore the dismissal of PricewaterhouseCoopers' did not prevent the resolution of any issue that had not been resolved to PricewaterhouseCoopers' satisfaction prior to discontinuation of the retention of PricewaterhouseCoopers. By letter to the Company dated as of December 18, 2001, a copy of which was filed with the Securities and Exchange Commission by the Company as an Amendment to its 2001 Proxy Statement on February 21, 2002, PricewaterhouseCoopers stated that it agreed with the Company's statements relating to the change in accountants that were included in the Company's Proxy Statement for the annual meeting of shareholders held on December 19, 2001. The Company's statements in that Proxy Statement are identical in all material respects to the statements contained herein. Since the appointment of Ernst & Young as the Company's independent auditors in 2001, the Company has had no disagreements with Ernst & Young regarding financial disclosure. PART III - -------- Item 10 Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The following is a list of the directors and executive officers of the Company, and for each a description of the following: (i) current principal occupation or employment and the name, principal business and address of any corporation or organization in which the employment or occupation is conducted; (ii) material occupations, positions, offices or employment during the past five years, giving the starting and ending dates of each and the name, principal business and address of any corporation or other organization in which the occupation, position, office or employment was carried on; and (iii) country of citizenship. Unless otherwise noted below, none of the following persons has been convicted in a criminal proceeding during the past five years (excluding traffic violations or similar misdemeanors), and none of the following persons has during the past five years been a party to any judicial or administrative proceeding (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. NAME AGE POSITION - ---- --- -------- David McD. Mann 63 Chairman of the Board Christopher G. Huskilson 45 Director, Vice Chairman Jane J. Bush 57 Director Norman A. Ledwin 60 Director Elizabeth A. MacDonald 56 Director Ronald E. Smith 52 Director Raymond R. Robinson 44 Chief Operating Officer David R. Black 55 Treasurer, Controller, CFO David McD. Mann has been a Director and Chairman of the Board since Bangor Hydro's merger with Emera in October, 2001. Mr. Mann also serves as President and Chief Executive Officer and Director of Emera Inc. Until July, 1996, Mr. Mann was a senior partner with the Halifax, Nova Scotia law firm of Cox Downie. Mr. Mann's business address is 1894 Barrington Street, Halifax, Nova Scotia B3J 2A8. Mr. Mann is a citizen of Canada. Christopher G. Huskilson has been a Director and Vice Chairman of the Board since Bangor Hydro's merger with Emera in October, 2001. Mr. Huskilson also serves as Chief Operating Officer of Nova Scotia Power Inc., a subsidiary of Emera. Mr. Huskilson's business address is 1894 Barrington Street, Halifax, Nova Scotia B3J 2A8. Mr. Huskilson is a citizen of Canada. Jane J. Bush has been a Director since 1990. Ms. Bush is President and co-owner of Coastal Ventures, a retailing company. Ms. Bush's business address is 11 Addison Rd, Columbia Falls, ME 04623. Ms. Bush is a citizen of the United States. Norman A. Ledwin has been a Director since 1996. Mr. Ledwin is President and Chief Executive Officer and a Director of Eastern Maine Healthcare, a health care organization made up of not-for-profit and for-profit entities (including Eastern Maine Medical Center, a not-for-profit regional acute care hospital facility). Mr. Ledwin's business address is 489 State St., Bangor, Maine 04401. Mr. Ledwin is a citizen of the United States. Elizabeth A. MacDonald has been a Director since Bangor Hydro's merger with Emera in October, 2001. Ms. MacDonald also serves as Vice President, Human Resources of Emera. Until November, 2001, Ms. MacDonald was Vice President - Human Resources of Nova Scotia Power Inc. Ms. MacDonald's business address is 1894 Barrington Street, Halifax, Nova Scotia B3J 2A8. Ms. MacDonald is a citizen of Canada. Ronald E. Smith has been a Director since Bangor Hydro's merger with Emera in October, 2001. Mr. Smith also serves as Chief Financial Officer of Emera. From September, 1999 to October, 2000, Mr. Smith was an independent consultant. From March, 1999 to September, 1999, Mr. Smith was Chief Financial Officer, Telecommunications, for Aliant Inc. Prior to March 1999 was Chief Financial Officer for Maritime Tel & Tel Co. Ltd. Mr. Smith's business address is 1894 Barrington Street, Halifax, Nova Scotia B3J 2A8. Mr. Smith is a citizen of Canada. Raymond R. Robinson has been Chief Operating Officer of Bangor Hydro since April, 2002. From 2001 until 2002, Mr. Robinson served as Vice President, Utility Integration for Emera. Prior to 2001, Mr. Robinson served as President and Chief Executive Officer of Yukon Energy Corporation. Mr. Robinson's business address is 33 State St., Bangor, Maine 04401. Mr. Robinson is a citizen of Canada. David R. Black has been Treasurer and Controller and Chief Financial Officer of Bangor Hydro since April, 2002. Prior to April, 2002, Mr. Black was Controller of Bangor Hydro. Mr. Black's business address is 33 State St., Bangor, Maine 04401. Mr. Black is a citizen of the United States. In 2002, the Board met on six occasions. The Board of Directors has one standing committee, its Audit Committee. The Audit Committee reviews with the independent public accountants the scope and results of their audit and other services to the Company, reviews the adequacy of the Company's internal accounting controls and reports to the Board at the Directors' meeting following each Audit Committee meeting or as necessary. The Audit Committee presently consists of Jane J. Bush, who is Chair of the Committee, Norman A. Ledwin and Ronald E. Smith. Mr. Smith is not independent under the listing standards of the New York Stock Exchange or under Section 301 of the Sarbanes-Oxley Act (15 USC Sec. 78f) since he is an employee of Emera Inc., a parent of the Company. With respect to Mr. Ledwin, the Board determined that Mr. Ledwin's affiliation with Eastern Maine Healthcare, which has an indirect business relationship with the Company, does not interfere with his exercise of independent judgment. The Audit Committee met five times during 2002. Audit Committee members are appointed by the Board and the Chair of the Committee is selected by Committee members. The Board does not have a compensation, investment or nominating committee. Item 11 Executive Compensation - ------- ---------------------- The following table shows, for the fiscal years ending December 31, 2002, 2001, and 2000, the cash compensation paid to the principal executive officer and to the other executive officers whose total salary and bonus exceeded $100,000: SUMMARY COMPENSATION TABLE - ANNUAL COMPENSATION
Annual Compensation Long term compensation ---------------------- ------------------------------ Awards Payouts ---------------------- Other ------------ Year Salary Bonus Annual Restricted Securities All Other Compen- Stock Underlying LTIP Payouts Compensation Sation Awards Options/SARs ($) ($) (#) (b) (c) (d) (e) (f) (g) (h) (i) - ----------------------------------------------------------------------------------------------------------------- Carroll R. Lee 2002 $98,654 none none $454,638 President & Chief Operating Officer 2001 190,131 $101,760 $3,400 none (Retired June 2002) 2000 180,289 $5,029 $3,400 none - ------------------------------------------------------------------------------------------------------------------ Raymond Robinson 2002 $117,337 $51,271 $160 17,500* $1,498 Chief Operating Officer (Appointed June 2002) - ------------------------------------------------------------------------------------------------------------------ David R. Black 2002 $92,680 $10,243 $2,391 Controller - ------------------------------------------------------------------------------------------------------------------ Frederick S. Samp 2002 $49,362 none none $272,743 Vice President - - Finance & Law 2001 138,624 $61,283 $3,400 none (Resigned May 2002) 2000 131,206 $3,664 $3,046 none - ------------------------------------------------------------------------------------------------------------------ Paul A. LeBlanc 2002 $68,654 none none $249,920 Vice President - - Human Resources 2001 128,066 $51,186 $3,400 none & Information Services 2000 121,085 $3,383 $2,800 none (Retired June 2002) - ------------------------------------------------------------------------------------------------------------------
* - The Stock Options granted to Mr. Robinson are for shares of Emera. Stock Options Granted During the Most Recent Fiscal Year - 2002 - --------------------------------------------------------------- The following table shows information regarding grants of stock options made to the Named Executive Officers during the fiscal year ended December 31, 2002. The stock options are granted pursuant to Emera's stock option plan and are options to purchase the stock of Emera, Inc. granted by Emera, the Company's ultimate parent. Mr. Robinson is eligible to participate in the Emera corporate stock option plan as the principal executive officer of a significant operating subsidiary. Emera's shares are traded on the Toronto Stock Exchange under the symbol "EMA". Emera shares trade in Canadian dollars. The exchange rate as of December 31, 2002 was US$1.5796 to CAN$1.00.
Market Value of % of Total Securities Securities Options Exercise or Underlying Under Granted to Base Options on the Options Employees Price Date of Grant Granted in $/Common $/Common Expiration Name (#) 2002 Share Share Date Raymond Robinson 17,500 100%* 16.50 16.50 Feb. 13, 2012
* - Mr. Robinson's 2002 award represents 3.18% of the options granted under the Emera corporate stock option plan during 2002. If Mr. Robinson's 2002 options appreciated at 5% per year through February 13, 2012, the potential realizable value of the options in nominal U.S. dollars would be $94,397.59. If Mr. Robinson's 2002 options appreciated at 10% per year through February 13, 2012, the potential realizable value of the options in nominal U.S. dollars would be $240,491.90. Each of these calculations is based upon a December 31, 2002 stock price of CAN$16.05 per share of Emera common stock and an exchange rate of US$1.5796 to CAN$1.00. Stock Option Exercises During the Most Recent Fiscal Year - 2002 - ---------------------------------------------------------------- The following table shows information regarding exercise of stock options by the Named Executive Officers during the fiscal year ended December 31, 2002. The stock options are options to purchase the stock of Emera, Inc. granted by Emera, the Company's ultimate parent. Emera shares trade in Canadian dollars. The exchange rate as of December 31, 2002 was US$1.5796 to CAN$1.00.
Securities Acquired Aggregate Unexercised Value of Unexercised On Value Options at In-the-Money Options at Exercise Realized December 31, 2002 December 31, 2002 Name (#) ($) (#) ($) Exercisable Unexercisable Exercisable Unexercisable Raymond Robinson 0 0.00 2,500* 25,000* 2,374 7,122
* - Mr. Robinson was awarded 10,000 stock options during 2001 as an employee of Emera prior to the October, 2001 completion of the Bangor Hydro merger with Emera. None of the Named Executive Officers received compensation under a Long Term Incentive Plan during 2002. Pension Plan Tables - ------------------- Mr. Robinson participates in the Emera corporate pension plan. The Pension Plan Table below sets out the estimated annual benefits payable to participants in the Emera plan upon retirement at age 60 for the various salary/years of service combinations as shown. Pension payments and the average annual compensation upon which the pension payments are determined are in Canadian dollars. The table is shown in Canadian currency and the exchange rate as of December 31, 2002 was US$1.5796 to CAN$1.00. Years of Credited Service at Retirement Age of 60 Remuneration 15 20 25 30 35 _____________________________________________________________________________ ($) ($) ($) ($) ($) ($) 100,000 30,000 40,000 50,000 60,000 70,000 200,000 60,000 80,000 100,000 120,000 140,000 300,000 90,000 120,000 150,000 180,000 210,000 400,000 120,000 160,000 200,000 240,000 280,000 500,000 150,000 200,000 250,000 300,000 350,000 600,000 180,000 240,000 300,000 360,000 420,000 700,000 210,000 280,000 350,000 420,000 490,000 800,000 240,000 320,000 400,000 480,000 560,000 Pension benefits paid under this pension plan are based on two percent of the average of the five highest years' earnings multiplied by each year of credited service. The pension is payable upon the earlier of: (i) age 60; or (ii) age 55, provided that age and years of service add to at least 85. A member may also retire on a reduced formula provided the member has attained age 55 but does not qualify for the Rule of 85. Members of the Emera pension plan contribute 5.4 percent of eligible earnings up to the year's maximum pensionable earnings ("YMPE") under the Canada Pension Plan, and seven percent of earnings over the YMPE, to the maximum amount permitted by Canada Customs and Revenue Agency regulations. Pension amounts in excess of such regulations do not require employee contributions. Spousal benefits are paid on the death of a member at the rate of 60 percent of regular pension benefits. The pension plan is indexed to the consumer price index to a maximum of six percent per annum. Upon reaching age 65, pension benefits under the pension plan are reduced to reflect commencement of payments under the Canada Pension Plan (CPP). The major portion of the above pension will be provided by the pension plan. Due to Canada Customs and Revenue Agency's limitations on the maximum pension benefit which may be paid under the pension plan, a portion of the pension earned after January 1, 1992 will be provided under the terms of a Supplementary Employee Retirement Plan which will be secured by a letter of credit. Mr. Robinson's benefit service, which includes his service at Emera prior to assuming his duties with Bangor Hydro, is two years (rounded to the nearest year). Mr. Black participates in a tax-qualified defined benefit pension plan that is also applicable to all Bangor Hydro employees. The following table sets forth estimated annual benefit amounts payable upon retirement to persons in specified compensation and benefit service classifications assuming their retirement at the normal retirement age (65) in 2003. Years of Benefit Service - --------------------------------------------------------------------------- Average Annual Compensation 5 10 15 20 25 30 $ 50,000 $ 4,339 $ 8,678 $13,016 $17,355 $21,694 $26,033 75,000 6,839 13,678 20,516 27,355 34,194 41,033 100,000 9,339 18,678 28,016 37,355 46,694 56,033 150,000 14,339 28,678 43,016 57,355 71,694 86,033 200,000 14,672 29,344 44,016 58,688 73,361 88,033 Compensation covered by the plan is total basic compensation exclusive of overtime, bonuses, and other extra, contingent or supplemental compensation, and is cash compensation plus compensation deferred pursuant to the Company's Section 401(k) Plan. It is essentially the same as the amount shown as "Salary" in the Summary Compensation Table above. The annual retirement benefit is the greater of the following: a. The benefit accrued as of December 31, 1988 under a prior plan formula. b. 2.0% "average annual compensation" minus 0.4% of "covered compensation", times years of "benefit service". The benefit may not be larger than limits set forth in IRC Section 415. "Average annual compensation" is computed using the 36 consecutive months yielding the highest average, and "benefit service" generally means years of employment after age 21 and one year of service, up to a maximum of 30 years. "Covered compensation" is the average (without indexing) of the Social Security Taxable Wage Bases for the 35 calendar years ending with the year an individual attains Social Security Normal Retirement Age. It is assumed that the taxable wage base in effect at the beginning of the plan calculation year will remain the same for all future years. The benefit amount is payable in a life annuity form in full upon retirement at age 62 and in proportionately reduced amounts upon termination down to age 55. In 2002, as part of an amendment to the defined benefit pension plan applicable to all Bangor Hydro employees designed to implement an early retirement program, all qualified employees' years of benefit service and ages were enhanced by five years and three years respectively. This enhancement increased Mr. Black's age for purposes of the plan to age 57. Prior to the enhancement, Mr. Black had already reached the maximum 30 years of benefit service. Messrs. Lee, Samp, and LeBlanc participated in the tax qualified defined benefit pension plan applicable to all Bangor Hydro employees at the time of their respective retirement/resignation from the Company in 2002. In addition, Messrs. Lee, Samp, and LeBlanc are parties to Supplemental Benefit Agreements with the Company under which additional retirement benefits are to be paid. Said agreements define the total pension amount to be paid to the executive officer by the Company, with the supplemental amount defined as the difference between this total amount due and the amount due to the executive officer under the tax qualified pension plan applicable to all employees. The total amount of pension benefit, as defined under the Supplemental Benefit Agreements, is a function of the executive officer's age at retirement and his average total compensation over a three-year period. Under the Supplemental Benefit Agreements, no pension amount would be due until the executive officer reaches age 55. At age 55, the executive officer would be entitled to receive 50% of his or her average total compensation over a three-year period. The total pension amount to be paid upon retirement would increase proportionately until a retirement age of 62, at which point the executive officer would be entitled to receive upon retirement 75% of his or her average total compensation over a three-year period. Pursuant to modifications to his individual agreements prior to his resignation in 2002, Mr. Samp's age was enhanced from 51 to 53. At the time of their respective retirements in 2002, Mr. Lee had attained a natural age of 53 and Mr. LeBlanc had attained a natural age of 54. In addition, pursuant to the amendment to the tax qualified defined benefit pension plan applicable to all Bangor Hydro employees designed to implement an early retirement program, Messrs. Lee, Samp, and LeBlanc each had their benefit service enhanced by five years and age enhanced by three years, so that their respective ages and years of benefit service for purposes of this tax qualified plan at the times of their respective retirement/resignation in 2002, rounded to the nearest year, were as follows: Mr. Lee, age - 56, years of service - 30 (the maximum); Mr. Samp, age - 54, years of service - 21; and Mr. LeBlanc, age - 58, years of service - 30 (the maximum). The following table sets forth estimated annual benefit amounts payable upon retirement after age 55 to Messrs. Lee, Samp, and LeBlanc under the Supplemental Benefit Agreements: Age at Retirement ___________________________________________________________________________ Average Total Compensation 55 56 57 58 59 60 61 62+ $100,000 $50,000 $53,000 $57,000 $60,000 $64,000 $68,000 $72,000 $75,000 $150,000 75,000 79,500 85,500 90,000 96,000 102,000 108,000 112,500 $200,000 100,000 106,000 114,000 120,000 128,000 136,000 144,000 150,000 $250,000 125,000 132,500 142,500 150,000 160,000 170,000 180,000 187,500 $300,000 150,000 159,000 171,000 180,000 192,000 204,000 216,000 225,000 Compensation covered by the Supplemental Benefit Agreements is total compensation inclusive of bonuses, and other, contingent or supplemental compensation, and compensation deferred pursuant to the Company's Section 401(k) Plan. "Average Total Compensation" under the Supplemental Benefit Agreements is computed using the average of the total annual compensation actually paid by the Company to the Executive during the thirty-six consecutive calendar months in which the Executive's total compensation from the Company was the highest. The total annual pension amounts shown in the Pension Plan Table above are payable for the remainder of the executive officer's life after retirement. If the executive officer's spouse survives the executive officer, the spouse will receive an annual benefit for the remainder of her life equal to 50% of the annual benefit to the executive officer. The total annual pension amounts shown in the Pension Plan Table are not subject to any deduction for Social Security or other offset amounts. Employment Contracts - -------------------- Mr. Robinson is party to an employment agreement with Emera that specifies his entitlement to salary, participation in compensation plans and other benefits, and an automobile allowance. In addition, Mr. Robinson is entitled to a severance payment of 18 months if he is removed from office without just cause. Mr. Black is party to an employment agreement with the Company that specifies his entitlement to salary and participation in benefit plans. Mr. Black is entitled to receive his salary and benefits for the remaining term of his employment contract if he is removed from office without cause. Mr. Black's employment agreement expires March 31, 2003. Messrs. Lee, Samp, and LeBlanc are parties to agreements under which in the event 1) of a change of control of the Company as defined in the agreements and 2) the covered party leaves the employment of the Company within one year after the change of control, he would be entitled to receive a payment equal to two years' salary based upon his average salary over the past three years. He would also be entitled to receive the Company's standard health, life insurance and disability