-----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, JadBGsZXGdx3Olmq5lo4fJO+cvxA5nF7cYl+w0wQ3VtGVNDqCzLAwePrMQ7VlDZI r+zLO41kEE8+BLN4PlQEjw== 0000009548-97-000022.txt : 19970814 0000009548-97-000022.hdr.sgml : 19970814 ACCESSION NUMBER: 0000009548-97-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANGOR HYDRO ELECTRIC CO CENTRAL INDEX KEY: 0000009548 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 010024370 STATE OF INCORPORATION: ME FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10922 FILM NUMBER: 97659035 BUSINESS ADDRESS: STREET 1: 33 STATE ST CITY: BANGOR STATE: ME ZIP: 04401 BUSINESS PHONE: 2079455621 MAIL ADDRESS: STREET 1: PO BOX 932 CITY: BANGOR STATE: ME ZIP: 04401 10-Q 1 2ND QUARTER 10Q DOCUMENT/BANGOR HYDRO-ELECTRIC CO. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 1997 Commission File No. 0-505 -------------- ------ BANGOR HYDRO-ELECTRIC COMPANY ------------------------------------------------------ (Exact Name of Registrant as specified in its Charter) Maine 01-0024370 ------------------------------- ------------------ (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 33 State Street, Bangor, Maine 04401 --------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code 207-945-5621 ------------ None ------------------------------------------------------------- Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report Outstanding Common Stock, $5 Par Value - 7,363,424 Shares June 30, 1997 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 ----- ---- FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 PART I - FINANCIAL INFORMATION PAGE ---- Cover Page 1 Index 2 Consolidated Statements of Income 3 Management's Discussion and Analysis of Financial Statements 4 Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 26 Consolidated Statements of Capitalization 28 Consolidated Statements of Cash Flows 29 Consolidated Statements of Retained Earnings 30 Notes to the Consolidated Financial Statements 31 PART II - OTHER INFORMATION 40 Item 6 - Exhibits and Reports on Form 8-K 41 Signature Page 42 BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME 000's Omitted Except Per Share Amounts (UNAUDITED)
Three Months Ended Six Months Ended Jun. 30, Jun. 30, Jun. 30, Jun. 30, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- ELECTRIC OPERATING REVENUES $ 42,236 $ 43,152 $ 90,412 $ 91,313 ---------- ---------- ---------- ---------- OPERATING EXPENSES: Fuel for generation and purchased power $ 21,006 $ 17,192 $ 45,288 $ 35,945 Other operation and maintenance 7,935 7,759 15,697 15,496 Depreciation and amortization 2,414 1,775 5,166 3,735 Amortization of Seabrook Nuclear Unit 425 425 850 850 Amortization of contract buyouts 5,229 5,189 10,457 10,379 Taxes - Property and payroll 1,411 1,293 2,823 2,583 State income (282) 102 (562) 530 Federal income (798) 381 (860) 2,305 ---------- ---------- ---------- ---------- $ 37,340 $ 34,116 $ 78,859 $ 71,823 ---------- ---------- ---------- ---------- OPERATING INCOME $ 4,896 $ 9,036 $ 11,553 $ 19,490 ---------- ---------- ---------- ---------- OTHER INCOME AND (DEDUCTIONS): Allowance for equity funds used during construction $ 88 $ 86 $ 183 $ 185 Other, net of applicable income taxes 246 292 543 590 ---------- ---------- ---------- ---------- $ 334 $ 378 $ 726 $ 775 ---------- ---------- ---------- ---------- INCOME BEFORE INTEREST EXPENSE $ 5,230 $ 9,414 $ 12,279 $ 20,265 ---------- ---------- ---------- ---------- INTEREST EXPENSE: Long-term debt $ 5,722 $ 5,985 $ 11,477 $ 12,042 Other 717 849 1,483 1,760 Allowance for borrowed funds used during construction (172) (178) (360) (390) ---------- ---------- ---------- ---------- $ 6,267 $ 6,656 $ 12,600 $ 13,412 ---------- ---------- ---------- ---------- NET INCOME (LOSS) $ (1,037) $ 2,758 $ (321) $ 6,853 DIVIDENDS ON PREFERRED STOCK 344 383 689 776 ---------- ---------- ---------- ---------- EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (1,381) $ 2,375 $ (1,010) $ 6,077 =========== ========== =========== ========== WEIGHTED AVERAGE NUMBER OF SHARES 7,363 7,328 7,363 7,320 =========== ========== =========== ========== EARNINGS (LOSS) PER COMMON SHARE, based on the weighted average number of shares outstanding during the period $ (.19) $ .32 $ (.14) $ .83 ========== ========== ========== ========== DIVIDENDS DECLARED PER COMMON SHARE $ .00 $ .18 $ .00 $ .36 ========== ========== ========== ========== See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Management's Discussion and Analysis of the Results of Operations and Financial Condition contained in Bangor Hydro-Electric Company's (the Company) Annual Report on Form 10-K for the year ended December 31, 1996 (1996 Form 10-K) should be read in conjunction with the comments below. EARNINGS The quarter ended June 30, 1997 resulted in a loss of $.19 per common share, compared to earnings of $.32 per common share for the quarter ended June 30, 1996. The decline in second quarter earnings compared to 1996 is attributable largely to the fact that the Maine Yankee nuclear power plant, in which the Company has a 7% interest, has been shut down since early December 1996 (See Maine Yankee below). While the plant remains shut down, the Company incurs approximately $1 million per month in replacement power costs. Maine Yankee's operating costs were significantly higher in the 1997 quarter, and these costs are being borne by its owners. The Company also incurred greater purchased power costs in the 1997 quarter due to the shutdown of various power plants in the Northeast. IMPORTANT CURRENT ACTIVITIES INDUSTRY RESTRUCTURING - In the Company's 1996 Form 10-K, the Company described electric utility restructuring efforts in Maine, including the Maine Public Utilities Commission's (MPUC) recommendation to the legislature. After months of hearings and deliberations, the Maine legislature passed L.D. 1804, "An Act to Restructure the State's Electric Industry", which the Governor signed into law on May 29, 1997. The principal provisions of the new law are as follows: (1) Beginning on March 1, 2000, all consumers of electricity have the right to purchase generation services directly from competitive electricity suppliers who will not be subject to rate regulation. 2) By March 1, 2000, the Company must divest of all generation related assets and business functions except for: (a) contracts with qualifying facilities and conservation providers; (b) nuclear assets, namely, the Company's investment in Maine Yankee, however, the MPUC may require divestiture on or after January 1, 2009; (c) assets that the MPUC determines necessary for the operation of the transmission and distribution services. The MPUC may grant an extension of the divestiture deadline if the extension will improve the selling price. For assets not divested, the utilities are required to sell the rights to the energy and capacity from these assets. The Company shall submit to the MPUC its divestiture plan no later than January 1, 1999. 3) Billing and metering services will be subject to competition beginning March 1, 2002, but the legislation permits the MPUC to establish an earlier date, no sooner than March 1, 2000. 4) The Company, through an unregulated affiliate, may market and sell electricity both within and outside its current service territory, limited to 33% of the load within the Company's service territory and unlimited outside the Company's service territory. 5) The Company will continue to provide transmission and distribution services which will be subject to continued regulation by the MPUC. 6) If after March 1, 2000, 10% or more of the stock of a regulated distribution utility is purchased by an entity, the purchasing entity and any related entity may not sell or offer for sale generation service to any retail customer of electric energy in the State of Maine. 7) Maine electric utilities will be permitted a reasonable opportunity to recover legitimate, verifiable and unmitigable costs that are otherwise unrecoverable as a result of retail competition in the electric utility industry. The MPUC shall determine these stranded costs by considering: a) the utility's regulatory assets related to generation, b) the difference between net plant investment in generation assets compared to the market value for those assets; and c) the difference between future contract payments and the market value of the purchased power contracts. The Company shall pursue all reasonable means to reduce its potential stranded costs and to receive the highest possible value for generation assets and contracts, including the exploration of all reasonable and lawful opportunities to reduce the cost to ratepayers of contracts with qualifying facilities. By July 1, 1999, the MPUC will have estimated the stranded costs for the Company and the manner for the collection of these costs by the transmission and distribution company. Customers reducing or eliminating their consumption of electricity by switching to self-generation, conversion to alternative fuels or utilizing demand-side management measures cannot be assessed exit or entry fees. The MPUC shall include in the rates charged by the transmission and distribution utility decommissioning expenses for Maine Yankee. In 2003 and every three years thereafter until the stranded costs are recovered, the MPUC shall review and revaluate the stranded cost recovery. 8) All competitive providers of retail electricity must be licensed and registered with the MPUC and meet certain financial standards, comply with customer notification requirements, adhere to customer solicitation requirements and are subject to unfair trade practice laws. Competitive electricity providers must have at least 30% renewable resources (which include hydroelectric generation) in their energy portfolios. 