benefits for a period of two years. Based upon the completion of the Company's merger with Emera Inc., Messrs. Lee, Samp, and LeBlanc were entitled to receive this benefit upon leaving the employment of the Company prior to October 10, 2002. The respective retirement/resignation of Messrs. Lee, Samp, and LeBlanc during 2002 constituted such termination of employment pursuant to the terms of these agreements. Compensation of Directors - ------------------------- Directors who are not employees of the Company, Emera Inc. or other Emera affiliates are paid a fee of $500 per meeting for attendance at regular or special meetings of the Board, and $500 per meeting for attendance at committee meetings (unless the committee meeting is held the same day as another meeting for which a full meeting fee is paid, in which case the fee is $250). The directors are also paid an annual retainer of $6,000. Directors who are employees of the Company, Emera Inc. or other Emera affiliates receive no fee for their services as directors. Item 12 Security Ownership of Certain Beneficial Owners and Management - ------- -------------------------------------------------------------- (a) Security Ownership of Certain Beneficial Owners As of February 1, 2003, the Company had outstanding 47,340 shares of Preferred Stock having general voting rights of one vote per share and 7,363,424 shares of Common Stock having general voting rights of one-twelfth of one vote per share. The following table sets forth as of February 1, 2003 information with respect to persons known to management to be the beneficial owners of more than 5% of any class of voting securities of the Company: Title of Class - --------------- Common Stock Name and Address of Beneficial Owner - ------------------------------------------------ BHE Holdings Inc. 566 Washington Road Rye, New Hampshire 03870 Amount and Nature of Beneficial Ownership - ------------------------------------------------------ 7,363,424 shares Percent of Class - -------------------- 100.0% (see (b) below) (b) Security Ownership of Management The following table sets forth as of February 1, 2003 information with respect to the beneficial ownership of equity securities by directors, nominees for the office of director and named executive officers: Title of Class Name of Beneficial Owner Beneficially Owned* - --------------------------------------------------------------------------- Common Jane J. Bush 1 Common Christopher G. Huskilson 1 Common Norman A. Ledwin 1 Common Elizabeth A. MacDonald 1 Common David McD. Mann 1 Common Ronald E. Smith 1 Common David R. Black 0 Common Raymond R. Robinson 0 Common Directors & Executive Officers as a group (8) 6 Preferred Directors & Executive Officers as a group (8) 0 * The directors and executive officers of the Company as a group own a beneficial interest in less than 1% of the Company's Common and Preferred Stock. (c) Changes in Control Effective October 10, 2001, pursuant to an Agreement and Plan of Merger, the Company became a wholly owned subsidiary of Emera Inc. of Halifax, Nova Scotia through Emera's purchase of 100% of the Company's common equity. The Company is unaware of any arrangements, including any pledge by any person of securities of the Company or any of its parents, the operation of which may at a subsequent date result in a change in control of the registrant. Item 13 Certain Relationships and Related Transactions - ------- ---------------------------------------------- Compensation Committee Interlocks - None. The Company does not have a compensation committee. Certain Relationships and Related Transactions - During 2002, the Company made payments to Eastern Maine Healthcare, its subsidiaries and affiliates, of $906,655. Mr. Ledwin, who serves on the Board of Directors and the Board's Compensation Committee, is President, Chief Executive Officer and a Director of Eastern Maine Healthcare. Eastern Maine Healthcare owns and operates Eastern Maine Medical Center, the second largest hospital in the State of Maine and the largest in the region served by the Company, as well as several other health care organizations in the region. The Company provides health care benefits to its employees through a self insured managed care plan. An independent plan administrator negotiates on behalf of the Company the rates for health care services paid to individual providers under the plan, including Eastern Maine Healthcare and its affiliates. PART IV - ------- Item 14 Controls and Procedures - ------- ----------------------- During the 90-day period prior to the filing date of this report, management, including the Company's Principal Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon, and as of the date of that evaluation, the Principal Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date the Company carried out its evaluation. Item 15 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, 2002, 2001 and 2000 Consolidated Balance Sheets - December 31, 2002 and 2001 Consolidated Statements of Capitalization - December 31, 2002 and 2001 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Common Stock Investment for the Years ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements Report of Independent Accountants (b) Schedules Report of Independent Accountants Schedule II - Valuation and Qualifying Accounts and Reserves 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. (d) Reports on Form 8-K Current reports on Form 8-K for the Fourth Quarter of 2002 dated December 9, 2002 and December 31, 2002 were filed regarding the Company's announced redemption of its 4% and 4 1/4% series of preferred stock. 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/ Raymond R. Robinson ----------------------- By: Raymond R. Robinson Chief Operating Officer 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/ David McD. Mann - ---------------- ------------------- Jane J. Bush David McD. Mann Director Chairman of the Board /s/ Christopher G. Huskilson /s/ Ronald E. Smith - ---------------------------- ------------------- Christopher G. Huskilson Ronald E. Smith Vice Chairman, Director Director /s/ Norman A. Ledwin /s/ David R. Black - -------------------- ------------------ Norman A. Ledwin David R. Black Director Treasurer, Controller, CFO - -------------------------- Elizabeth A. MacDonald Director Each of the above signatures is affixed as of March 28, 2003. CERTIFICATIONS CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Bangor Hydro-Electric Company (the Company) on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on March 28, 2003, we, the undersigned, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ David R. Black - ------------------ David R. Black Chief Financial Officer March 28, 2003 /s/ Raymond R. Robinson - ----------------------- Raymond R. Robinson Principal Executive Officer March 28, 2003 This certification is made solely for purpose of 18 U.S.C. Section 1350, subject to the knowledge standard contained therein, and not for any other purpose. I, David R. Black, certify that: 1. I have reviewed this annual report on Form 10-K of Bangor Hydro-Electric Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ David R. Black - ------------------ David R. Black Chief Financial Officer I, Raymond R. Robinson, certify that: 1. I have reviewed this annual report on Form 10-K of Bangor Hydro-Electric Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 28, 2003 /s/ Raymond R. Robinson - ----------------------- Raymond R. Robinson Principal Executive Officer SCHEDULE II Valuation and Qualifying Accounts and Reserves ------------------------------------------------------------
Additions ----------------------------- Balance at Charged to Charged to Balance at Beginning Costs and Other End Of Period Expenses Accounts Deductions of Period ------------------------------------------------------ ------------- 2002 Reserve for Doubtful Accounts $ 761,000 $1,801,158 $ 249,052 $1,726,158 (A) $1,085,052 ---------- ---------- ---------- ---------- ---------- 2001 Reserve for Doubtful Accounts $ 761,000 $1,884,630 $ - $1,884,630 (A) $ 761,000 ---------- ---------- ---------- ---------- ---------- 2000 Reserve for Doubtful Accounts $1,075,000 $1,275,016 $ - $1,589,016 (B) $ 761,000 ---------- ---------- ---------- ---------- ---------- NOTE: (A) Accounts written off, less recoveries. (B) Accounts written off, less recoveries. For 2000 includes reduction in reserve for doubtful accounts of $314,000.
EXHIBIT INDEX Exhibits Included Herewith -------------------------- 3. Articles of Incorporation and By-Laws 3(a) Articles of Amendment dated May 15, 2002, granting the Board of Directors authority to repurchase stock and to make equity distributions to shareholders 3(b) Articles of Amendment dated June 17, 2002, reducing the par value of the Company's common stock from $5.00 to $0.00. 10. Material Contracts 10(a) Note Purchase Agreement dated as of December 20, 2002 By and Among the Company and Thrivent Financial for Lutherans 10(b) Amendment No. 4 entered into as of March 29, 2002 to the 1998 Amended and Restated Revolving Credit Agreement and Term Loan Agreement By and Among the Company and Fleet National Bank as Agent 10(c) Amendment No. 5 entered into as of September 13, 2002 to the 1998 Amended and Restated Revolving Credit Agreement and Term Loan Agreement By and Among the Company and Fleet National Bank as Agent EXHIBIT INDEX 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 Articles of Amendment Form 10-K, 1998, Exhibit 3(a) Allowing Use of Similar Name 3.5 Articles of Merger dated October Form 10-K, 2001, Exhibit 3(a) 10, 2001 3.6 Articles of Amendment dated January Form 10-K, 2001, Exhibit 3(b) 8, 2002, reducing the minimum number of directors from 9 to 3 3.7 By-Laws of the Company, Amended Form 10-K, 2001, Exhibit 3(c) and Restated as of December 19, 2001 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 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 4.7 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 4.8 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 4.9 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 4.10 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 4.11 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 4.12 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 4.13 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 4.14 Loan Agreement by and Form 10-Q, 3rd Quarter 1995, Finance Authority of Exhibit 4.1 Maine and Bangor Hydro- Electric Company 4.15 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 4.16 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 4.17 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). 4.18 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). 4.19 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). 4.20 TERM LOAN AGREEMENT Form 10-Q, First Quarter 1998, dated as of March 31, 1998 Exhibit 4(a) among BANGOR ENERGY RESALE, INC., BANKBOSTON, N.A. and the certain other lending institutions and BANKBOSTON, N.A., as Agent, including all Exhibits thereto 4.21 GUARANTY, dated as of March 31, Form 10-Q, First Quarter 1998, 1998, by BANGOR HYDRO Exhibit 4(b) -ELECTRIC COMPANY, in favor of (a) BANKBOSTON, N.A., as Agent, for itself and the other lending institutions which are or may become parties to a Term Loan Agreement, dated as of March 31, 1998 4.22 Warrant to Purchase Form 10-Q, Second Quarter 1998, Common Stock Granted to Exhibit 4(a) the Municipal Review Committee, Inc. on June 26, 1998 4.23 Supplemental Indenture Form 10-Q, Second Quarter 1998, Dated as of June 29, 1998 Exhibit 4(d) between the Company and Citibank, N.A. 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 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 10.11 Third Amendment dated Form 10-K, 1983, Exhibit 10.2 as of November 1, 1982 to Preliminary Quebec Interconnection Support Agreement 10.12 Second Amendment dated Form 10-K, 1983, Exhibit 10.3 as of November 1, 1982 to Agreement With Respect to Use of Quebec Interconnection 10.13 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) 10.14 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) 10.15 Fourth Amendment Form 10-Q, 1st Quarter 1983, dated as of March 1, Exhibit 10.1 1983, to Preliminary Quebec Interconnection Support Agreement 10.16 Amendment dated as of Form 10-Q, 2nd Quarter 1983, September 1, 1981 Exhibit 10.3 to New England Power Pool Agreement 10.17 Amendment dated as of Form 10-Q, 2nd Quarter 1983, June 1, 1982 to New Exhibit 10.4 England Power Pool Agreement 10.18 Amendment dated as of Form 10-Q, 2nd Quarter 1983, June 15, 1983 to New Exhibit 10.5 England Power Pool Agreement 10.19 Amendment dated as of Form 10-Q, 3rd Quarter 1983, October 1, 1983 to Exhibit 10.1 New England Power Pool Agreement 10.20 Amendment No. 1 to the Form 10-K, 1983, Exhibit 10(b) Maine Yankee Power Contract 10.21 Amendment No. 2 to the Form 10-K, 1983, Exhibit 10(c) Maine Yankee Power Contract 10.22 Additional Power Con- Form 10-K, 1983, Exhibit 10(d) tract between Maine Yankee and its sponsors, including the Company 10.23 Preliminary Support Form 10-K, 1984, Exhibit 10(b) Agreement - Phase 2 of Hydro-Quebec Inter- connection 10.24 Amendment dated September 1, Form 10-K, 1985, Exhibit 10(b) 1985 to Agreement with respect to Use of Quebec Interconnection 10.25 Energy Contract dated Form 10-K, 1985, Exhibit 10(c) March 1983 between NEPOOL and Hydro-Quebec re: Hydro-Quebec Phase I interconnection project 10.26 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 10.27 Interconnection Agreement Form 10-K, 1985, Exhibit 10(e) dated March 1983 between NEPOOL and Hydro-Quebec re: Hydro-Quebec Phase I interconnection project 10.28 Amendment dated September 1 Form 10-K, 1985, Exhibit 10(f) 1985 to NEPOOL Agreement re: Hydro-Quebec Phase II interconnection project 10.29 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 10.30 Boston Edison AC Facilities Form 10-K, 1985, Exhibit 10(h) Support Agreement dated June 1, 1985 re: Hydro-Quebec Phase II interconnection project 10.31 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 10.32 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 10.33 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 10.34 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 10.35 Amendment No. 3 dated Form 10-K, 1985, Exhibit 10(m) October 1, 1984 to Maine Yankee Power Contract 10.36 Amendment No. 1 dated Form 10-K, 1985, Exhibit 10(n) August 1, 1985 to Maine Yankee Capital Funds Agreement 10.37 Amendments dated August 1, Form 10-K, 1985, Exhibit 10(o) 1985, August 15, 1985, and January 1, 1986 to NEPOOL Agreement 10.38 Third Amendment to Vermont Form 10-Q, 1st Quarter 1986, Transmission Line Support Exhibit 10.2 Agreement 10.39 First Amendment to Hydro- Form 10-Q, 1st Quarter 1986, Quebec Phase I Intercon- Exhibit 10.3 nection Agreement 10.40 First Amendment to Hydro- Form 10-Q, 2nd Quarter 1986, Quebec Phase II Exhibit 10.1 Massachusetts Trans- mission Facilities Support Agreement 10.41 First Amendment to Hydro- Form 10-Q, 2nd Quarter 1986, Quebec Phase II New Exhibit 10.2 Hampshire Transmission Facilities Support Agreement 10.42 First Amendment to Hydro- Form 10-Q, 2nd Quarter 1986, Quebec Phase II New England Exhibit 10.3 Power AC Facilities Support Agreement 10.43 First Amendment to Form 10-Q, 2nd Quarter 1986, Hydro-Quebec Phase II Exhibit 10.4 Boston Edison Company AC Facilities Support Agreement 10.44 Amendment Number 3 to Form 10-Q, 3rd Quarter 1986, Hydro-Quebec Phase l Exhibit 10.1 Terminal Facility Support Agreement 10.45 Amendment Number 3 to Form 10-Q, 3rd Quarter 1986, Hydro-Quebec Phase I Exhibit 10.2 Vermont Transmission Line Support Agreement 10.46 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. 10.47 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 10.48 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) 10.49 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 10.50 Third Amendment to Pre- Form 10-K, 1987, Exhibit 10(a) liminary Quebec Intercon- nection Support Agreement - Phase II 10.51 Fourth Amendment to Pre- Form 10-K, 1987, Exhibit 10(b) liminary Quebec Intercon- nection Support Agreement - Phase II 10.52 Fifth Amendment to Pre- Form 10-K, 1987, Exhibit 10(c) liminary Quebec Intercon- nection Support Agreement - Phase II 10.53 Sixth Amendment to Pre- Form 10-K, 1987, Exhibit 10(d) liminary Quebec Intercon- nection Support Agreement - Phase II 10.54 Seventh Amendment to Pre- Form 10-K, 1987, Exhibit 10(e) liminary Quebec Intercon- nection Support Agreement - Phase II 10.55 Amendment to New England Form 10-K, 1987, Exhibit 10(f) Power Pool Agreement dated March 1, 1988 10.56 Ninth Amendment to Form 10-K, 1988, Exhibit 10(b) Preliminary Quebec Interconnection Support Agreement - Phase II 10.57 Tenth Amendment to Form 10-K, 1988, Exhibit 10(c) Preliminary Quebec Interconnection Support Agreement - Phase II 10.58 Second Amendment to Form 10-K, 1988, Exhibit 10(d) Massachusetts Trans- mission Facilities Support Agreement 10.59 Third Amendment to Form 10-K, 1988, Exhibit 10(e) Massachusetts Trans- mission Facilities Support Agreement 10.60 Fourth Amendment to Form 10-K, 1988, Exhibit 10(f) Massachusetts Trans- mission Facilities Support Agreement 10.61 Fifth Amendment to Form 10-K, 1988, Exhibit 10(g) Massachusetts Trans- mission Facilities Support Agreement 10.62 Sixth Amendment to Form 10-K, 1988, Exhibit 10(h) Massachusetts Trans- mission Facilities Support Agreement 10.63 Second Amendment to Form 10-K, 1988, Exhibit 10(i) New Hampshire Trans- mission Facilities Support Agreement 10.64 Third Amendment to Form 10-K, 1988, Exhibit 10(j) New Hampshire Trans- mission Facilities Support Agreement 10.65 Fourth Amendment to Form 10-K, 1988, Exhibit 10(k) New Hampshire Trans- mission Facilities Support Agreement 10.66 Fifth Amendment to Form 10-K, 1988, Exhibit 10(l) New Hampshire Trans- mission Facilities Support Agreement 10.67 Sixth Amendment to Form 10-K, 1988, Exhibit 10(m) New Hampshire Trans- mission Facilities Support Agreement 10.68 Second Amendment to Form 10-K, 1988, Exhibit 10(n) Phase II AC New England Power Facilities Sup- port Agreement 10.69 Third Amendment to Form 10-K, 1988, Exhibit 10(o) Phase II AC New England Power Facilities Sup- port Agreement 10.70 Fourth Amendment to Form 10-K, 1988, Exhibit 10(p) Phase II AC New England Power Facilities Sup- port Agreement 10.71 Fifth Amendment to Form 10-K, 1988, Exhibit 10(q) Phase II AC New England Power Facilities Sup- port Agreement 10.72 Second Amendment to Form 10-K, 1988, Exhibit 10(r) Phase II Boston Edison AC Facilities Support Agreement 10.73 Third Amendment to Form 10-K, 1988, Exhibit 10(s) Phase II Boston Edison AC Facilities Support Agreement 10.74 Fourth Amendment to Form 10-K, 1988, Exhibit 10(t) Phase II Boston Edison AC Facilities Support Agreement 10.75 Fifth Amendment to Form 10-K, 1988, Exhibit 10(u) Phase II Boston Edison AC Facilities Support Agreement 10.76 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 10.77 401 (k) Plan for Non- Form 10-K, 1988, Exhibit 10(x) Union Employees 10.78 Agreement for the Form S-2, Reg. No. 33-39181, Purchase and Sale o Exhibit 10.82 Electricity dated as of June 21, 1984 between Penobscot Energy Recovery Company and the Company 10.79 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 10.80 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. 10.81 Purchase Agreement between Form 10-Q, 3rd Quarter 1995, Babcock-Ultrapower Exhibit 10.1 Jonseboro and Bangor Hydro- Electric Company 10.82 Purchase Agreement between Form 10-Q, 3rd Quarter 1995, Babcock-Ultrapower West Exhibit 10.2 Enfield and Bangor Hydro- Electric Company 10.83 ASSIGNMENT OF CONTRACTS Form 10-Q, 1st Quarter 1998, AND ENTITLEMENTS, made March Exhibit 10(a) 31, 1998 by and between Bangor Hydro-Electric Company and Bangor Energy Resale, Inc. 10.84 Rate Agreement made October 30, Form 10-Q, 1st Quarter 1998, 1997, by and between Bangor Exhibit 10(b) Hydro-Electric Company and Bangor Energy Resale, Inc. 10.85 Management and Support Services Form 10-Q, 1st Quarter 1998, Agreement made March 31, 1998 Exhibit 10(c) by and between Bangor Hydro- Electric Company and Bangor Energy Resale, Inc. 10.86 Surplus Cash Agreement Form 10-Q, 2nd Quarter 1998, dated as of June 26, 1998 Exhibit 10(a) among the Company, Penobscot Energy Recovery Company Limited Partnership and the Municipal Review Committee, Inc. 10.87 Guaranty Agreement dated Form 10-Q, 2nd Quarter 1998, as of June 1, 1998 Exhibit 10(b) between the Company and The Chase Manhattan Bank 10.88 Amendment No. 2 to Form 10-Q, 2nd Quarter 1998, Purchase Power Agreement Exhibit 10(c) dated as of June 26, 1998 between the Company and Penobscot Energy Recovery Company Limited Partnership 10.89 Amended and Restated Form 10-Q, 2nd Quarter 1998, Revolving Credit And Exhibit 10(d) Term Loan Agreement dated as of June 19, 1998 between the Company and BankBoston, N.A. and Fleet National Bank 10.90 Asset Purchase Agreement Form 8-K, September 25, 1998 dated as of September 25, Exhibit 2 1998 between Bangor Hydro- Electric Company and PP&L Global, Inc. (schedules and exhibits omitted). 