9) A standard-offer service will be available for all customers. An unregulated affiliate of the Company providing retail electric power are prohibited from providing more than 20% of the load within the Company's service territory under the standard offer service. 10) An unregulated affiliate of the Company marketing and selling retail electric power must adhere to specific codes of conduct, including, among others: a) employees of the unregulated affiliate providing retail electric power must be physically separated from the regulated distribution affiliate and cannot be shared; b) the regulated distribution affiliate must provide equal access to customer information; c) the regulated distribution company cannot participate in joint advertising or marketing programs with the unregulated affiliate providing retail electric power; d) the distribution company and its unregulated affiliated provider of retail electric power must keep separate books of accounts and records; and e) the distribution company cannot condition or tie the provision of any regulated service to the provision of any service provided by the unregulated affiliated provider of electricity. 11) Employees, other than officers, displaced as a result of retail competition will be entitled to certain severance benefits and retraining programs. These costs will be recovered through charges collected by the regulated distribution company. 12) Other provisions of the new law include provisions for: a) consumer education; b) continuation of low-income programs and demand-side management activities; c) consumer protection provisions; d) new enforcement authority for the MPUC to protect consumers. The MPUC will conduct several rulemaking proceedings associated with the new restructuring law. The Company is presently reviewing its business operations and the opportunities that the new restructuring law presents. The Company cannot predict the value of its stranded investment that the MPUC will determine, but feels the law provides reasonable assurance as to the recovery of its stranded costs. MAINE YANKEE - As previously reported, Maine Yankee has been shut down since December 6, 1996, and was expected to remain off-line at least until August 1997. Also as previously reported, on May 27, 1997, the Board of Directors of Maine Yankee voted to reduce maintenance-and-repair spending at the Plant and announced that Maine Yankee was considering permanent closure based on economic concerns and uncertainty about operation of the Plant; and on the same day the Maine Yankee Board indicated that it had also been exploring a sale of the Plant to PECO Energy Company ("PECO"). For a detailed discussion of the background of the current shutdown, including events leading to the Plant's being placed on the "watch list" by the Nuclear Regulatory Commission ("NRC") and other significant regulatory and operational issues, management changes, and investigations of Maine Yankee by the NRC and the United States Department of Justice, see the Company's 1996 Form 10-K, its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and its Current Report on Form 8-K dated May 27, 1997. On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at the Plant and begin the process of decommissioning the Plant. The formal vote followed an announcement by the Maine Yankee Board on August 1, 1997, that Maine Yankee and PECO, after two months of intensive negotiations, had been unable to arrive at "a mutually beneficial framework for agreement" on a sale of the Plant to PECO. The decision to shut down the Plant was based on an economic analysis of the costs, risks and uncertainties associated with operating the Plant compared to those associated with closing and decommissioning the Plant. Prior to the shutdown vote the Company had been incurring substantial costs to support Maine Yankee's efforts to return the Plant to service as well as additional costs for replacement power. The Maine Yankee Board's decision to close the Plant should mitigate the costs the Company would otherwise incur in 1997 through a phasing down of Maine Yankee's operations and maintenance costs. The need to purchase replacement power will continue. Maine Yankee's most recent estimate of the total costs of decommissioning was $369.4 million (in 1996 dollars), of which approximately $183 million had been collected as of June 30, 1997. Maine Yankee is in the process of developing an updated decommissioning cost estimate, which the Company anticipates will be higher than the 1993 estimate, and expects to file the revised decommissioning cost study with the FERC in the fall of 1997 as part of a rate filing reflecting the permanent shutdown of the Plant. With the decision to permanently cease power operations at the Plant and begin the process of decommissioning the Plant, the Company, in the third quarter of 1997, will be recording a liability for its share of the estimated cost of decommissioning the Plant. A regulatory asset will