10.91 Asset Purchase Implementation Form 10-K, 2000, Exhibit 10(a) Agreement, dated as of May 27, 1999, by and among Bangor Hydro- Electric Company, Penobscot Hydro Co., Inc. and Penobscot Hydro, LLC 10.92 33rd Amendment to the NEPOOL Form 10-K, 2000, Exhibit 10(b) Agreement dated December 1, 1996 10.93 Form of Agreement with Form 10-K, 2000, Exhibit 10(c) certain Executive Officers providing benefits upon a change of control 10.94 Form of Agreement with Form 10-K, 2000, Exhibit 10(d) certain Executive Officers providing supplemental death and retirement benefits 10.95 Agreement and Plan of Merger by Form 8-K, June 29, 2000, and Among Bangor Hydro-Electric Exhibit 2.1 Company and NS Power Holdings Incorporated dated as of June 29, 2000 10.96 Amendment No. 1 to Agreement Form 8-K, October 10, 2001, and Plan of Merger dated as of Exhibit 2.2 August 28, 2001 by an Among the Company and Emera, Inc. 10.97 Line Agreement dated as of June Form 10-K, 2001, Exhibit 10(a) 29, 2001 Agreement By and Among the Company and Fleet National Bank 10.98 Promissory Note dated as of June 29, Form 10-K, 2001, Exhibit 10(b) 2001 Agreement By and Among the Company and Fleet National Bank 10(a) 10.99 Promissory Note dated as of October Form 10-K, 2001, Exhibit 10(c) 10, 2001 from the Company to the Municipal Review Committee, Inc. 10.100 Amendment No. 3 entered into as of Form 10-K, 2001, Exhibit 10(b) December 31, 2001 to the 1998 Amended and Restated Revolving Credit Agreement and Term Loan Agreement By and Among the Company and Fleet National Bank as Agent 10.101 Amendment No. 2 dated as of December Form 10-K, 2001, Exhibit 10(b) 31, 2001 to Promissory Note By and Among the Company and Fleet National Bank EX-3 4 a3a2002.txt EXH 3(A) BANGOR HYDRO-ELECTRIC CO. 10-K 2002 DOMESTIC Minimum Fee $35 (See section 1401 sub-section 15) BUSINESS CORPORATION File No. 19240001 D Pages 2 Fee Paid $35 DCN 2021621300021 AMEN STATE OF MAINE ------FILED--------------- 05/24/2002 ____________________________________ ARTICLES OF AMENDMENT (Shareholders Voting as One Class) /s/ Julie L. Flynn ------------------ Deputy Secretary of State _____________________________________ A True Copy When Attested By Signature Bangor Hydro-Electric Company /s/ Julie L. Flynn ___________________________________ ------------------ (Name of Corporation) Deputy Secretary of State Pursuant to 13-A MRSA sections 805 and 807, the undersigned corporation adopts these Articles of Amendment: FIRST: All outstanding shares were entitled to vote on the following amendment as one class. SECOND: The amendment set out in Exhibit A attached was adopted by the shareholders on (date) April 24, 2002. -------------- ("X" one box only) X at a meeting legally called and held OR --- ___ by unanimous written consent THIRD: Shares outstanding and entitled to vote and shares voted for and against said amendment were: Number of Shares Outstanding NUMBER NUMBER and Entitled to Vote Voted For Voted Against ---------------------------- --------- ------------- Preferred 47,340 15,753 3,428 Common 7,363,424 7,363,424 0 --------- --------- ------ Total 7,410,764 7,379,177 3,428 Common stock is entitled to 1/12 of a vote per share. FOURTH: If such amendment provides for exchange, reclassification or cancellation of issued shares, the manner in which this shall be effected is contained in Exhibit B attached if it is not set forth in the amendment itself. FIFTH: If the amendment changes the number of par values of authorized shares, the number of shares the corporation has authority to issue thereafter, is as follows: Class Series (If Any) Number of Shares Par Value (If Any) ----- --------------- ---------------- ------------------ The aggregate par value of all such shares (of all classes and series) having par value is $_____________ The total number of all such shares (of all classes and series) without par value is _____________shares SIXTH: The address of the registered office of the corporation in the State of Maine is 33 State Street --------------- Bangor ME 04401 -------------------------------------------------------------- (street, city, state and zip code) DATED May 15, 2002 *By /s/ Andrew Landry ------------ ------------------- (signature) Andrew Landry, Clerk -------------------------- MUST BE COMPLETED FOR VOTE type or print name and capacity) OF SHAREHOLDERS - -------------------------------- I certify that I have custody of the minutes showing the above action by the shareholders. *BY_________________________________ (signature) ________________________________ (signature of clerk, secretary or ------------------------------------ asst. secretary) (type or print name and capacity) - --------------------------------- Exhibit A - --------- RESOLVED that the Articles of Incorporation of the Company, as amended to date, be further amended to permit the Company to use its unreserved and unrestricted capital surplus, as defined in the Maine Business Corporation Act, to make capital distributions as permitted by Section 517 of the Maine Business Corporation Act or to repurchase its own common or preferred shares as permitted by Section 518 of the Maine Business Corporation Act, and to authorize the Company's Board of Directors to direct such a capital distribution or such a repurchase of common or preferred shares from time-to-time, to the extent such a distribution or repurchase is not contrary to any other provision of these Articles, on such terms as they deem reasonable and in the best interests of the Company. NOTE: This form should not be used if any class of shares is entitled to vote as a separate class for any of the reasons set out in section 806, or because the articles so provide. For vote necessary for adoption see section 805. ______________________________________________________________________________ *This document MUST be signed by (1) the Clerk OR (2) the President or a vice-president and the Secretary or an assistant secretary, or such other officer as the bylaws may designate as a 2nd certifying officer OR (3) if there are no such officers, then a majority of the Directors or such directors as may be designated by a majority of directors then in office OR (4) if there are no such directors, then the Holders, or such of them as may be designated by the holders, of record of a majority of all outstanding shares entitled to vote thereon OR (5) the Holders of all of the outstanding shares of the corporation. SUBMIT COMPLETED FORMS TO: CORPORATE EXAMINING SECTION, SECRETARY OF STATE, 101 STATE HOUSE STATION, AUGUSTA, ME 04333-0101 FORM NO. MBCA-9 Rev. 96 TEL. (207) 287-4195 EX-3 5 b3b2002.txt EXH 3(B) BANGOR HYDRO-ELECTRIC CO. 10-K 2002 DOMESTIC Minimum Fee $35 (See section 1401 sub-section 15) BUSINESS CORPORATION File No. 19240001 D Pages 2 Fee Paid $35 DCN 2021721800044 STCK STATE OF MAINE ------FILED------------------------- 06/18/2002 ____________________________________ ARTICLES OF AMENDMENT /s/ Julie L. Flynn (Shareholders Voting as One Class) ------------------ Deputy Secretary of State _____________________________________ A True Copy When Attested By Signature Bangor Hydro-Electric Company /s/ Julie L. Flynn ___________________________________ ------------------ (Name of Corporation) Deputy Secretary of State (Quasi-Public) -------------------------------------- Pursuant to 13-A MRSA sections 805 and 807, the undersigned corporation adopts these Articles of Amendment: FIRST: All outstanding shares were entitled to vote on the following amendment as one class. SECOND: The amendment set out in Exhibit A attached was adopted by the shareholders on (date) April 24, 2002. -------------- ("X" one box only) X at a meeting legally called and held OR --- ___ by unanimous written consent THIRD: Shares outstanding and entitled to vote and shares voted for and against said amendment were: Number of Shares Outstanding NUMBER NUMBER and Entitled to Vote Voted For Voted Against ---------------------------- -------- ------------- Preferred 47,340 16,036 3,659 Common 7,363,424 7,363,424 0 --------- --------- ------ Total 7,410,764 7,379,460 3,659 Common stock is entitled to 1/12 of a vote per share. FOURTH: If such amendment provides for exchange, reclassification or cancellation of issued shares, the manner in which this shall be effected is contained in Exhibit B attached if it is not set forth in the amendment itself. FIFTH: If the amendment changes the number of par values of authorized shares, the number of shares the corporation has authority to issue thereafter, is as follows: Class Series (If Any) Number of Shares Par Value (If Any) ----- --------------- ---------------- ------------------ Common - 10,000,000 authorized $ 0.00 Preferred - 600,000 authorized $100.00 The aggregate par value of all such shares (of all classes and series) having par value is $__60,000,000______ The total number of all such shares (of all classes and series) without par value is __10,000,000___shares SIXTH: The address of the registered office of the corporation in the State of Maine is 33 State Street --------------- Bangor ME 04401 --------------------------------------------------------------- (street, city, state and zip code) DATED June 17, 2002 *By /s/ Andrew Landry ------------- ----------------- (signature) Andrew Landry, Clerk --------------------------------- MUST BE COMPLETED FOR VOTE (type or print name and capacity) OF SHAREHOLDERS I certify that I have custody of the minutes showing the above action by the shareholders. *BY_________________________________ (signature) /s/ Andrew Landry ________________________________ (signature of clerk, secretary -------------------------------- or asst. secretary) (type or print name and capacity) - -------------------------------- Exhibit A RESOLVED that the Articles of Incorporation of the Company, as amended to date, be further amended to reduce the par value of the Company's common stock from $5.00 to $0.00. NOTE: This form should not be used if any class of shares is entitled to vote as a separate class for any of the reasons set out in section 806, or because the articles so provide. For vote necessary for adoption see section 805. ____________________________________________________________________________ *This document MUST be signed by (1) the Clerk OR (2) the President or a vice-president and the Secretary or an assistant secretary, or such other officer as the bylaws may designate as a 2nd certifying officer OR (3) if there are no such officers, then a majority of the Directors or such directors as may be designated by a majority of directors then in office OR (4) if there are no such directors, then the Holders, or such of them as may be designated by the holders, of record of a majority of all outstanding shares entitled to vote thereon OR (5) the Holders of all of the outstanding shares of the corporation. SUBMIT COMPLETED FORMS TO: CORPORATE EXAMINING SECTION, SECRETARY OF STATE, 101 STATE HOUSE STATION, AUGUSTA, ME 04333-0101 FORM NO. MBCA-9 Rev. 96 TEL. (207) 287-4195 EX-10 6 exs10k02.txt EXH 10 (A) BANGOR HYDRO-ELECTRIC CO. 10-K 2002 BANGOR HYDRO-ELECTRIC COMPANY $20,000,000 6.09% SENIOR NOTES DUE DECEMBER 20, 2012 NOTE PURCHASE AGREEMENT DATED DECEMBER 20, 2002 TABLE OF CONTENTS Section Page - ------- ---- 1. AUTHORIZATION OF NOTES 1 2. SALE AND PURCHASE OF NOTES 1 3. CLOSING 1 4. CONDITIONS TO CLOSING 2 4.1. Representations and Warranties 2 4.2. Performance; No Default 2 4.3. Compliance Certificates 2 4.4. Opinions of Counsel 2 4.5. Purchase Permitted By Applicable Law, etc. 2 4.6. Intentionally Omitted 3 4.7. Payment of Special Counsel Fees 3 4.8. Private Placement Number 3 4.9. Changes in Corporate Structure 3 4.10. Proceedings and Documents 3 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY 3 5.1. Organization; Power and Authority 3 5.2. Authorization, etc. 4 5.3. Disclosure 4 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates 4 5.5. Financial Statements 5 5.6. Compliance with Laws, Other Instruments, etc. 5 5.7. Governmental Authorizations, etc. 5 5.8. Litigation; Observance of Agreements, Statutes and Orders 6 5.9. Taxes 6 5.10. Title to Property; Leases 6 5.11. Licenses, Permits, etc 6 5.12. Compliance with ERISA 7 5.13. Private Offering by the Company 8 5.14. Use of Proceeds; Margin Regulations 8 5.15. Existing Indebtedness; Future Liens 8 5.16. Foreign Assets Control Regulations, etc. 9 5.17. Status under Certain Statutes 9 5.18. Environmental Matters 9 6. REPRESENTATIONS OF THE PURCHASER 10 6.1. Purchase for Investment 10 6.2. Source of Funds 10 7. INFORMATION AS TO COMPANY 11 7.1. Financial and Business Information 11 7.2. Officer's Certificate 13 7.3. Inspection 14 8. PREPAYMENT OF THE NOTES 14 8.1. Intentionally Omitted 14 8.2. Optional Prepayments with Make-Whole Amount 14 8.3. Allocation of Partial Prepayments 15 8.4. Maturity; Surrender, etc. 15 8.5. Purchase of Notes 15 8.6. Make-Whole Amount 15 9. AFFIRMATIVE COVENANTS 17 9.1. Compliance with Law 17 9.2. Insurance 17 9.3. Maintenance of Properties 17 9.4. Payment of Taxes and Claims 17 9.5. Corporate Existence, etc. 18 9.6. Keeping of Records and Books of Account 18 9.7. Additional Assurances 18 10. NEGATIVE COVENANTS 18 10.1. Transactions with Affiliates 18 10.2. Merger, Consolidation, etc 19 10.3. Liens 19 10.4. Permitted Additional Indebtedness 20 10.5. Fixed Charge Coverage Ratio 21 10.6. Consolidated Net Worth 21 11. EVENTS OF DEFAULT 21 12. REMEDIES ON DEFAULT, ETC. 23 12.1. Acceleration 23 12.2. Other Remedies 24 12.3. Rescission 24 12.4. No Waivers or Election of Remedies, Expenses, etc. 24 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES 25 13.1. Registration of Notes 25 13.2. Transfer and Exchange of Notes 25 13.3. Replacement of Notes 25 14. PAYMENTS ON NOTES 26 14.1. Place of Payment 26 14.2. Home Office Payment 26 15. EXPENSES, ETC 26 15.1. Transaction Expenses 26 15.2. Survival 27 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT 27 17. AMENDMENT AND WAIVER 27 17.1. Requirements 27 17.2. Solicitation of Holders of Notes 27 17.3. Binding Effect, etc. 28 17.4. Notes held by Company, etc. 28 18. NOTICES 28 19. REPRODUCTION OF DOCUMENTS 29 20. CONFIDENTIAL INFORMATION 29 21. SUBSTITUTION OF PURCHASER 30 22. MISCELLANEOUS 30 22.1. Successors and Assigns 30 22.2. Payments Due on Non-Business Days 30 22.3. Severability 31 22.4. Construction 31 22.5. Counterparts 31 22.6. Governing Law 31 22.7. Headings 31 22.8. Integration 31 22.9. Waiver of Jury Trial 31 TABLE OF SCHEDULES AND EXHIBITS SCHEDULE A -- Purchaser Information SCHEDULE B -- Defined Terms SCHEDULE 4.9 -- Changes in Corporate Structure SCHEDULE 5.3 -- Disclosure Materials SCHEDULE 5.4 -- Subsidiaries of the Company and Ownership of Subsidiary Stock SCHEDULE 5.5 -- Financial Statements SCHEDULE 5.7 -- Governmental Authorizations SCHEDULE 5.8 -- Certain Litigation SCHEDULE 5.11 -- Patents, etc. SCHEDULE 5.12 -- Plans SCHEDULE 5.14 -- Use of Proceeds SCHEDULE 5.15 -- Existing Indebtedness SCHEDULE 5.18 -- Environmental Matters SCHEDULE 5.19 -- Insurance EXHIBIT 1 -- Form of 6.09% Senior Notes due December 20, 2012 EXHIBIT 4.4(a) -- Form of Opinion of Special Counsel for the Company BANGOR HYDRO-ELECTRIC COMPANY 33 State Street Bangor, Maine 04401 6.09% SENIOR NOTES DUE DECEMBER 20, 2012 December 20, 2002 TO: Thrivent Financial for Lutherans Ladies and Gentlemen: Bangor Hydro-Electric Company, a Maine corporation (the "Company"), agrees with you as follows: 1. AUTHORIZATION OF NOTES. The Company will authorize the issue and sale of $20,000,000 aggregate principal amount of its 6.09% Senior Notes due December 20, 2012 (the "Notes", such term to include any such notes issued in substitution therefor pursuant to Section 13 of this Agreement). The Notes shall be substantially in the form set out in Exhibit 1, with such changes therefrom, if any, as may be approved by you and the Company. Certain capitalized terms used in this Agreement are defined in Schedule B; references to a "Schedule" or an "Exhibit" are, unless otherwise specified, to a Schedule or an Exhibit attached to this Agreement. 2. SALE AND PURCHASE OF NOTES. Subject to the terms and conditions of this Agreement, the Company will issue and sell to you and you will purchase from the Company, at the Closing provided for in Section 3, Notes in the principal amount of $20,000,000 at the purchase price of 100% of the principal amount thereof. 3. CLOSING. The sale and purchase of the Notes to be purchased by you shall occur at the offices of Rudman & Winchell, LLC, 84 Harlow St., Bangor, ME 04402, at 10:00 a.m., Eastern Time, at a closing (the "Closing") on December 20, 2002 or on such other Business Day thereafter on or prior to January 30, 2003 as may be agreed upon by the Company and you. At the Closing, the Company will deliver to you the Notes to be purchased by you in the form of a single Note (or such greater number of Notes in denominations of at least $100,000 as you may request) dated the date of the Closing and registered in your name (or in the name of your nominee), against delivery by you to the Company or its order of immediately available funds in the amount of the purchase price therefor by wire transfer of immediately available funds for the account of the Company to account number 1000306 (Bangor Hydro-Electric Company Operating Account) at Fleet Bank of Maine, ABA No. 011200365. If at the Closing the Company shall fail to tender such Notes to you as provided above in this Section 3, or any of the conditions specified in Section 4 shall not have been fulfilled to your satisfaction, you shall, at your election, be relieved of all further obligations under this Agreement, without thereby waiving any rights you may have by reason of such failure or such nonfulfillment. 4. CONDITIONS TO CLOSING. Your obligation to purchase and pay for the Notes to be sold to you at the Closing is subject to the fulfillment to your satisfaction, prior to or at the Closing, of the following conditions: 4.1. Representations and Warranties. The representations and warranties of the Company in this Agreement shall be correct when made and at the time of the Closing. 4.2. Performance; No Default. The Company shall have performed and complied with all agreements and conditions contained in this Agreement required to be performed or complied with by it prior to or at the Closing and after giving effect to the issue and sale of the Notes (and the application of the proceeds thereof as contemplated by Schedule 5.14) no Default or Event of Default shall have occurred and be continuing. Neither the Company nor any Subsidiary shall have entered into any transaction since the date of the Memorandum that would have been prohibited by Sections 10.1, through 10.4 hereof had such Sections applied since such date. 4.3. Compliance Certificates. (a) Officer's Certificate. The Company shall have delivered to you an Officer's Certificate, dated the date of the Closing, certifying that the conditions specified in Sections 4.1, 4.2 and 4.9 have been fulfilled. (b) Secretary's Certificate. The Company shall have delivered to you a certificate certifying as to the resolutions attached thereto and other corporate proceedings relating to the authorization, execution and delivery of the Notes and the Agreements. 4.4. Opinions of Counsel. You shall have received opinions in form and substance satisfactory to you, dated the date of the Closing from Rudman & Winchell, LLC, counsel for the Company, covering the matters set forth in Exhibit 4.4(a) and covering such other matters incident to the transactions contemplated hereby as you or your counsel may reasonably request (and the Company hereby instructs its counsel to deliver such opinion to you). 4.5. Purchase Permitted By Applicable Law, etc. On the date of the Closing, your purchase of Notes shall (i) be permitted by the laws and regulations of each jurisdiction to which you are subject, without recourse to provisions (such as Section 1405(a)(8) of the New York Insurance Law) permitting limited investments by insurance companies without restriction as to the character of the particular investment, (ii) not violate any applicable law or regulation (including, without limitation, Regulation U, T or X of the Board of Governors of the Federal Reserve System) and (iii) not subject you to any tax, penalty or liability under or pursuant to any applicable law or regulation, which law or regulation was not in effect on the date hereof. If requested by you, you shall have received an Officer's Certificate certifying as to such matters of fact as you may reasonably specify to enable you to determine whether such purchase is so permitted. 4.6. Intentionally Omitted. 4.7. Payment of Special Counsel Fees. Without limiting the provisions of Section 15.1, the Company shall have paid on or before the Closing the fees, charges and disbursements of your special counsel referred to in Section 4.4 to the extent reflected in a statement of such counsel rendered to the Company at least one Business Day prior to the Closing. 4.8. Private Placement Number. A Private Placement number issued by Standard & Poor's CUSIP Service Bureau (in cooperation with the Securities Valuation Office of the National Association of Insurance Commissioners) shall have been obtained for the Notes. 4.9. Changes in Corporate Structure. Except as specified in Schedule 4.9, the Company shall not have changed its jurisdiction of incorporation or been a party to any merger or consolidation and shall not have succeeded to all or any substantial part of the liabilities of any other entity, at any time following the date of the most recent financial statements referred to in Schedule 5.5. 4.10. Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated by this Agreement and all documents and instruments incident to such transactions shall be satisfactory to you and your special counsel, and you and your special counsel shall have received all such counterpart originals or certified or other copies of such documents as you or they may reasonably request. 5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to you that: 5.1. Organization; Power and Authority. The Company is a corporation duly organized, validly existing and in good standing under the laws of Maine, and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The Company has all requisite corporate power and authority to own or hold under lease the properties it purports to own or hold under lease, to transact the business it transacts and proposes to transact, to execute and deliver this Agreement and the Notes and to perform the provisions hereof and thereof. 5.2. Authorization, etc. This Agreement and the Notes have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement constitutes, and upon execution and delivery thereof each Note will constitute, the legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 5.3. Disclosure. The Company, through its agent, Fleet Securities, Inc., has delivered to you a copy of a Private Placement Memorandum, dated November 26, 2002 (the "Memorandum"), relating to the transactions contemplated hereby. The Memorandum fairly describes, in all material respects, the general nature of the business and principal properties of the Company and its Subsidiaries. Except as disclosed in Schedule 5.3, this Agreement, the Memorandum, the documents, certificates or other writings delivered to you by or on behalf of the Company in connection with the transactions contemplated hereby and the financial statements listed in Schedule 5.5, taken as a whole, do not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading in light of the circumstances under which they were made. Except as disclosed in the Memorandum or as expressly described in Schedule 5.3, or in one of the documents, certificates or other writings identified therein, or in the financial statements listed in Schedule 5.5, since December 31, 2001, there has been no change in the financial condition, operations, business, properties or prospects of the Company or any Subsidiary except changes that individually or in the aggregate could not reasonably be expected to have a Material Adverse Effect. There is no fact known to the Company that could reasonably be expected to have a Material Adverse Effect that has not been set forth herein or in the Memorandum or in the other documents, certificates and other writings delivered to you by or on behalf of the Company specifically for use in connection with the transactions contemplated hereby. 5.4. Organization and Ownership of Shares of Subsidiaries; Affiliates. (a) Schedule 5.4 contains (except as noted therein) complete and correct lists (i) of the Company's Subsidiaries, showing, as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of its capital stock or similar equity interests outstanding owned by the Company and each other Subsidiary, (ii) the Company's Affiliates, other than (A) the Company's Subsidiaries and (B) Subsidiaries of the Company's parent company, Emera, Inc., and (iii) the Company's directors and senior officers. (b) All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in Schedule 5.4 as being owned by the Company and its Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by the Company or another Subsidiary free and clear of any Lien (except as otherwise disclosed in Schedule 5.4). (c) Each Subsidiary identified in Schedule 5.4 is a corporation or other legal entity duly organized, validly existing and in good standing under the laws of its jurisdiction of formation or organization, and is duly qualified as a foreign corporation or other legal entity and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Each such Subsidiary has the requisite corporate or other power and authority to own or hold under lease the properties it purports to own or hold under lease and to transact the business it transacts and proposes to transact. (d) No Subsidiary is a party to, or otherwise subject to any legal restriction or any agreement (other than this Agreement, the agreements listed on Schedule 5.4 and customary limitations imposed by corporate or other applicable law statutes) restricting the ability of such Subsidiary to pay dividends out of profits or make any other similar distributions of profits to the Company or any of its Subsidiaries that owns outstanding shares of capital stock or similar equity interests of such Subsidiary. 5.5. Financial Statements. The Company has delivered to each Purchaser copies of the consolidated and consolidating financial statements of the Company and its Subsidiaries listed on Schedule 5.5. All of said financial statements (including in each case the related schedules and notes) fairly present in all material respects the consolidated financial position of the Company and its Subsidiaries as of the respective dates specified in such Schedule and the consolidated results of their operations and cash flows for the respective periods so specified and have been prepared in accordance with GAAP consistently applied throughout the periods involved except as set forth in the notes thereto (subject, in the case of any interim financial statements, to normal year-end adjustments). 5.6. Compliance with Laws, Other Instruments, etc. The execution, delivery and performance by the Company of this Agreement and the Notes will not (a) contravene, result in any breach of, or constitute a default under, or result in the creation of any Lien in respect of any property of the Company or any Subsidiary under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by- laws, or any other agreement or instrument to which the Company or any Subsidiary is bound or by which the Company or any Subsidiary or any of their respective properties may be bound or affected, (b) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or (c) violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. 5.7. Governmental Authorizations, etc. Except as set forth on Schedule 5.7, no consent, approval or authorization of, or registration, filing or declaration with, any Governmental Authority is required in connection with the execution, delivery or performance by the Company of this Agreement or the Notes. 5.8. Litigation; Observance of Agreements, Statutes and Orders. (a) There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. All such pending or threatened actions, suits or proceedings are disclosed in Schedule 5.8. (b) Neither the Company nor any Subsidiary is in default under any term of any agreement or instrument to which it is a party or by which it is bound, or any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including without limitation Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 5.9. Taxes. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (i) the amount of which is not individually or in the aggregate Material or (ii) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and its Subsidiaries in respect of Federal, state or other taxes for all fiscal periods are adequate. The Federal income tax liabilities of the Company and its Subsidiaries have been determined by the Internal Revenue Service and paid for all fiscal years up to and including the fiscal year ended December 31, 2001. 5.10. Title to Property; Leases. The Company and its Subsidiaries have good and sufficient title to their respective properties that individually or in the aggregate are Material, including all such properties reflected in the most recent audited balance sheet referred to in Section 5.5 or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens prohibited by this Agreement. All leases that individually or in the aggregate are Material are valid and subsisting and are in full force and effect in all material respects. 5.11. Licenses, Permits, etc. Except as disclosed in Schedule 5.11, (a) the Company and its Subsidiaries own or possess all licenses, permits, franchises, authorizations, patents, copyrights, service marks, trademarks and trade names, or rights thereto, that individually or in the aggregate are Material, without known conflict with the rights of others; (b) to the best knowledge of the Company, no product of the Company infringes in any material respect any license, permit, franchise, authorization, patent, copyright, service mark, trademark, trade name or other right owned by any other Person; and (c) to the best knowledge of the Company, there is no Material violation by any Person of any right of the Company or any of its Subsidiaries with respect to any patent, copyright, service mark, trademark, trade name or other right owned or used by the Company or any of its Subsidiaries. 5.12. Compliance with ERISA. (a) The Company and each ERISA Affiliate have operated and administered each Plan covered by ERISA and as discussed in Schedule 5.12 in compliance with all applicable laws except for such instances of noncompliance as have not resulted in and could not reasonably be expected to result in a Material Adverse Effect. The Company and each ERISA Affiliate represents that there are no claims asserted or can reasonably be expected to be asserted against a Plan that will result in or that cannot reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans (as defined in Section 3 of ERISA), and no event, transaction or condition has occurred or exists that could reasonably be expected to result in the incurrence of any such liability by the Company or any ERISA Affiliate, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate, in either case pursuant to Title I or IV of ERISA or to such penalty or excise tax provisions or to Section 401(a)(29) or 412 of the Code, other than such liabilities or Liens as would not be individually or in the aggregate Material. (b) The present value of the aggregate benefit liabilities under each of the Plans (other than Multiemployer Plans), determined as of the end of such Plan's most recently ended plan year on the basis of the actuarial assumptions specified for funding purposes in such Plan's most recent actuarial valuation report, did not exceed the aggregate current value of the assets of such Plan allocable to such benefit liabilities. The term "benefit liabilities" has the meaning specified in Section 4001 of ERISA and the terms "current value" and "present value" have the meaning specified in Section 3 of ERISA. (c) The Company and its ERISA Affiliates have not incurred withdrawal liabilities (and are not subject to contingent withdrawal liabilities), and no event has occurred or can reasonably be expected to occur that will result in or can reasonably be expected to result in withdrawal liability under Section 4201 or 4204 of ERISA in respect of Multiemployer Plans that individually or in the aggregate are Material. (d) The expected postretirement benefit obligation (determined as of the last day of the Company's most recently ended fiscal year in accordance with Financial Accounting Standards Board Statement No. 106, without regard to liabilities attributable to continuation coverage mandated by Section 4980B of the Code) of the Company and its Subsidiaries is not Material. (e) The execution and delivery of this Agreement and the issuance and sale of the Notes hereunder will not involve any transaction that is subject to the prohibitions of Section 406 of ERISA or in connection with which a tax could be imposed pursuant to Section 4975(c)(1)(A)-(D) of the Code. The representation by the Company in the first sentence of this Section 5.12(e) is made in reliance upon and subject to (i) the accuracy of your representation in Section 6.2 as to the sources of the funds used to pay the purchase price of the Notes to be purchased by you, in accordance with Department of Labor regulations. 5.13. Private Offering by the Company. Neither the Company nor anyone acting on its behalf has offered the Notes or any similar securities for sale to, or solicited any offer to buy any of the same from, or otherwise approached or negotiated in respect thereof with, any person other than you and not more than 5 other Institutional Investors, each of which has been offered the Notes at a private sale for investment. Neither the Company nor anyone acting on its behalf has taken, or will take, any action that would subject the issuance or sale of the Notes to the registration requirements of Section 5 of the Securities Act. 5.14. Use of Proceeds; Margin Regulations. The Company will apply the proceeds of the sale of the Notes as set forth in Schedule 5.14. No part of the proceeds from the sale of the Notes hereunder will be used, directly or indirectly, for the purpose of buying or carrying any margin stock within the meaning of Regulation U of the Board of Governors of the Federal Reserve System (12 CFR 221), or for the purpose of buying or carrying or trading in any securities under such circumstances as to involve the Company in a violation of Regulation X of said Board (12 CFR 224) or to involve any broker or dealer in a violation of Regulation T of said Board (12 CFR 220). Margin stock does constitutes less than 1% of the value of the consolidated assets of the Company and its Subsidiaries and the Company does not have any present intention that margin stock will constitute more than 1% of the value of such assets. As used in this Section, the terms "margin stock" and "purpose of buying or carrying" shall have the meanings assigned to them in said Regulation U. 5.15. Existing Indebtedness; Future Liens. (a) Except as described therein, Schedule 5.15 sets forth a complete and correct list of all outstanding Indebtedness of the Company and its Subsidiaries as of [ , 2002], since which date there has been no Material change in the amounts, interest rates, sinking funds, installment payments or maturities of the Indebtedness of the Company or its Subsidiaries. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment. (b) Except as disclosed in Schedule 5.15, neither the Company nor any Subsidiary has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its property, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 10.3. 5.16. Foreign Assets Control Regulations, etc. Neither the sale of the Notes by the Company hereunder nor its use of the proceeds thereof will violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto. 5.17. Status under Certain Statutes. The Company is part of the registered holding company system of Emera, Inc. under the Public Utility Holding Company Act of 1935, the terms and conditions of which are described more fully in the SEC's Holding Company Act Release in SEC File No. 70-9787 (Emera Inc., Holding Co. Act Release No. 27445 (October 1, 2001)), and is exempt from the registration provisions of such Public Utility Holding Company Act of 1935. Neither the Company nor any Subsidiary is subject to regulation under the Investment Company Act of 1940, as amended, the Interstate Commerce Act, as amended, or the Federal Power Act, as amended. 5.18. Environmental Matters. Except as set forth on Schedule 5.18, neither the Company nor any Subsidiary has knowledge of any claim or has received any notice of any claim, and no proceeding has been instituted raising any claim against the Company or any of its Subsidiaries or any of their respective real properties now or formerly owned, leased or operated by any of them or other assets, alleging any damage to the environment or violation of any Environmental Laws, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed to you in writing, (a) neither the Company nor any Subsidiary has knowledge of any facts which would give rise to any claim, public or private, of violation of Environmental Laws or damage to the environment emanating from, occurring on or in any way related to real properties now or formerly owned, leased or operated by any of them or to other assets or their use, except, in each case, such as could not reasonably be expected to result in a Material Adverse Effect; (b) neither the Company nor any of its Subsidiaries (i) has stored any Hazardous Materials on real properties now or formerly owned, leased or operated by any of them and (ii) has disposed of any Hazardous Materials in a manner contrary to any Environmental Laws in each case in any manner that could reasonably be expected to result in a Material Adverse Effect; and (c) all buildings on all real properties now owned, leased or operated by the Company or any of its Subsidiaries are in compliance with applicable Environmental Laws, except where failure to comply could not reasonably be expected to result in a Material Adverse Effect. 6. REPRESENTATIONS OF THE PURCHASER. 6.1. Purchase for Investment. You represent that you are purchasing the Notes for your own account or for one or more separate accounts maintained by you or for the account of one or more pension or trust funds and not with a view to the distribution thereof, provided that the disposition of your or their property shall at all times be within your or their control. You understand that the Notes have not been registered under the Securities Act and may be resold only if registered pursuant to the provisions of the Securities Act or if an exemption from registration is available, except under circumstances where neither such registration nor such an exemption is required by law, and that the Company is not required to register the Notes. 6.2. Source of Funds. In the event that you maintain assets of an ERISA covered Plan that is related to the Company or an ERISA Affiliate, you represent that at least one of the following statements is an accurate representation as to each source of funds (a "Source") to be used by you to pay the purchase price of the Notes to be purchased by you hereunder: (a) if you are an insurance company, the Source does not include assets allocated to any separate account maintained by you in which any employee benefit plan (or its related trust) has any interest, other than a separate account that is maintained solely in connection with your fixed contractual obligations under which the amounts payable, or credited, to such plan and to any participant or beneficiary of such plan (including any annuitant) are not affected in any manner by the investment performance of the separate account; or (b) the Source is either (i) an insurance company pooled separate account, within the meaning of Prohibited Transaction Exemption ("PTE") 90-1 (issued January 29, 1990), or (ii) a bank collective investment fund, within the meaning of the PTE 91-38 (issued July 12, 1991) and, except as you have disclosed to the Company in writing pursuant to this paragraph (b), no employee benefit plan or group of plans maintained by the same employer or employee organization beneficially owns more than 10% of all assets allocated to such pooled separate account or collective investment fund; or (c) the Source constitutes assets of an "investment fund" (within the meaning of Part V of the QPAM Exemption) managed by a "qualified professional asset manager" or "QPAM" (within the meaning of Part V of the QPAM Exemption), no employee benefit plan's assets that are included in such investment fund, when combined with the assets of all other employee benefit plans established or maintained by the same employer or by an affiliate (within the meaning of Section V(c)(1) of the QPAM Exemption) of such employer or by the same employee organization and managed by such QPAM, exceed 20% of the total client assets managed by such QPAM, the conditions of Part I(c) and (g) of the QPAM Exemption are satisfied, neither the QPAM nor a person controlling or controlled by the QPAM (applying the definition of "control" in Section V(e) of the QPAM Exemption) owns a 5% or more interest in the Company and (i) the identity of such QPAM and (ii) the names of all employee benefit plans whose assets are included in such investment fund have been disclosed to the Company in writing pursuant to this paragraph (c); or (d) the Source is a governmental plan; or (e) the Source is one or more employee benefit plans, or a separate account or trust fund comprised of one or more employee benefit plans, each of which has been identified to the Company in writing pursuant to this paragraph (e); (f) the Source does not include assets of any employee benefit plan, other than a plan exempt from the coverage of ERISA; or (g) the Source is an "insurance company general account" as such term is defined in Section V(e) of Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60"), and the conditions of PTCE 95-60 are satisfied with respect to your acquisition of the Note. As used in this Section 6.2, the terms "employee benefit plan", "governmental plan", "party in interest" and "separate account" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 7. INFORMATION AS TO COMPANY. 