also be established for this estimated amount, since the Company believes the cost of decommissioning will be recoverable from customers in rates. As discussed above, the electric utility restructuring legislation provides for the transmission and distribution company to include Maine Yankee decommissioning costs in its rates. RATE RELIEF - As previously reported, on April 1, 1997, the Company filed with the MPUC a Petition for Temporary Rates to increase its rates to allow for a $10 million increase in annual revenues, and requested that the change take effect on June 1, 1997. The Company asked that the temporary rate change be allowed to remain in effect until final disposition of the Company's pending request for permanent rate changes expected in early 1998. On June 26, 1997, the MPUC issued an order authorizing the Company to change rates to increase its annual revenues by approximately $5.1 million effective July 1, 1997. In doing so, however, the MPUC also required the Company to accelerate the amortization of the deferred regulatory asset associated with the 1993 buyout of one of its high-priced non-utility generator contracts. As a result, the rate increase is not expected to have any net impact on earnings but will result in increased cash flow. The MPUC authorized the Company to apply the rate increase only to "core" customers and not to those customers who purchase pursuant to special rate contracts or under rates designed to be competitive with energy alternatives. As reported previously, the Company filed a request with the MPUC on May 9, 1997 for permanent base rate relief. The original request called for two step increase in rates designed to increase revenues on an annual basis by $5.0 million upon completion of the case and by $4.5 million effective January 1, 1999. The Company also proposed a Maine Yankee Adjustment Mechanism whereby the Company would be allowed to defer costs related to the Maine Yankee nuclear power plant for future collection in rates. By letter dated July 2, 1997, the Company informed the MPUC of its intent to revise its request to eliminate the two step nature of the proposal, to eliminate the proposed Maine Yankee adjustment mechanism and to revise its overall request upward to a one-time change in rates designed to increase revenues on an annual basis by $20.6 million upon completion of the case. This request, if granted by the MPUC, would increase rates to most customers by approximately 15.6% over 1996 levels. Customers receiving reduced rates for competitive reasons would not be affected by the proposed increase. In response to this notification, the Commission required the Company to file supplemental testimony in support of its revised request, to provide additional customer notice, and to provide additional procedural opportunities to review and respond to the request to parties participating in the administrative review of the request. The Company has complied with or is in the process of complying with all of these additional requirements. Management cannot predict the level of base rate increase which will be obtained in these proceedings. BANK CREDIT AGREEMENT COVENANT COMPLIANCE - The Company's credit agreement with its lending banks contains a number of covenants keyed to the Company's financial condition and performance. One such covenant, contained in its Credit Agreement dated June 30, 1995 with a group of seven banks, required the Company maintain a consolidated fixed charge ratio of 1.5 to 1.0 (defined as the ratio of the sum of the Company s net income, income tax expense and interest expense to the Company s interest expense, subject to a few minor adjustments) on a rolling four quarter basis. After the first quarter 1997 financial results, the Company was not in compliance with this covenant. The Company obtained a temporary waiver of the noncompliance effective through May 15, 1997 and a second waiver effective through June 6, 1997. On June 6, 1997 the Company and the lending banks amended the credit agreement. Under the amendment, compliance with the covenant related to the fixed charge ratio was permanently waived for the four quarters ending March 31, 1997 and June 30, 1997. This financial covenant will be in effect again for the four quarters ending September 30, 1997. The Company projects that at the end of the third quarter in 1997 it will likely not maintain compliance with this financial covenant. Failure to comply with this financial covenant, absent a waiver or further amendment, is an Event of Default under the Credit Agreement that may result in restrictions on the Company s continuing access to adequate borrowing capacity for working capital purposes, including mandatory debt repayments. The Company is will be negotiating with the lenders to amend the credit agreement and remove the likely event of noncompliance with the financial covenant. Management cannot predict the outcome