7.1. Financial and Business Information. The Company shall deliver to each holder of Notes that is an Institutional Investor: (a) Quarterly Statements -- within 45 days after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), duplicate copies of, (i) a consolidated and consolidating balance sheet of the Company and its Subsidiaries as at the end of such quarter, and (ii) consolidated and consolidating statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the figures for the corresponding periods in the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP applicable to quarterly financial statements generally, and certified by a Senior Financial Officer as fairly presenting, in all material respects, the financial position of the companies being reported on and their results of operations and cash flows, subject to changes resulting from normal year-end adjustments, provided that delivery within the time period specified above of copies of the Company's Quarterly Report on Form 10-Q prepared in compliance with the requirements therefor and filed with the Securities and Exchange Commission shall be deemed to satisfy the requirements of this Section 7.1(a); (b) Annual Statements -- within 90 days after the end of each fiscal year of the Company, duplicate copies of, (i) a consolidated and consolidating balance sheet of the Company and its Subsidiaries, as at the end of such year, and (ii) consolidated and consolidating statements of income, changes in shareholders' equity and cash flows of the Company and its Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, prepared in accordance with GAAP, and accompanied (A) by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion in the circumstances, and (B) a certificate of such accountants stating that they have reviewed this Agreement and stating further whether, in making their audit, they have become aware of any condition or event that then constitutes a Default or an Event of Default, and, if they are aware that any such condition or event then exists, specifying the nature and period of the existence thereof (it being understood that such accountants shall not be liable, directly or indirectly, for any failure to obtain knowledge of any Default or Event of Default unless such accountants should have obtained knowledge thereof in making an audit in accordance with generally accepted auditing standards or did not make such an audit), provided that the delivery within the time period specified above of the Company's Annual Report on Form 10-K for such fiscal year (together with the Company's annual report to shareholders, if any, prepared pursuant to Rule 14a-3 under the Exchange Act) prepared in accordance with the requirements therefor and filed with the Securities and Exchange Commission, together with the accountant's certificate described in clause (B) above, shall be deemed to satisfy the requirements of this Section 7.1(b); (c) SEC and Other Reports -- promptly upon their becoming available, one copy of (i) each financial statement, report, notice or proxy statement sent by the Company or any Subsidiary to public securities holders generally, and (ii) each regular or periodic report, each registration statement (without exhibits except as expressly requested by such holder), and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the Securities and Exchange Commission and of all press releases and other statements made available generally by the Company or any Subsidiary to the public concerning developments that are Material; (d) Notice of Default or Event of Default -- promptly, and in any event within five days after a Responsible Officer becoming aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given any notice or taken any action with respect to a claimed default of the type referred to in Section 11(c) through (j), a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto; (e) ERISA Matters -- promptly, and in any event within five days after a Responsible Officer becoming aware of any of the following, a written notice setting forth the nature thereof and the action, if any, that the Company or an ERISA Affiliate proposes to take with respect thereto: (i) with respect to any Plan, any reportable event, as defined in Section 4043(b) of ERISA and the regulations thereunder, for which notice thereof has not been waived pursuant to such regulations as in effect on the date hereof; or (ii) the taking by the PBGC of steps to institute, or the threatening by the PBGC of the institution of, proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by the PBGC with respect to such Multiemployer Plan; or (iii) any event, transaction or condition that could result in the incurrence of any liability by the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, or in the imposition of any Lien on any of the rights, properties or assets of the Company or any ERISA Affiliate pursuant to Title I or IV of ERISA or such penalty or excise tax provisions, if such liability or Lien, taken together with any other such liabilities or Liens then existing, could reasonably be expected to have a Material Adverse Effect; (f) Notices from Governmental Authority -- promptly, and in any event within 30 days of receipt thereof, copies of any notice to the Company or any Subsidiary from any Federal or state or local Governmental Authority relating to any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; and (g) Requested Information -- with reasonable promptness, such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes. 7.2. Officer's Certificate. Each set of financial statements delivered to a holder of Notes pursuant to Section 7.1(a) or Section 7.1(b) hereof shall be accompanied by a certificate of a Senior Financial Officer setting forth: (a) Covenant Compliance -- the information (including detailed calculations) required in order to establish whether the Company was in compliance with the requirements of Section 10.4 through Section 10.6 hereof, inclusive, during the quarterly or annual period covered by the statements then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amount, ratio or percentage then in existence); and (b) Event of Default -- a statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes a Default or an Event of Default or, if any such condition or event existed or exists (including, without limitation, any such event or condition resulting from the failure of the Company or any Subsidiary to comply with any Environmental Law), specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto. 7.3. Inspection. The Company shall permit the representatives of each holder of Notes that is an Institutional Investor: (a) No Default -- if no Default or Event of Default then exists, at the expense of such holder and upon reasonable prior notice to the Company, to visit the principal executive office of the Company, to discuss the affairs, finances and accounts of the Company and its Subsidiaries with the Company's officers, and (with the consent of the Company, which consent will not be unreasonably withheld) its independent public accountants, and (with the consent of the Company, which consent will not be unreasonably withheld) to visit the other offices and properties of the Company and each Subsidiary, all at such reasonable times and as often as may be reasonably requested in writing; and (b) Default -- if a Default or Event of Default then exists, at the reasonable expense of the Company to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. 8. PREPAYMENT OF THE NOTES. 8.1. Intentionally Omitted. 8.2. Optional Prepayments with Make-Whole Amount. The Company may, at its option, upon notice as provided below, prepay at any time all, or from time to time any part of, the Notes, at 100% of the principal amount so prepaid, plus the Make-Whole Amount determined for the prepayment date with respect to such principal amount. The Company will give each holder of Notes written notice of each optional prepayment under this Section 8.2 not less than 30 days and not more than 60 days prior to the date fixed for such prepayment. Each such notice shall specify such date, the aggregate principal amount of the Notes to be prepaid on such date, the principal amount of each Note held by such holder to be prepaid (determined in accordance with Section 8.3), and the interest to be paid on the prepayment date with respect to such principal amount being prepaid, and shall be accompanied by a certificate of a Senior Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment (calculated as if the date of such notice were the date of the prepayment), setting forth the details of such computation. Two Business Days prior to such prepayment, the Company shall deliver to each holder of Notes a certificate of a Senior Financial Officer specifying the calculation of such Make-Whole Amount as of the specified prepayment date. 8.3. Allocation of Partial Prepayments. In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment. 8.4. Maturity; Surrender, etc. In the case of each prepayment of Notes pursuant to this Section 8, the principal amount of each Note to be prepaid shall mature and become due and payable on the date fixed for such prepayment, together with interest on such principal amount accrued to such date and the applicable Make-Whole Amount, if any. From and after such date, unless the Company shall fail to pay such principal amount when so due and payable, together with the interest and Make- Whole Amount, if any, as aforesaid, interest on such principal amount shall cease to accrue. Any Note paid or prepaid in full shall be surrendered to the Company and cancelled and shall not be reissued, and no Note shall be issued in lieu of any prepaid principal amount of any Note. 8.5. Purchase of Notes. The Company will not and will not permit any Affiliate to purchase, redeem, prepay or otherwise acquire, directly or indirectly, any of the outstanding Notes except upon the payment or prepayment of the Notes in accordance with the terms of this Agreement and the Notes. The Company will promptly cancel all Notes acquired by it or any Affiliate pursuant to any payment, prepayment or purchase of Notes pursuant to any provision of this Agreement and no Notes may be issued in substitution or exchange for any such Notes. 8.6. Make-Whole Amount. The term "Make-Whole Amount" means, with respect to any Note, an amount equal to the excess, if any, of the Discounted Value of the Remaining Scheduled Payments with respect to the Called Principal of such Note over the amount of such Called Principal, provided that the Make-Whole Amount may in no event be less than zero. For the purposes of determining the Make-Whole Amount, the following terms have the following meanings: "Called Principal" means, with respect to any Note, the principal of such Note that is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. "Discounted Value" means, with respect to the Called Principal of any Note, the amount obtained by discounting all Remaining Scheduled Payments with respect to such Called Principal from their respective scheduled due dates to the Settlement Date with respect to such Called Principal, in accordance with accepted financial practice and at a discount factor (applied on the same periodic basis as that on which interest on the Notes is payable) equal to the Reinvestment Yield with respect to such Called Principal. "Reinvestment Yield" means, with respect to the Called Principal of any Note, 0.5% over the yield to maturity implied by (a) the yields reported, as of 10:00 A.M. (Eastern time) on the second Business Day preceding the Settlement Date with respect to such Called Principal, on the display designated "PX1" on Bloomberg Financial Markets Services Screen (or such other display as may replace Page PX1 on the Bloomberg Financial Markets Services Screen) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date, or (b) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the Treasury Constant Maturity Series Yields reported, for the latest day for which such yields have been so reported as of the second Business Day preceding the Settlement Date with respect to such Called Principal, in Federal Reserve Statistical Release H.15 (519) (or any comparable successor publication) for actively traded U.S. Treasury securities having a constant maturity equal to the Remaining Average Life of such Called Principal as of such Settlement Date. Such implied yield will be determined, if necessary, by (i) converting U.S. Treasury bill quotations to bond-equivalent yields in accordance with accepted financial practice and (ii) interpolating linearly between (A) the actively traded U.S. Treasury security with the duration closest to and greater than the Remaining Average Life and (B) the actively traded U.S. Treasury security with the duration closest to and less than the Remaining Average Life. "Remaining Average Life" means, with respect to any Called Principal, the number of years (calculated to the nearest one-twelfth year) obtained by dividing (a) such Called Principal into (b) the sum of the products obtained by multiplying (i) the principal component of each Remaining Scheduled Payment with respect to such Called Principal by (ii) the number of years (calculated to the nearest one-twelfth year) that will elapse between the Settlement Date with respect to such Called Principal and the scheduled due date of such Remaining Scheduled Payment. "Remaining Scheduled Payments" means, with respect to the Called Principal of any Note, all payments of such Called Principal and interest thereon that would be due after the Settlement Date with respect to such Called Principal if no payment of such Called Principal were made prior to its scheduled due date, provided that if such Settlement Date is not a date on which interest payments are due to be made under the terms of the Notes, then the amount of the next succeeding scheduled interest payment will be reduced by the amount of interest accrued to such Settlement Date and required to be paid on such Settlement Date pursuant to Section 8.2 or Section 12.1. "Settlement Date" means, with respect to the Called Principal of any Note, the date on which such Called Principal is to be prepaid pursuant to Section 8.2 or has become or is declared to be immediately due and payable pursuant to Section 12.1, as the context requires. 9. AFFIRMATIVE COVENANTS. The Company covenants that from and after the date hereof and for so long as any of the Notes are outstanding: 9.1. Compliance with Law. The Company will and will cause each of its Subsidiaries to comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.2. Insurance. The Company will and will cause each of its Subsidiaries to maintain, with financially sound and reputable insurers, insurance with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated. 9.3. Maintenance of Properties. The Company will and will cause each of its Subsidiaries to maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times, provided that this Section shall not prevent the Company or any Subsidiary from discontinuing the operation and the maintenance of any of its properties if such discontinuance is desirable in the conduct of its business and the Company has concluded that such discontinuance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. 9.4. Payment of Taxes and Claims. The Company will and will cause each of its Subsidiaries to file all tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if (i) the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with GAAP on the books of the Company or such Subsidiary or (ii) the nonpayment of all such taxes and assessments in the aggregate could not reasonably be expected to have a Material Adverse Effect. 9.5. Corporate Existence, etc. The Company will at all times preserve and keep in full force and effect its corporate existence. Subject to Section 10.2, the Company will at all times preserve and keep in full force and effect the corporate existence of each of its Subsidiaries (unless merged into the Company or a Subsidiary) and all rights and franchises of the Company and its Subsidiaries unless, in the good faith judgment of the Company, the termination of or failure to preserve and keep in full force and effect such corporate existence, right or franchise could not, individually or in the aggregate, have a Material Adverse Effect. 9.6. Keeping of Records and Books of Account. The Company will, and will cause its Subsidiaries to, keep adequate records and books of account, in which complete entries will be made in accordance with GAAP and with applicable requirements of any Governmental Authority having jurisdiction over the Company and/or any Subsidiary in question, reflecting all financial transactions. 9.7. Additional Assurances. The Company shall from time to time hereafter, execute and deliver or cause to be executed and delivered, such additional instruments, certificates and documents, and take all such actions, as you shall reasonably request for the purpose of implementing or effectuating the provisions of this Agreement, and upon the exercise by you of any power, right, privilege or remedy pursuant to this Agreement which requires any consent, approval, registration, qualification or authorization of any Governmental Authority or instrumentality, exercise and deliver all applications, certifications, instruments and other documents and papers that you may be so required to obtain. 10. NEGATIVE COVENANTS. The Company covenants that from and after the date hereof and for so long as any of the Notes are outstanding: 10.1. Transactions with Affiliates. The Company will not and will not permit any Subsidiary to enter into directly or indirectly any Material transaction or Material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except in the ordinary course and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate. Notwithstanding the foregoing, any Material transaction or Material group of related transactions with any Affiliate that has been approved by the Main Public Utilities Commission or the Securities and Exchange Commission shall be deemed to comply with the provisions of this Section 10.1. 10.2. Merger, Consolidation, etc. The Company shall not consolidate with or merge with any other corporation or convey, transfer or lease substantially all of its assets in a single transaction or series of transactions to any Person unless: (a) the successor formed by such consolidation or the survivor of such merger or the Person that acquires by conveyance, transfer or lease substantially all of the assets of the Company as an entirety, as the case may be, shall be a solvent corporation organized and existing under the laws of the United States or any State thereof (including the District of Columbia), and, if the Company is not such corporation, (i) such corporation shall have executed and delivered to each holder of any Notes its assumption of the due and punctual performance and observance of each covenant and condition of this Agreement and the Notes and (ii) shall have caused to be delivered to each holder of any Notes an opinion of nationally recognized independent counsel, or other independent counsel reasonably satisfactory to the Required Holders, to the effect that all agreements or instruments effecting such assumption are enforceable in accordance with their terms and comply with the terms hereof; (b) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing determined on a Pro Forma Basis. No such conveyance, transfer or lease of substantially all of the assets of the Company shall have the effect of releasing the Company or any successor corporation that shall theretofore have become such in the manner prescribed in this Section 10.2 from its liability under this Agreement or the Notes. 10.3. Liens. The Company will not and will not permit any Subsidiary to create, incur, assume or suffer to exist any Lien upon any of their respective properties or assets, whether now owner or hereafter acquired, except as follows (collectively, "Permitted Liens"): (a) any Liens existing on the date hereof; (b) Liens in favor of the Company on all or part of the assets of any Subsidiary or the Company securing Indebtedness owing by such Subsidiary of the Company to the Company; (c) Liens to secure taxes, assessments and other government charges in respect of obligations not overdue or liens on properties to secure claims for labor, material or supplies in respect of obligations not overdue, or which are being contented in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are being maintained in accordance with GAAP so long as such Liens are not being foreclosed; (d) Liens made in connection with, or to secure payment of, worker's compensation, unemployment insurance, old age pension or other social security obligations; (e) Liens of carriers, warehousemen, mechanics and materialmen, and other like liens on properties, in existence less than 120 days from the date of creation thereof in respect of obligations not overdue, or which are being contested in goof faith by appropriate proceedings diligently conducted and with respect to which adequate reserves are being maintained in accordance with GAAP so long as such Liens are not being foreclosed; (f) any purchase money Lien or construction mortgage on assets hereafter acquired or constructed by the Company or any Subsidiary and any Lien on any assets existing at the date of acquisition thereof by the Company or such Subsidiary or created within 180 days after the date of completion of such acquisition or construction; provided that such Lien shall at all times be confined solely to the assets so acquired or constructed and any additions thereto and shall secure Indebtedness of the lesser of (i) cost and (ii) fair market value, of such assets so acquired or constructed; (g) Liens resulting from legal proceedings being contested in good faith by appropriate legal or administrative proceedings by the Company or the Subsidiary (as appropriate), and as to which the Company shall have established an adequate reserve on its books; (h) any Liens in favor of any state of the United States or any political subdivision of any such state, or any agency of any such state or political subdivisions, or trustee acting on behalf of holders of obligations issued by any of the foregoing or any financial institutions lending to or purchasing obligations of any of the foregoing, which Lien is created or assumed for the purpose of financing all or part of the cost of acquiring or constructing the property subject thereto (i) Liens resulting from conditional sale agreements, capital leases or other title retention agreements; and (j) Liens acquired in connection with any transaction permitted by Section 10.2 in respect of Priority Indebtedness (constituting Permitted Indebtedness); provided that such Lien shall not attach to any assets of the Company or any Subsidiary existing immediately prior to the consummation of such transaction. 10.4. Additional Indebtedness. The Company will not and will not permit any Subsidiary to create, incur, assume or suffer to exist any Indebtedness or in any manner become liable in respect of any Indebtedness, except as follows (collectively, "Permitted Indebtedness"): (a) Indebtedness evidenced by the Notes; (b) Indebtedness of the Company and its Subsidiaries outstanding as of the date hereof and any renewals, extensions or refundings of any such Indebtedness without increase in the aggregate principal amount thereof; (c) additional Indebtedness of the Company and its Subsidiaries; provided, however, that at the time of issuance of such Indebtedness and after giving effect thereto and to the application of the proceeds of such Indebtedness, Consolidated Total Indebtedness shall not exceed 65% of Consolidated Total Capitalization. Notwithstanding the foregoing, Borrower will not, at any time, permit Priority Indebtedness to exceed $121,400,000 from the date hereof through July 31, 2005 and $75,000,000 thereafter plus, in either case, Priority Indebtedness acquired in connection with any transaction permitted by Section 10.2. 10.5. Fixed Charge Coverage Ratio. The Company will not at any time permit the Fixed Charge Coverage Ratio to be less than 2.00 to 1.00. 10.6. Consolidated Net Worth. The Company will not at any time permit Consolidated Net Worth to be less than the sum of $120,000,000. 