of these negotiations. The amendment also changed the terms of another financial covenant, the Consolidated Total Debt Ratio, for the second quarter of 1997, to ensure compliance by the Company. The Company was in compliance with all financial covenants as of June 30, 1997. The amended credit agreement changed the repayment terms of the Company's medium term notes. Twelve million dollars in principal was repaid on June 9, 1997, and principal payments are now payable on a quarterly basis (as compared to the original schedule of $12 million in payments each June 30), beginning September 30, 1997 at a rate of $1 million each for the quarters ending September 30, 1997 and December 31, 1997, $4 million for the quarter ending March 31, 1998, and $6 million for the quarter ending June 30, 1998. This quarterly schedule will also be in effect for each quarter in the period from September 30, 1998 through June 30, 2000. Also included in the amended credit agreement were requirements for the disposition of proceeds from the Company's potential sale/assignment to a third party of its power sale contract with another utility (See Sale/Assignment of Power Sale Contract below) and the terms under which the Company may raise funds to restructure its power purchase contract with the Penobscot Energy Recovery Company (PERC). SALE/ASSIGNMENT OF POWER SALE CONTRACT - The Company is currently negotiating with interested parties the sale/assignment of a power sale contract with another electric utility. The Company currently provides power to the utility at significantly above-market rates, with the contract term ending in the year 2003. The Company recognizes there is value in selling or assigning the contract, and the cash flows from such a transaction, ranging from $27 to $45 million, could be utilized to reduce outstanding high rate debt obligations, cure potential debt covenant violations, and provide funding for the potential restructuring of the purchased power contract with PERC (See discussion on PERC below). The Company cannot predict whether a sale or assignment of the contract will occur. PENOBSCOT ENERGY RECOVERY COMPANY - As previously reported, the Company has been working to restructure a power purchase contract with PERC, its last remaining high-priced non-utility generator contract that offers a potential for substantial savings. PERC owns a waste-to-energy facility in Orrington, Maine that provides solid waste disposal services to many communities in central, eastern and northern Maine. The contract requires the Company to purchase the electricity output of the plant until 2018 at a price that is presently above the cost of alternative sources of power, and, in the Company's opinion, is likely to remain so. The Company has been working with PERC and the affected municipalities at a restructuring of the power contract that would result in substantial savings for the Company and would continue to allow PERC to meet the solid waste disposal needs of Maine communities. In the 1996 Form 10-K, the Company discussed what appeared at that time to be the outline of a satisfactory arrangement to all interested parties for the restructuring of the PERC contract. Since that time, the Company has continued to negotiate with PERC and the affected municipalities and has modified and refined the terms previously discussed somewhat to take into account further concerns raised by the municipalities. The Company has now reached an agreement with PERC and a committee representing the municipalities that includes the following major components: 1. The Company would make an initial payment to PERC of $8 million and installment payments through 2002 totalling an additional $2 million. These funds would be retained by PERC to meet operation and debt reserve requirements of the PERC plant. 2. As of May 31, 1997, the PERC plant was financed in part by tax exempt municipal revenue bonds in the principal amount of $50.3 million payable pursuant to a sinking fund schedule and finally maturing in 2004. Sinking fund payments of $1.2 million are required on August 1 and November 1 of 1997. The credit on those bonds is enhanced by letters of credit issued by a group of banks. Those bonds would be restructured to extend the maturity date to 20 years from the date of closing. The bonds would continue to be tax exempt and their credit would be enhanced by the moral obligation of the State of Maine under the auspices of the Finance Authority of Maine ("FAME") pursuant to the State of Maine's Electric Rate Stabilization Program. The extended maturity of low cost bonds would, therefore, provide savings to be shared by the parties. 3. The Company would continue to purchase power at the rates established under the existing PERC contract. Payments would be made to a trust from which disbursements would be made according to the following priorities: a. debt service and expense, including all principal and interest; b. trustee and bond related fees and expenses; c. all operating and maintenance expenses of the PERC plant; d. operating and management fees paid to the PERC partners pursuant to a partnership operating agreement; e. payment to the PERC owners of any savings in interest expense resulting from the prepayment of bonds; and f. except for cash reserve requirements, all remaining cash would be distributed 1/3 to the Company, 1/3 to the PERC owners and 1/3 to the participating municipalities. 4. The Company would issue warrants for the purchase of two million shares of its common stock, one million each to the PERC owners and the participating municipalities. The warrants would be exercisable within ten years of their issuance and would entitle the holder to purchase common stock for $7 per share (subject to adjustment under certain circumstances). No warrants may be exercised within the first nine months after their issuance, and they would become exercisable in 500,000 share blocks following the expiration of nine months, 21 months, 33 months and 45 months from the closing date. Upon exercise, the Company would have the option, instead of providing common stock, to pay cash equal to the difference between the then market price of the stock and the exercise price of $7 per share times the number of shares as to which exercise is made. The Company's obligation under the letter of intent would be specifically conditioned upon receipt of authorization from the MPUC to recover in rates the difference between the market value of stock issued and the $7 per share exercise price or, alternatively, any payment of cash under the Company's option. 5. The municipalities would extend their waste disposal contracts through 2017 and waive their existing rights to an early termination or the buyout of PERC. There are a number of events upon which the proposed transaction is contingent, including the approval of the MPUC, approval by the affected municipalities, the rendering of an opinion by bond counsel that the PERC bonds will remain tax-exempt, the approval of the new financing arrangement by FAME and its Board of Directors, and the financing of necessary cash payments by the Company. Depending in part on the ultimate cost of the warrants to the Company, it is projected that the restructured PERC contract will result in net cost savings with a present value of $30-40 million over the remaining life of the contract. That projection is based upon a number of assumptions about future events and the markets for electricity. SUSPENSION OF COMMON DIVIDEND PAYMENT - In March 1997, the Company's Board of Directors decided not to declare its regular quarterly dividend on the Company's common stock because of current financial pressures, primarily caused by the ongoing difficulties at the Maine Yankee nuclear generating plant. The suspension of the common dividend also remained in effect for the second quarter of 1997. SPECIAL CONTRACTS WITH LARGE INDUSTRIAL CUSTOMERS - Effective January 1, 1997 the Company renegotiated the revenue sharing portion of a special rate contract with its largest industrial customer. The rate for this customer is based in part on a revenue sharing arrangement whereby the revenues for service vary depending on the price and volume of product sold by the industrial customer to its customers. Under the revised revenue sharing formula, the Company estimates that annual revenues from the revenue sharing could be reduced by approximately $2.6 million. The Company also entered into a special rate contract with a large pulp and paper manufacturer, effective April 1, 1997. Annual revenues for this customer are estimated to be reduced by approximately $1.5 million due to the reduced rate. It was necessary to reduce rates to this pulp and paper manufacturer in order to retain the customer, since the customer was exploring self-generation for its energy needs. EMPLOYEES - On February 26, 1997, the employees of the Company's customer service center, approximately 50 employees, voted to join the International Brotherhood of Electrical Workers (AFL-CIO). To date no contract has been negotiated between the Company and the union with respect to these new members. REVENUES The $916,000 reduction in electric operating revenue is due principally to a $1.3 million reduction in off-system sales in the second quarter of 1997 as compared to the second quarter of 1996, as well as an $867,000 reduction in revenue in the 1997 quarter related to the previously discussed revenue sharing arrangement with the Company's largest industrial customer. While there was an overall 4.1% increase in total kilowatt hour (KWH) sales (excluding off-system sales) in the second quarter of 1997 over second quarter 1996 sales, associated revenues increased by only 2.9%, or $1.1 million, due to the effect of adjusting prices downward to some customers in order to retain sales that would