11. EVENTS OF DEFAULT. An "Event of Default" shall exist if any of the following conditions or events shall occur and be continuing: (a) the Company defaults in the payment of any principal or Make-Whole Amount, if any, on any Note when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration or otherwise; or (b) the Company defaults in the payment of any interest on any Note for more than five Business Days after the same becomes due and payable; or (c) the Company incurs any Indebtedness other than Permitted Indebtedness or suffers or Permits any Liens other than Permitted Liens or defaults in the performance of or compliance with any term contained in Sections 10.5 or 10.6; or (d) the Company defaults in the performance of or compliance with any term contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 11) and such default is not remedied within 30 days after the earlier of (i) a Responsible Officer obtaining actual knowledge of such default and (ii) the Company receiving written notice of such default from any holder of a Note (any such written notice to be identified as a "notice of default" and to refer specifically to this paragraph (d) of Section 11); or (e) any representation or warranty made in writing by or on behalf of the Company or any Subsidiary or by any officer of the Company or any Subsidiary in this Agreement or in any writing furnished in connection with the transactions contemplated hereby proves to have been false or incorrect in any Material respect on the date as of which made; or (f)(i) the Company or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any Indebtedness that is outstanding in an aggregate principal amount of at least $10,000,000 beyond any period of grace provided with respect thereto, or (ii) the Company or any Subsidiary is in default in the performance of or compliance with any term of any evidence of any Indebtedness in an aggregate outstanding principal amount of at least $10,000,000 or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such Indebtedness has become, or has been declared (or one or more Persons are entitled to declare such Indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of Indebtedness to convert such Indebtedness into equity interests), (x) the Company or any Subsidiary has become obligated to purchase or repay Indebtedness before its regular maturity or before its regularly scheduled dates of payment in an aggregate outstanding principal amount of at least $1,000,000, or (y) one or more Persons have the right to require the Company or any Subsidiary so to purchase or repay such Indebtedness; or (g) the Company or any Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due; provided, that if a Subsidiary is generally not paying, or admits in writing its inability to pay, its debts as they become due, and the same has not caused and could not reasonably be expected to cause a Material Adverse Effect, then the same shall not constitute an Event of Default hereunder, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or (h) a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any of its Subsidiaries, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any of its Subsidiaries, or any such petition shall be filed against the Company or any of its Subsidiaries and such petition shall not be dismissed within 60 days; or (i) a final judgment or judgments for the payment of money aggregating in excess of $10,000,000 are rendered against one or more of the Company and its Subsidiaries and which judgments are not, within 60 days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within 60 days after the expiration of such stay; or (j) if (i) any Plan shall fail to satisfy the minimum funding standards of ERISA or the Code for any plan year or part thereof or a waiver of such standards or extension of any amortization period is sought or granted under Section 412 of the Code, (ii) a notice of intent to terminate any Plan shall have been or is reasonably expected to be filed with the PBGC or the PBGC shall have instituted proceedings under ERISA Section 4042 to terminate or appoint a trustee to administer any Plan or the PBGC shall have notified the Company or any ERISA Affiliate that a Plan may become a subject of any such proceedings, (iii) the aggregate "amount of unfunded benefit liabilities" (within the meaning of Section 4001(a)(18) of ERISA) under all Plans, determined in accordance with Title IV of ERISA, shall exceed $10,000,000, (iv) the Company or any ERISA Affiliate shall have incurred or is reasonably expected to incur any liability pursuant to Title I or IV of ERISA or the penalty or excise tax provisions of the Code relating to employee benefit plans, (v) the Company or any ERISA Affiliate withdraws from any Multiemployer Plan, or (vi) the Company or any Subsidiary establishes or amends any employee welfare benefit plan that provides post-employment welfare benefits in a manner that would increase the liability of the Company or any Subsidiary thereunder; and any such event or events described in clauses (i) through (vi) above, either individually or together with any other such event or events, could reasonably be expected to have a Material Adverse Effect. As used in Section 11(j), the terms "employee benefit plan" and "employee welfare benefit plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA. 12. REMEDIES ON DEFAULT, ETC. 12.1. Acceleration. (a) If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 11 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable. (b) If any other Event of Default has occurred and is continuing, any holder or holders of more than a majority in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable. (c) If any Event of Default described in paragraph (a) or (b) of Section 11 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable. Upon any Notes becoming due and payable under this Section 12.1, whether automatically or by declaration, such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus (x) all accrued and unpaid interest thereon and (y) the Make-Whole Amount determined in respect of such principal amount (to the full extent permitted by applicable law), shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived. The Company acknowledges, and the parties hereto agree, that each holder of a Note has the right to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. 12.2. Other Remedies. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared immediately due and payable under Section 12.1, the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise. 12.3. Rescission. At any time after any Notes have been declared due and payable pursuant to clause (b) or (c) of Section 12.1, the holders of not less than a majority in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if (a) the Company has paid all overdue interest on the Notes, all principal of and Make-Whole Amount, if any, on any Notes that are due and payable and are unpaid other than by reason of such declaration, and all interest on such overdue principal and Make-Whole Amount, if any, and (to the extent permitted by applicable law) any overdue interest in respect of the Notes, at the Default Rate, (b) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 17, and (c) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 12.3 will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon. 12.4. No Waivers or Election of Remedies, Expenses, etc. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 15, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 12, including, without limitation, reasonable attorneys' fees, expenses and disbursements. 13. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES. 13.1. Registration of Notes. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Note that is an Institutional Investor promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Notes. 13.2. Transfer and Exchange of Notes. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit 1. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. Notes shall not be transferred in denominations of less than $100,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $100,000. Any transferee, by its acceptance of a Note registered in its name (or the name of its nominee), shall be deemed to have made the representation set forth in Section 6.2. 13.3. Replacement of Notes. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation), and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, an original Purchaser or another holder of a Note with a minimum net worth of at least $10,000,000, such Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. 14. PAYMENTS ON NOTES. 14.1. Place of Payment. Subject to Section 14.2, payments of principal, Make-Whole Amount, if any, and interest becoming due and payable on the Notes shall be made in Bangor, Maine at the principal office of the Company in such jurisdiction. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction. 14.2. Home Office Payment. So long as you or your nominee shall be the holder of any Note, and notwithstanding anything contained in Section 14.1 or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal, Make-Whole Amount, if any, and interest by the method and at the address specified for such purpose opposite your name in Schedule A, or by such other method or at such other address as you shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, you shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 14.1. Prior to any sale or other disposition of any Note held by you or your nominee you will, at your election, either endorse thereon the amount of principal paid thereon and the last date to which interest has been paid thereon or surrender such Note to the Company in exchange for a new Note or Notes pursuant to Section 13.2. The Company will afford the benefits of this Section 14.2 to any Institutional Investor that is the direct or indirect transferee of any Note purchased by you under this Agreement and that has made the same agreement relating to such Note as you have made in this Section 14.2. 15. EXPENSES, ETC. 15.1. Transaction Expenses. Whether the transactions contemplated hereby are consummated, the Company will pay all costs and expenses (including reasonable attorneys' fees of a special counsel and, if reasonably required, local or other counsel) incurred by you or any holder of a Note in connection with such transactions and in connection with any amendments, waivers or consents under or in respect of this Agreement or the Notes (whether or not such amendment, waiver or consent becomes effective), including, without limitation: (a) the costs and expenses incurred in enforcing or defending (or determining whether or how to enforce or defend) any rights under this Agreement or the Notes or in responding to any subpoena or other legal process or informal investigative demand issued in connection with this Agreement or the Notes, or by reason of being a holder of any Note, and (b) the costs and expenses, including financial advisors' fees, incurred in connection with the insolvency or bankruptcy of the Company or any Subsidiary or in connection with any work-out or restructuring of the transactions contemplated hereby and by the Notes. The Company will pay, and will save you and each other holder of a Note harmless from, all claims in respect of any fees, costs or expenses if any, of brokers and finders (other than those retained by you). 15.2. Survival. The obligations of the Company under this Section 15 will survive the payment or transfer of any Note, the enforcement, amendment or waiver of any provision of this Agreement or the Notes, and the termination of this Agreement. 16. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT. All representations and warranties contained herein shall survive the execution and delivery of this Agreement and the Notes, the purchase or transfer by you of any Note or portion thereof or interest therein and the payment of any Note, and may be relied upon by any subsequent holder of a Note, regardless of any investigation made at any time by or on behalf of you or any other holder of a Note. All statements contained in any certificate or other instrument delivered by or on behalf of the Company pursuant to this Agreement shall be deemed representations and warranties of the Company under this Agreement. Subject to the preceding sentence, this Agreement and the Notes embody the entire agreement and understanding between you and the Company and supersede all prior agreements and understandings relating to the subject matter hereof. 17. AMENDMENT AND WAIVER. 17.1. Requirements. This Agreement and the Notes may be amended, and the observance of any term hereof or of the Notes may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the Required Holders, except that (a) no amendment or waiver of any of the provisions of Section 1, 2, 3, 4, 5, 6 or 21 hereof, or any defined term (as it is used therein), will be effective as to you unless consented to by you in writing, and (b) no such amendment or waiver may, without the written consent of the holder of each Note at the time outstanding affected thereby, (i) subject to the provisions of Section 12 relating to acceleration or rescission, change the amount or time of any prepayment or payment of principal of, or reduce the rate or change the time of payment or method of computation of interest or of the Make-Whole Amount on, the Notes, (ii) change the percentage of the principal amount of the Notes the holders of which are required to consent to any such amendment or waiver, or (iii) amend any of Sections 8, 11(a), 11(b), 12, 17 or 20. 17.2. Solicitation of Holders of Notes. (a) Solicitation. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 17 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes. (b) Payment. The Company will not directly or indirectly pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes or any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to each holder of Notes then outstanding even if such holder did not consent to such waiver or amendment. 17.3. Binding Effect, etc. Any amendment or waiver consented to as provided in this Section 17 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "this Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented in accordance with the terms hereof. 17.4. Notes held by Company, etc. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding. 18. NOTICES. All notices and communications provided for hereunder shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid), or (c) by a recognized overnight delivery service (with charges prepaid). Any such notice must be sent: (i) if to you or your nominee, to you or it at the address specified for such communications in Schedule A, or at such other address as you or it shall have specified to the Company in writing, (ii) if to any other holder of any Note, to such holder at such address as such other holder shall have specified to the Company in writing, or (iii) if to the Company, to the Company at its address set forth at the beginning hereof to the attention of the Chief Financial Officer, or at such other address as the Company shall have specified to the holder of each Note in writing. Notices under this Section 18 will be deemed given only when actually received. 19. REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating thereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the Closing (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you, may be reproduced by you by any photographic, photostatic, microfilm, microcard, miniature photographic or other similar process and you may destroy any original document so reproduced. The Company agrees and stipulates that, to the extent permitted by applicable law, any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by you in the regular course of business) and any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. This Section 19 shall not prohibit the Company or any other holder of Notes from contesting any such reproduction to the same extent that it could contest the original, or from introducing evidence to demonstrate the inaccuracy of any such reproduction. 20. CONFIDENTIAL INFORMATION. For the purposes of this Section 20, "Confidential Information" means information delivered to you by or on behalf of the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Company or any Subsidiary or (d) constitutes financial statements delivered to you under Section 7.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to (i) your directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes), (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 20, (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell such Note or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (v) any Person from which you offer to purchase any security of the Company (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 20), (vi) any federal or state regulatory authority having jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (w) to effect compliance with any law, rule, regulation or order applicable to you, (x) in response to any subpoena or other legal process, (y) in connection with any litigation to which you are a party or (z) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 20 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Company embodying the provisions of this Section 20. 21. SUBSTITUTION OF PURCHASER. You shall have the right to substitute any one of your Affiliates as the purchaser of the Notes that you have agreed to purchase hereunder, by written notice to the Company, which notice shall be signed by both you and such Affiliate, shall contain such Affiliate's agreement to be bound by this Agreement and shall contain a confirmation by such Affiliate of the accuracy with respect to it of the representations set forth in Section 6. Upon receipt of such notice, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall be deemed to refer to such Affiliate in lieu of you. In the event that such Affiliate is so substituted as a purchaser hereunder and such Affiliate thereafter transfers to you all of the Notes then held by such Affiliate, upon receipt by the Company of notice of such transfer, wherever the word "you" is used in this Agreement (other than in this Section 21), such word shall no longer be deemed to refer to such Affiliate, but shall refer to you, and you shall have all the rights of an original holder of the Notes under this Agreement. 22. MISCELLANEOUS. 22.1. Successors and Assigns. All covenants and other agreements contained in this Agreement by or on behalf of any of the parties hereto bind and inure to the benefit of their respective successors and assigns (including, without limitation, any subsequent holder of a Note) whether so expressed or not. 22.2. Payments Due on Non-Business Days. Anything in this Agreement or the Notes to the contrary notwithstanding, any payment of principal of or Make-Whole Amount or interest on any Note that is due on a date other than a Business Day shall be made on the next succeeding Business Day and shall include the additional days elapsed in the computation of the interest payable on such next succeeding Business Day. 22.3. Severability. Any provision of this Agreement that 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 (to the full extent permitted by law) not invalidate or render unenforceable such provision in any other jurisdiction. 22.4. Construction. Each covenant contained herein shall be construed (absent express provision to the contrary) as being independent of each other covenant contained herein, so that compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with any other covenant. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person. 22.5. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original but all of which together shall constitute one instrument. Each counterpart may consist of a number of copies hereof, each signed by less than all, but together signed by all, of the parties hereto. 22.6. Governing Law. This Agreement shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Maine excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. 22.7. Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. 22.8. Integration. This Agreement is intended by the parties as the final, complete and exclusive statement of the transactions evidenced by this Agreement. All prior or contemporaneous promises, agreements and understandings, whether oral or written, are deemed to be superceded by this Agreement, and no party is relying on any promise, agreement or understanding with respect to the matters covered by this Agreement which is not set forth in this Agreement. 