otherwise be lost to competitive pressures. The increased sales in the 1997 quarter can also be attributed somewhat to weather conditions more favorable for electricity sales as compared to 1996. EXPENSES Fuel for generation and purchased power expense increased principally due to the previously mentioned shutdown of Maine Yankee during the entire second quarter of 1997 and the increase in its operating and maintenance expenditures. In the second quarter of 1997 the Company incurred approximately $2.8 million in incremental Maine Yankee replacement power costs, as compared to $272,000 in the second quarter of 1996. Maine Yankee was operational at 90% capacity for the entire second quarter of 1996. The Company has also borne a greater level of Maine Yankee operating costs, which increased by approximately $442,000 in 1997, as compared to the 1996 quarter. Increased fuel and purchased power expense was also affected by various electric power plants (excluding Maine Yankee) in the Northeast being nonoperational in the second quarter of 1997, causing the Company's power purchases on the open market to be at higher than normal prices. Also affecting the increased expense in the 1997 quarter was the fact the Company had a 16.8 million, or 4.1%, increase in KWH sales. Other operation and maintenance (O&M) expense increased by $176,000 in the second quarter of 1997, due principally to recording a $216,000 adjustment for obligations due under a demand-side management contract. O&M payroll expense increased by $54,000 due to a greater number of employees, a 2.5% union wage rate increase effective January 1, 1997 and various wage rate increases to nonunion personnel. These increases were offset by higher level of payroll being charged to the Company's capital program and a $100,000 decrease in postretirement medical and pension costs in the 1997 quarter as compared to 1996. The $639,000 increase in depreciation and amortization expense was due principally to the ending of the amortization of the overaccumulated depreciation reserve in 1996 (See the 1996 Form 10-K for a more complete discussion). This amortization resulted in a $438,000 reduction in depreciation expense in the second quarter of 1996. Also increasing depreciation and amortization expense in the 1997 quarter were anticipated 1997 property additions, including the effect of the implementation of three large information system projects. The increase in property and other taxes in the second quarter of 1997 was due principally to greater property taxes, which was a result of increased property levels and property tax rates. The decrease in income taxes was primarily a function of an operating loss in the second quarter of 1997 as compared to earnings in the 1996 quarter. Income tax expense in the 1996 quarter was reduced by $431,000 in investment tax credits recorded in connection with an Internal Revenue Service (IRS) examination of the 1993 and 1994 tax years. Long-term debt interest expense decreased $263,000 in the second quarter of 1997 as compared to 1996 due to two $12 million principal repayments on the Company's $60 million medium term notes in June 1996 and 1997, as well as sinking fund payments on the Company's 12.25% first mortgage bonds. Other interest expense, which is composed principally of interest expense on short term borrowings, decreased due to a reduction in weighted average short-term borrowings outstanding in the 1997 quarter as compared to 1996, as well as $130,000 in interest paid to the IRS related to amended income tax returns in the 1996 quarter. This was offset by a slightly higher weighted average short-term debt interest rate in 1997. SIX MONTHS OF 1997 AS COMPARED TO THE SIX MONTHS OF 1996 EARNINGS The six months ended June 30, 1997 resulted in a loss of $.14 per common share, compared to earnings of $.83 per common share for the 1996 period. As discussed previously, the decline in 1997 earnings compared to 1996 is attributable largely to Maine Yankee. In the 1997 period the Company incurred approximately $6.3 million in incremental Maine Yankee replacement power costs, as compared to $1.2 million in 1996. The Company's share of Maine Yankee operating costs increased by approximately $2.0 million in 1997, as compared to 1996. The decrease in earnings in 1997 as compared to 1996 has also been impacted by the ending of the amortization of the overaccumulated depreciation reserve in 1996, which was an $876,000 benefit in the 1996 period. Earnings in the 1997 period were positively affected by three transactions that were nonrecurring in nature. The Company recorded $335,000 in revenues from the sale of air emission allowances to a coal fired generating facility, and $350,000 in revenue was recognized under a shared savings distribution agreement with another utility. Also, the Company recorded a $204,000 state income tax benefit as the result of an IRS examination of the