22.9. Waiver of Jury Trial. THE PARTIES HERETO MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, ANY NOTE CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR EACH OF THE PARTIES TO ENTER INTO THIS AGREEMENT AND CONSUMMATE THE TRANSACTIONS CONTEMPLATED HEREBY. [Remainder of Page Intentionally Blank] If you are in agreement with the foregoing, please sign the form of agreement on the accompanying counterpart of this Agreement and return it to the Company, whereupon the foregoing shall become a binding agreement between you and the Company. BANGOR HYDRO-ELECTRIC COMPANY By: /s/ David R. Black Name: David R. Black Title: Treasurer The foregoing is hereby agreed to as of the date thereof. THRIVENT FINANCIAL FOR LUTHERANS By: /s/ Glen Vanic Name: Glen Vanic Title: Portfolio Manager SCHEDULE A ---------- INFORMATION RELATING TO PURCHASERS Notice of Principal Payment and Amount of Payment Wire Confirmation of All Other Name of Notes to be Transfer Wire Transfer Notices Purchaser Purchased Instructions Address Address - --------- ----------- ------------ --------------- -------- Thrivent $20,000,000 ABA #011000028 Investment Thrivent Financial State Street Division Financial for for Bank & Trust Co. Thrivent Lutherans Lutherans DDA # A/C - Financial for Attn:Investment 6813-049-1 Lutherans Division Fund Number: NCE1 625 Fourth 625 Fourth Fund Name: Thrivent Avenue North Avenue South Financial for Minneapolis MN Minneapolis, MN Lutherans 55415 55415 All payments Fax: Fax: must include 612-340-5776 (612) 340-5776 the following information: With a copy to: . Security Thrivent Accounts Description State Street . Private Kansas City Placement 801 Pennsylvania Number Kansas City, MO . Reference 64105 Purpose of Attention: Payment Bart Woodson . Interest and/or Fax: Principal 816-691-3610 Breakdown SCHEDULE B ---------- DEFINED TERMS - ------------- As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: "Affiliate" means, at any time, and with respect to any Person, (a) any other Person that at such time directly or indirectly through one or more intermediaries Controls, or is Controlled by, or is under common Control with, such first Person, and (b) any Person beneficially owning or holding, directly or indirectly, 10% or more of any class of voting or equity interests of the Company or any Subsidiary or any corporation of which the Company and its Subsidiaries beneficially own or hold, in the aggregate, directly or indirectly, 10% or more of any class of voting or equity interests. As used in this definition, "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. Unless the context otherwise clearly requires, any reference to an "Affiliate" is a reference to an Affiliate of the Company. "Applicable Laws" means any law, rule, regulation, order, decree or other requirement having the force of law, and, where applicable, any interpretation thereof by any authority having jurisdiction with respect thereto or charged with the administration thereof. "Business Day" means (a) for the purposes of Section 8.6 only, any day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York are required or authorized to be closed, and (b) for the purposes of any other provision of this Agreement, any day other than a Saturday, a Sunday or a day on which commercial banks in New York, New York, Boston, Massachusetts or Bangor, Maine are required or authorized to be closed. "Capital Lease" means, at any time, a lease with respect to which the lessee is required concurrently to recognize the acquisition of an asset and the incurrence of a liability in accordance with GAAP. "Closing" is defined in Section 3. "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the rules and regulations promulgated thereunder from time to time. "Company" means Bangor Hydro-Electric Company, a Maine corporation. "Confidential Information" is defined in Section 20. "Consolidated Adjusted EBITDA" means, in respect of any period, Consolidated Net Income (Loss) for such period plus (a) without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income (Loss) for such period the sum of (i) total income tax expense plus (ii) interest expense, amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness, (iii) depreciation, and (iv) amortization and (b) minus, to the extent included in Consolidated Net Income (Loss) for such period, the amount that would appear in accordance with GAAP on a statement of income of the Company and its consolidated Subsidiaries opposite the heading "Allowance for equity funds used during construction" (or any similar item). "Consolidated Fixed Charges" means, with respect to any period (a) total interest expense (including that attributable to capital lease obligations) of the Company and its Subsidiaries for such period with respect to all outstanding Indebtedness of the Company and its Subsidiaries, including, without limitation, all commissions, discounts and other fees and charges owed to letters of credit and bankers' acceptance financing, determined on a consolidated basis in accordance with GAAP plus (b) to the extent subtracted in arriving at the amount described in clause (a) above, the amount that would appear in accordance with GAAP on a statement of income of the Company and its Subsidiaries for such period opposite the heading "Allowance for borrowed funds used during construction" (or any similar item). "Consolidated Net Income (Loss)" means, with reference to any period, the net income (or loss) of the Company and its Subsidiaries for such period (taken as a cumulative whole), as determined in accordance with GAAP, after eliminating all offsetting debits and credits between the Company and its Subsidiaries and all other items required to be eliminated in the course of the preparation of consolidated financial statements of the Company and its Subsidiaries in accordance with GAAP, provided, however, that there shall be excluded: (a) the income (or loss) of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with the Company or any of its Subsidiaries; (b) the income (or loss) of any Person (other than a Subsidiary) in which the Company or any of its Subsidiaries has an ownership interest, except to the extent that any such income (or loss) is actually received by the Company or such Subsidiary in the form of cash dividends or similar cash distributions; and (c) the undistributed earnings of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary is not at the time permitted by the terms of any contractual obligation or any law, rule, regulation or order applicable to such Subsidiary. "Consolidated Net Worth" means the sum of (a) the value stated on the books of the Company of the capital stock of the Company and its Subsidiaries plus (b) the amount of the paid in capital and retained earnings of the Company and its Subsidiaries, in each case as such amounts would be shown on a consolidated balance sheet of the Company and its Subsidiaries as of such time prepared in accordance with GAAP. "Consolidated Total Capitalization" means, as of the date of determination thereof, the sum of (a) Consolidated Total Indebtedness at such date plus (b) the aggregate of all amounts that would appear in accordance with GAAP on a balance sheet of the Company and its consolidated Subsidiaries opposite the headings Common stock investment", "Preferred stock" and "Preferred stock subject to mandatory redemption" or similar items. "Consolidated Total Indebtedness" means, as of the date of determination thereof, the aggregate principal amount of all indebtedness that would appear in accordance with GAAP on a balance sheet of the Borrower and its consolidated Subsidiaries at such date. "Default" means an event or condition the occurrence or existence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. "Default Rate" means that rate of interest that is 2.0% per annum above the rate of interest stated in clause (a) of the first paragraph of the Notes. "Environmental Laws" means any statute, ordinance, code, law, or regulation or any other requirement enacted or adopted by any Governmental Authority relating to pollution or protection of public health, safety or welfare or the environment, including without limitation (i) those relating to emissions, discharges, releases or threatened releases of Hazardous Materials into the environment (including ambient air, surface water, ground water or land), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, (ii) the Clean Air Act, 42 U.S.C. Section 2001, et seq., the Federal Water Pollution Control Act, 33 U.S.C. Section 1247, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. Section 9601, et seq., the Toxic Substance Control Act, 42 U.S.C. Section 2501, et seq., and any state law counterparts, including the law of nuisance and strict liability. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the rules and regulations promulgated thereunder from time to time in effect. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer together with the Company under Section 414 of the Code. "Event of Default" is defined in Section 11. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fixed Charge Coverage Ratio" means the ratio of (a) Consolidated Adjusted EBITDA to (b) Consolidated Fixed Charges determined as of the end of each fiscal quarter for the immediately preceding four fiscal quarters treating such four quarter period as a single accounting period. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Governmental Authority" means (a) the government of (i) the United States of America or any State or other political subdivision thereof, or (ii) any jurisdiction in which the Company or any Subsidiary conducts all or any part of its business, or which asserts jurisdiction over any properties of the Company or any Subsidiary, or (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. "Guaranty" means, with respect to any Person, any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing any indebtedness, dividend or other obligation of any other Person in any manner, whether directly or indirectly, including (without limitation) obligations incurred through an agreement, contingent or otherwise, by such Person: (a) to purchase such indebtedness or obligation or any property constituting security therefor; (b) to advance or supply funds (i) for the purchase or payment of such indebtedness or obligation, or (ii) to maintain any working capital or other balance sheet condition or any income statement condition of any other Person or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease properties or to purchase properties or services primarily for the purpose of assuring the owner of such indebtedness or obligation of the ability of any other Person to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of such indebtedness or obligation against loss in respect thereof. In any computation of the indebtedness or other liabilities of the obligor under any Guaranty, the indebtedness or other obligations that are the subject of such Guaranty shall be assumed to be direct obligations of such obligor. "Hazardous Material" means any and all pollutants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which may be required or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is or shall be restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polycholorinated biphenyls). "holder" means, with respect to any Note, the Person in whose name such Note is registered in the register maintained by the Company pursuant to Section 13.1. "Indebtedness" with respect to any Person means, at any time, without duplication, (a) its liabilities for borrowed money and its redemption obligations in respect of mandatorily redeemable Preferred Stock; (b) its liabilities for the deferred purchase price of property acquired by such Person (excluding accounts payable arising in the ordinary course of business but including all liabilities created or arising under any conditional sale or other title retention agreement with respect to any such property); (c) all liabilities appearing on its balance sheet in accordance with GAAP in respect of Capital Leases; (d) all liabilities for borrowed money secured by any Lien with respect to any property owned by such Person (whether or not it has assumed or otherwise become liable for such liabilities); (e) all its liabilities in respect of letters of credit or instruments serving a similar function issued or accepted for its account by banks and other financial institutions (whether or not representing obligations for borrowed money); (f) Swaps of such Person; (g) every obligation of such Person under any Synthetic Lease; and (h) any Guaranty of such Person with respect to liabilities of a type described in any of clauses (a) through (g) hereof. Indebtedness of any Person shall include all obligations of such Person of the character described in clauses (a) through (g) to the extent such Person remains legally liable in respect thereof notwithstanding that any such obligation is deemed to be extinguished under GAAP. "Institutional Investor" means (a) any original purchaser of a Note, (b) any holder of a Note holding more than 25% of the aggregate principal amount of the Notes then outstanding, and (c) any bank, trust company, savings and loan association or other financial institution, any pension plan, any investment company, any insurance company, any broker or dealer, or any other similar financial institution or entity, regardless of legal form. "Lien" means, with respect to any Person, any mortgage, lien, pledge, charge, security interest or other encumbrance, or any interest or title of any vendor, lessor, lender or other secured party to or of such Person under any conditional sale or other title retention agreement or Capital Lease, upon or with respect to any property or asset of such Person (including in the case of stock, stockholder agreements, voting trust agreements and all similar arrangements). "Make-Whole Amount" is defined in Section 8.6. "Material" means material in relation to the business, operations, affairs, financial condition, assets, properties, or prospects of the Company and its Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the business, operations, affairs, financial condition, assets, properties or prospects of the Company and its Subsidiaries taken as a whole, or (b) the ability of the Company to perform its obligations under this Agreement and the Notes, or (c) the validity or enforceability of this Agreement or the Notes. "Memorandum" has the meaning provided in Section 5.3. "Multiemployer Plan" means any Plan that is a "multiemployer plan" (as such term is defined in Section 4001(a)(3) of ERISA). "Notes" is defined in Section 1. "Officer's Certificate" means a certificate of a Senior Financial Officer or of any other officer of the Company whose responsibilities extend to the subject matter of such certificate. "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA or any successor thereto. "Permitted Indebtedness" has the meaning provided in Section 10.4. "Permitted Liens" has the meaning provided in Section 10.3. "Person" means an individual, partnership, corporation, limited liability company, association, trust, unincorporated organization, or a government or agency or political subdivision thereof. "Plan" means an "employee benefit plan" (as defined in Section 3(3) of ERISA) that is or, within the preceding five years, has been established or maintained, or to which contributions are or, within the preceding five years, have been made or required to be made, by the Company or any ERISA Affiliate or with respect to which the Company or any ERISA Affiliate may have any liability. This definition shall include all other plans or policies which may or may not be ERISA plans which have been maintained or contributed to by the Company or an ERISA Affiliate. A list of all Plans as of the date of this Agreement is listed in Exhibit C. "Preferred Stock" means any class of capital stock of a corporation that is preferred over any other class of capital stock of such corporation as to the payment of dividends or the payment of any amount upon liquidation or dissolution of such corporation. "Priority Indebtedness" means, as of the date of determination thereof, the sum of (a) all Indebtedness of the Company and its Subsidiaries secured by Permitted Liens plus, but without duplication, (b) all other Indebtedness of Subsidiaries (excluding, in any event, Indebtedness due or owing to the Company or another wholly owned Subsidiary. "Pro Forma Basis" means a basis for making accounting calculations following in connection with any transaction permitted pursuant to Section 10.2, in which Indebtedness and Consolidated Adjusted EBITDA for the fiscal quarter immediately preceding the fiscal quarter in which such transaction occurred and each of the immediately preceding three fiscal quarters are calculated taking into account the audited historical financial results of the Person with whom the Company engaged in such transaction (or, to the extent such financial results are unaudited, such unaudited results shall have been prepared in accordance with GAAP) and the Company and its Subsidiaries for the fiscal quarter immediately preceding the fiscal quarter in which such transaction occurred and the immediately preceding three Borrower fiscal quarters after giving effect on a Pro Forma Basis to such transaction and assuming that such transaction had been consummated at the beginning of such four fiscal quarter period in the manner described in (a), (b) and (c) below: (a) all Indebtedness and any other balance sheet adjustments incurred or made in connection with the transaction shall be deemed to have been incurred or made on the first day of such four fiscal quarter period, and all Indebtedness of the Person acquired or to be acquired in such transaction which was or will have been repaid in connection with the consummation of such transaction shall be deemed to have been repaid concurrently with the incurrence of the Indebtedness incurred in connection with such transaction; (b) all Indebtedness assumed to have been incurred pursuant to preceding clause (a) shall be deemed to have borne interest at the same rate as set forth in the Notes; and (c) other reasonable cost savings, expenses and other income statement or operating statement adjustments which are attributable to the change in ownership and/or management resulting from such transaction shall be deemed to have been realized on the first day of such four fiscal-quarter period. "property" or "properties" means, unless otherwise specifically limited, real or personal property of any kind, tangible or intangible, choate or inchoate. "QPAM Exemption" means Prohibited Transaction Class Exemption 84-14, as amended by Prohibited Transaction Class Exemption 2002-13, issued by the United States Department of Labor. "Required Holders" means, at any time, the holders of at least a majority in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by the Company or any of its Affiliates). "Responsible Officer" means any Senior Financial Officer and any other officer of the Company with responsibility for the administration of the relevant portion of this agreement. "Securities Act" means the Securities Act of 1933, as amended from time to time. "Senior Financial Officer" means the chief financial officer, principal accounting officer, treasurer or comptroller of the Company. "Subsidiary" means, as to any Person, any corporation, association or other business entity in which such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries owns sufficient equity or voting interests to enable it or them (as a group) ordinarily, in the absence of contingencies, to elect a majority of the directors (or Persons performing similar functions) of such entity, and any partnership or joint venture if more than a 50% interest in the profits or capital thereof is owned by such Person or one or more of its Subsidiaries or such Person and one or more of its Subsidiaries (unless such partnership can and does ordinarily take major business actions without the prior approval of such Person or one or more of its Subsidiaries). Unless the context otherwise clearly requires, any reference to a "Subsidiary" is a reference to a Subsidiary of the Company. "Swaps" means, with respect to any Person, payment obligations with respect to interest rate swaps, currency swaps and similar obligations obligating such Person to make payments, whether periodically or upon the happening of a contingency. For the purposes of this Agreement, the amount of the obligation under any Swap shall be the amount determined in respect thereof as of the end of the then most recently ended fiscal quarter of such Person, based on the assumption that such Swap had terminated at the end of such fiscal quarter, and in making such determination, if any agreement relating to such Swap provides for the netting of amounts payable by and to such Person thereunder or if any such agreement provides for the simultaneous payment of amounts by and to such Person, then in each such case, the amount of such obligation shall be the net amount so determined. "Synthetic Lease" means any lease treated as an operating lease under GAAP and as a loan or financing for United States income tax purposes. "Wholly-Owned Subsidiary" means, at any time, any Subsidiary one hundred percent (100%) of all of the equity interests (except directors' qualifying shares) and voting interests of which are owned by any one or more of the Company and the Company's other Wholly-Owned Subsidiaries at such time. EXHIBIT 1 --------- [FORM OF NOTE] This Note has not been registered under the Securities Act of 1933 as amended (the "Act") or registered or qualified under any state securities law and may not be offered, sold, or otherwise transferred except in connection in compliance with the registration requirements of the Act and applicable state securities laws or pursuant to an exemption therefrom. BANGOR HYDRO-ELECTRIC COMPANY 6.09% Senior Notes due December 20, 2012 No. 1 December 20, 2002 $20,000,000 PPN: 060077 G*9 FOR VALUE RECEIVED, the undersigned, Bangor Hydro-Electric Company (herein called the "Company"), a corporation organized and existing under the laws of the State of Maine, hereby promises to pay to Swanbird & Co., or registered assigns, the principal sum of $20,000,000 on December 20, 2012, with interest (computed on the basis of a 360-day year of twelve 30-day months) (a) on the unpaid balance thereof at the rate of 6.09% per annum from the date hereof, payable semiannually, on the 1st day of January and July in each year, commencing with the July 1, 2003, until the principal hereof shall have become due and payable, and (b) to the extent permitted by law on any overdue payment (including any overdue prepayment) of principal, any overdue payment of interest and any overdue payment of any Make-Whole Amount (as defined in the Note Purchase Agreement referred to below), payable semiannually as aforesaid (or, at the option of the registered holder hereof, on demand), at a rate per annum from time to time equal to 2.0% above the rate interest rate that would otherwise have been applicable to such overdue amount on the date such amount was due. Payments of principal of, interest on and any Make-Whole Amount with respect to this Note are to be made in lawful money of the United States of America at the location specified in Section 14 of the Note Purchase Agreements referred to below or at such other place as the Company shall have designated by written notice to the holder of this Note as provided in the Note Purchase Agreements referred to below. This Note is issued pursuant to a separate Note Purchase Agreements dated as of December 20, 2002 (as from time to time amended, the "Note Purchase Agreement"), between the Company and the purchaser named therein and is entitled to the benefits thereof. Each holder of this Note will be deemed, by its acceptance hereof, (i) to have agreed to the confidentiality provisions set forth in Section 20 of the Note Purchase Agreement and (ii) to have made the representation set forth in Section 6 of the Note Purchase Agreement. This Note is a registered Note and, as provided in the Note Purchase Agreements, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary. This Note is subject to optional prepayment, in whole or from time to time in part, at the times and on the terms specified in the Note Purchase Agreement, but not otherwise. If an Event of Default, as defined in the Note Purchase Agreement, occurs and is continuing, the principal of this Note may be declared or otherwise become due and payable in the manner, at the price (including any applicable Make-Whole Amount) and with the effect provided in the Note Purchase Agreement. This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of Maine excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State. BANGOR HYDRO-ELECTRIC COMPANY By: Name: Title: FORM OF OPINION OF SPECIAL COUNSEL TO THE COMPANY Matters To Be Covered In Opinion of Special Counsel To the Company 1. Each of the Company and its Subsidiaries being duly incorporated, validly existing and in good standing and having requisite corporate power and authority to issue and sell the Notes and to execute and deliver the documents. 2. Each of the Company and its Subsidiaries being duly qualified and in good standing as a foreign corporation in appropriate jurisdictions. 3. Due authorization and execution of the documents and such documents being legal, valid, binding and enforceable. 4. No conflicts with charter documents, laws or other agreements. 5. All consents required to issue and sell the Notes and to execute and deliver the documents having been obtained. 6. No litigation questioning validity of documents. 7. The Notes not requiring registration under the Securities Act of 1933, as amended; no need to qualify an indenture under the Trust Indenture Act of 1939, as amended. 8. No violation of Regulations U, T or X of the Federal Reserve Board. 9. Company not an "investment company", or a company "controlled" by an "investment company", under the Investment Company Act of 1940, as amended. 10. Company not a public utility required to be registered under the Public Utility Holding Company Act. Exhibit 4.4(b) EX-10 7 ex10b10k.txt EXH 10 (B) BANGOR HYDRO-ELECTRIC CO. 10-K 2002 AMENDMENT NO. 4 TO AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT This AMENDMENT NO. 4 TO AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT (this "Amendment No. 4") is made and entered into as of March 29, 2002, by and among BANGOR HYDRO-ELECTRIC COMPANY, a Maine corporation having its chief executive office at 33 State Street, Bangor, Maine 04402 (the "Borrower"), FLEET NATIONAL BANK (f/k/a BankBoston, N.A.), a national banking association having a place of business at 80 Exchange Street, Bangor, Maine 04401 ("Fleet"), and the other lending institutions listed on Schedule 1 to the Credit Agreement (as defined below) and Fleet as administrative agent and documentation agent for itself and such other lending institutions (the "Agent"). Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Credit Agreement. WHEREAS, the Borrower, the Banks, and the Agent entered into an Amended and Restated Revolving Credit and Term Loan Agreement dated as of June 29, 1998 (as amended by Amendment No. 1 to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of June 29, 2001, Amendment No. 2 to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of October 1, 2001, and Amendment No. 3 to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of December 31, 2001, as the same may be further amended and in effect from time to time, the "Credit Agreement"), pursuant to which the Banks extended credit to the Borrower on the terms set forth therein; and WHEREAS, the Borrower has requested an extension of the Revolving Credit Loan Maturity Date, and the parties hereto have agreed to extend the Revolving Credit Loan Maturity Date on the terms set forth herein; and WHEREAS, Fleet has approved, among the other amendments set forth herein, an increase in the Total Commitment to $60,000,000; NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to amend the provisions of the Credit Agreement as follows: 1. Amendments to Section 1 of the Credit Agreement. (a) Section 1 of the Credit Agreement is hereby amended by deleting the following definition of "Consolidated Adjusted EBIT" in its entirety and replacing it with the following new definition, inserted in proper alphabetical order: "Consolidated Adjusted EBIT. For any period, Consolidated Net Income (or deficit) for such period (a) plus, without duplication and to the extent reflected as a charge in the statement of such Consolidated Net Income (or deficit) for such period, the sum of (i) total income tax expense, (ii) interest expense, amortization or write-off of debt discount and debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness (including the Loans) and (iii) solely for the purposes of determining compliance with Section 11.2 hereof, (A) the non-cash non-recurring charge related to the early retirement plan and severance arrangements implemented in connection with the corporate reorganization of the Borrower to be taken in the fiscal year ending December 31, 2002, and (B) any non-cash charges attributable to the impairment of goodwill of the Borrower to be taken in the fiscal year ending December 31, 2002; and (b) minus, to the extent included in Consolidated Net Income (or deficit) for such period, the amount which would appear in accordance with GAAP on a statement of income of the Borrower and its consolidated Subsidiaries opposite the heading "Allowance for equity funds used during construction" (or any similar item)." (b) Section 1 of the Credit Agreement is hereby amended by deleting the following definitions of "Level I Status", "Level II Status", "Level III Status", "Level IV Status", "Level V Status" and "Level VI Status" in their entirety and replacing them with the following new definitions, inserted in proper alphabetical order: "Level I Status. With respect to the Revolving Credit Loans, the Status that exists on any date if on such date the Borrower has a long-term senior secured debt or corporate credit rating (whether or not published) of BBB+ or better by S&P and, unless the Borrower is then unrated by Moody's, Baa1 or better by Moody's." "Level II Status. With respect to the Revolving Credit Loans, the Status that exists on any date if on such date Level I Status does not exist, and the Borrower has a long-term senior secured debt or corporate credit rating (whether or not published) of BBB or better by S&P and, unless the Borrower is then unrated by Moody's, Baa1 or better by Moody's." "Level III Status. With respect to the Revolving Credit Loans, the Status that exists on any date if on such date neither Level I Status nor Level II Status exists, and the Borrower has a long-term senior secured debt or corporate credit rating (whether or not published) of BBB- or better by S&P and, unless the Borrower is then unrated by Moody's, Baa2 or better by Moody's." "Level IV Status. With respect to the Revolving Credit Loans, the Status that exists on any date if on such date neither Level I Status nor Level II Status nor Level III Status exists, and the Borrower has a long-term senior secured debt or corporate credit rating (whether or not published) of BB+ or better by S&P and, unless the Borrower is then unrated by Moody's, Ba1 or better by Moody's." "Level V Status. With respect to the Revolving Credit Loans, the Status that exists on any date if on such date neither Level I Status nor Level II Status nor Level III Status nor Level IV Status exists, and the Borrower has a long-term senior secured debt or corporate credit rating (whether or not published) of BB or better by S&P and, unless the Borrower is then unrated by Moody's, Ba2 or better by Moody's." "Level VI Status. With respect to the Revolving Credit Loans, the Status that exists on any date if on such date neither Level I Status nor Level II Status nor Level III Status nor Level IV Status nor Level V Status exists." (c) Section 1 of the Credit Agreement is hereby amended by deleting the following "Pricing Table" in its entirety and replacing it with the following new Pricing Table, inserted in proper alphabetical order: Status Applicable Applicable Applicable L/C Commitment LIBOR Margin Base Rate Rate Fee Rate (per annum) Margin (per annum) (per annum) (per annum) Level I 0.60% 0.00% 0.60% 0.20% Level II 0.75% 0.00% 0.75% 0.25% Level III 1.25% 0.25% 1.25% 0.375% Level IV 1.75% 0.75% 1.75% 0.50% Level V 2.00% 1.00% 2.00% 0.50% Level VI 2.50% 1.50% 2.50% 0.625% (d) Section 1 of the Credit Agreement is further amended by deleting the following definition of "Revolving Credit Loan Maturity Date" in its entirety and replacing it with the following new definition, inserted in proper alphabetical order: "Revolving Credit Loan Maturity Date. June 30, 2003." (e) Section 1 is further amended by deleting the following definition of "Status" in its entirety and replacing it with the following new definition, inserted in proper alphabetical order: "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." 2. Amendment to Section 2.4 of the Credit Agreement. Section 2.4(a) of the Credit Agreement is hereby amended by adding the following phrase immediately after the words "Closing Date": ", the effective date of any amendment and restatement of such note". 3. Amendments to Section 9.4 of the Credit Agreement. (a) Section 9.4(a) of the Credit Agreement is hereby amended by deleting Section 9.4(a) in its entirety and restating it as follows: "(a) as soon as practicable, but in any event not later than one-hundred twenty (120) days after the end of each fiscal year (i) of the Borrower, the consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such year, and the related consolidated statements of cash flows, operations and retained earnings for such year, each setting forth in comparative form the figures for the previous fiscal year and all such consolidated statements to be in reasonable detail, prepared in accordance with GAAP, and certified without qualification by Coopers & Lybrand or by other independent certified public accountants of nationally recognized standing reasonably satisfactory to the Administrative Agent, together with a written statement from such accountants to the effect that, in making the examination necessary to said certification, they have obtained no knowledge of any Default or Event of Default, or, if such accountants shall have obtained knowledge of any then existing Default or Event of Default they shall disclose in such statement any such Default or Event of Default and (ii) of Emera, Inc., the consolidated balance sheet of Emera, Inc. and its Subsidiaries as at the end of such year, and the related consolidated statements of cash flows, operations and retained earnings for such year, each setting forth in comparative form the figures for the previous fiscal year and all such consolidated statements to be in reasonable detail, prepared in accordance with GAAP, and certified without qualification by Ernst & Young LLP or by other independent certified public accountants of nationally recognized standing reasonably satisfactory to the Administrative Agent, together with a written statement from such accountants to the effect that, in making the examination necessary to said certification, they have obtained no knowledge of any Default or Event of Default, or, if such accountants shall have obtained knowledge of any then existing Default or Event of Default they shall disclose in such statement any such Default or Event of Default; provided that such accountants shall not be liable to the Banks for failure to obtain knowledge of any Default or Event of Default;" (b) Section 9.4(b) of the Credit Agreement is hereby amended by deleting the phrase "fifty (50) days" and replacing it with the phrase "forty-five (45) days". (c) Section 9.4(h) is hereby amended by deleting the phrase "(1) on or about June 30 and December 31 of each year, a letter from S&P setting forth the Borrower's long-term senior secured debt or corporate credit rating then in effect and" and replacing it with the phrase "(1) once each year, a letter from S&P setting forth the Borrower's and Emera Inc.'s long-term senior secured debt or corporate credit rating then in effect and". 4. Amendment to Section 10 of the Credit Agreement. Section 10 of the Credit Agreement is hereby amended by adding the following Section 10.11 immediately after Section 10.10: "Section 10.11. Assignment of Service Agreement. The Borrower will not, and will not permit any of its Subsidiaries to, assign the Service Agreement." 5. Amendment to Section 11.1 of the Credit Agreement. Section 11.1 of the Credit Agreement is hereby amended by deleting Section 11.1 in its entirety and restating it as follows: "Section 11.1. Consolidated Net Worth. The Borrower will not permit Consolidated Net Worth to be less than $150,000,000." 6. Amendment to Section 11.4 of the Credit Agreement. Section 11.4 of the Credit Agreement is hereby amended by deleting all of the second sentence of Section 11.4 and replacing it with: "Notwithstanding the foregoing, so long as no Default or Event of Default has occurred or is continuing, the Borrower may declare or otherwise become obligated to make dividend payments not to exceed one hundred percent (100%) of earnings applicable to common stock for each fiscal year; provided that the Borrower has a long term senior secured debt rating (whether or not published) of BBB or better by S&P. If the Borrower's long term senior secured debt rating is less than BBB by S&P at any time, then dividend payments shall not exceed seventy percent (70%) of earnings applicable to common stock for such fiscal year and each fiscal year thereafter." 7. Amendment to Schedule 1 to the Credit Agreement. Schedule 1 to the Credit Agreement is hereby amended by deleting Schedule 1 in its entirety and substituting in lieu thereof Schedule 1 attached hereto. 8. Conditions to Effectiveness. This Amendment No. 4 shall become effective as of the date hereof, subject to the satisfaction of each of the following conditions: (a) receipt by the Agent of this Amendment No. 4 duly and properly authorized, executed and delivered by each of the respective parties hereto; (b) the Borrower shall have delivered to the Agent certified copies of corporate resolutions of the Borrower satisfactory to the Agent authorizing this Amendment No. 4; (c) receipt by the Agent of the Borrower's audited financial statements pursuant to Section 9.4(a) in form and substance satisfactory to the Agent; (d) receipt by the Agent of an opinion of Borrower's counsel issued to the Agent and the Banks, in form and substance satisfactory to the Agent and the Banks; and (e) receipt by Bingham Dana LLP of payment of all fees and expenses incurred in the connection with the preparation of this Amendment No. 4. 9. Representations and Warranties. The Borrower represents and warrants to the Agent and the Banks as follows: (a) The execution, delivery and performance of each of this Amendment No. 4 and the transactions contemplated hereby are within the corporate power and authority of the Borrower and have been or will be authorized by proper corporate proceedings, and do not (i) require any consent or approval of the stockholders of the Borrower, (ii) contravene any provision of the charter documents or by-laws of the Borrower or any law, rule or regulation applicable to the Borrower, or (iii) contravene any provision of, or constitute an event of default or event which, but for the requirement that time elapse or notice be given, or both, would constitute an event of default under, any other material agreement, instrument or undertaking binding on the Borrower. (b) This Amendment No. 4 and the Credit Agreement, as amended as of the date hereof, and all of the terms and provisions hereof and thereof are the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, and except as the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. (c) The execution, delivery and performance of this Amendment No. 4 and the transactions contemplated hereby do not require any approval or consent of, or filing or registration with, any governmental or other agency or authority, or any other party. (d) The representations and warranties contained in Section 8 of the Credit Agreement are true and correct in all material respects as of the date hereof as though made on and as of the date hereof. (e) After giving effect to this Amendment No. 4, no Default or Event of Default under the Credit Agreement has occurred and is continuing. 10. Ratification, etc. Except as expressly amended hereby, the Credit Agreement, the other Loan Documents and all documents, instruments and agreements related thereto are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Amendment No. 4 and the Credit Agreement shall hereafter be read and construed together as a single document, and all references in the Credit Agreement, any other Loan Document or any agreement or instrument related to the Credit Agreement shall hereafter refer to the Credit Agreement as amended by this Amendment No. 4. 11. GOVERNING LAW. THIS AMENDMENT NO. 4 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 12. Counterparts. This Amendment No. 4 may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, each of the undersigned has duly executed this Amendment No. 4 as of the date first set forth above. THE BORROWER: BANGOR HYDRO-ELECTRIC COMPANY By: /s/ David R. Black ------------------ Name: David R. Black Title: Treasurer THE BANKS: FLEET NATIONAL BANK (f/k/a BankBoston, N.A.), individually and as Administrative Agent and Documentation Agent By: /s/ Neil C. Buitenhuys ---------------------- Name: Neil C. Buitenhuys Title: Senior Vice President BANKNORTH, N.A. (F/K/A PEOPLES HERITAGE BANK) By: /S/ Lynn B. Hughes ------------------ Name: Lynn B. Hughes Title: Senior Vice President Schedule 1 BANKS ----- Commitment Commitment Banks Address Amount Percentage ----- ------- ---------- ---------- Fleet National Bank 80 Exchange Street $52,000,000 86.6667% Bangor, ME 04401 BankNorth, N.A. One Portland Square $8,000,000 13.3333% Portland, ME 04101 ----------- --------- Total $60,000,000 100% EX-10 8 ex10c10k.txt EXH 10 (C) BANGOR HYDRO-ELECTRIC CO. 10-K 2002 AMENDMENT NO. 5 TO AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT This AMENDMENT NO. 5 TO AMENDED AND RESTATED REVOLVING CREDIT AND TERM LOAN AGREEMENT (this "Amendment No. 5") is made and entered into as of September 13, 2002, by and among BANGOR HYDRO-ELECTRIC COMPANY, a Maine corporation having its chief executive office at 33 State Street, Bangor, Maine 04402 (the "Borrower"), FLEET NATIONAL BANK, a national banking association having a place of business at 80 Exchange Street, Bangor, Maine 04401 ("Fleet"), and the other lending institutions listed on Schedule 1 to the Credit Agreement (as defined below) and Fleet as administrative agent and documentation agent for itself and such other lending institutions (the "Agent"). Capitalized terms used herein without definition shall have the meanings assigned to such terms in the Credit Agreement. WHEREAS, the Borrower, the Banks, and the Agent entered into an Amended and Restated Revolving Credit and Term Loan Agreement dated as of June 29, 1998 (as amended by Amendment No. 1 to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of June 29, 2001, Amendment No. 2 to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of October 1, 2001, Amendment No. 3 to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of December 31, 2001, and Amendment No. 4 to Amended and Restated Revolving Credit and Term Loan Agreement, dated as of March 29, 2002, as the same may be further amended and in effect from time to time, the "Credit Agreement"), pursuant to which the Banks extended credit to the Borrower on the terms set forth therein; and WHEREAS, the Borrower has requested to have the option to borrow LIBOR Rate Loans with an interest period of nine or twelve months in addition to the interest period of one, two, three or six months currently permitted under the Credit Agreement; NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree to amend the provisions of the Credit Agreement as follows: 1. Amendment to Section 1 of the Credit Agreement. Section 1 of the Credit Agreement is hereby amended by deleting the phrase "1, 2, 3, or 6 months" in the definition of "Interest Period" and replacing it with the phrase "1, 2, 3, 6, 9 or 12 months (to the extent available)". 2. Ratification, etc. Except as expressly amended hereby, the Credit Agreement, the other Loan Documents and all documents, instruments and agreements related thereto are hereby ratified and confirmed in all respects and shall continue in full force and effect. This Amendment No. 5 and the Credit Agreement shall hereafter be read and construed together as a single document, and all references in the Credit Agreement, any other Loan Document or any agreement or instrument related to the Credit Agreement shall hereafter refer to the Credit Agreement as amended by this Amendment No. 5. 3. GOVERNING LAW. THIS AMENDMENT NO. 5 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. 4. Counterparts. This Amendment No. 5 may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which counterparts taken together shall be deemed to constitute one and the same instrument. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] IN WITNESS WHEREOF, each of the undersigned has duly executed this Amendment No. 5 as of the date first set forth above. THE BORROWER: ------------ BANGOR HYDRO-ELECTRIC COMPANY By: /s/ David R. Black ------------------ Name: David R. Black Title: Treasurer THE BANKS: --------- FLEET NATIONAL BANK, individually and as Administrative Agent and Documentation Agent By: /s/ Neil C. Buitenhuys ---------------------- Name: Neil C. Buitenhuys Title: Senior Vice President BANKNORTH, N.A. By: /s/ Lynn B. Hughes ------------------ Name: Lynn B. Hughes Title: Senior Vice President -----END PRIVACY-ENHANCED MESSAGE-----