Company's 1994 federal income tax return. Without the impact of these one-time events benefitting earnings, the Company would have incurred a $.22 loss per common share in the 1997 period. REVENUES The reasons for the $901,000 decrease in electric operating revenue in the 1997 period as compared 1996 are consistent with those previously mentioned. There was a $1.2 million decrease in off-system sales in 1997, revenue sharing from the Company's largest industrial customer decreased by $1.9 million in 1997, and while there was an overall 3.0% increase in total KWH sales (excluding off-system sales) in 1997 over 1996, associated revenues increased by only 1.4%, or $1.1 million. Positively impacting revenues in 1997 were the previously discussed sale of air emission allowances and revenue associated with the shared distribution savings with another utility. EXPENSES The increase in fuel and purchased power expense in 1997, as compared to 1996, is due principally to reasons previously discussed in this document. Also, the Company realized greater benefits under its fuel hedge program in 1996 as compared to 1997, due principally to actual fuel and purchased power costs in 1997 not tracking favorably against the index utilized to derive the fuel hedge results. In 1996 the Company achieved more favorable results under the fuel hedge program. The increases in other O&M, depreciation and amortization, and property and other taxes in the 1997 period as compared to 1996 were due to the previously mentioned reasons. The decreases in income tax expense and long- term debt and other interest expense in 1997 were also due principally to reasons previously discussed. LIQUIDITY AND CAPITAL RESOURCES The Consolidated Statements of Cash Flows reflect events in the first six months of 1997 and 1996 as they affect the Company's liquidity. Net cash provided by operations increased by $241,000 in the 1997 period as compared to 1996. Positively impacting cash flows in 1997 was the payment of $91,000 in income taxes, as compared to $1.7 million in income tax payments in 1996. Also, in the 1996 period, the Company expended $1.7 million to terminate a demand-side management contract. Also enhancing cash flows from operations in 1997 was an improvement in accounts receivable collections. Negatively impacting cash flows from operations in 1997 were the incremental costs incurred to replace the Company's share of Maine Yankee's output, additional Maine Yankee operating costs, costs associated with the current refueling at the Plant, and the Company's share of the cable separation repair (see the 1996 Form 10-K for a more complete discussion). Due to efforts by the Company to control costs and conserve cash in 1997, construction expenditures were reduced by $860,000 in the 1997 period as compared to 1996. Dividends paid on common stock were lower in 1997 due to the suspension of the common dividend at the end of the first quarter of 1997. The reduction in preferred dividends paid resulted from $3 million in sinking fund payments made on the Company's 8.76% mandatory redeemable preferred stock in 1996. The Company, in each period, made sinking fund payments on its 12.25% first mortgage bonds, as well as making $12 million in principal payments on its Medium Term Notes. As discussed in more detail in the footnotes to the consolidated financial statements contained in the 1996 Form 10-K, the Company in the first quarter of 1996 made a $115,000 payment to the 8.76% preferred stockholder related to a "make whole provision" under the preferred stock agreement. In 1997 the Company amended its Dividend Reinvestment and Common Stock Purchase Plan (the Plan) to allow for the option of purchasing shares either in the open market or from newly issued shares sold by the Company. The Company anticipates that for the foreseeable future common stock will be purchased in the open market. In 1996, under the Plan, the Company realized a common stock investment of $338,000 through the issuance of 29,953 new common shares. As discussed previously, the Company's revolving credit agreement was amended in June 1997. The Company's cash flows will be improved with the $5.1 million temporary rate increase effective July 1, 1997, and further enhancements are anticipated with the results of the Company's general rate increase proceedings with the MPUC. For additional discussion of liquidity and capital resources, see the Company's 1996 Form 10-K. NEW ACCOUNTING PRONOUNCEMENTS In June 1997 the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings per Share", which establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. This Statement simplifies the standards for computing earnings per share previously found in APB Opinion No. 15, "Earnings per Share", and makes them comparable to international EPS standards. It also requires dual presentation of basic and diluted EPS on the face of the statement of income for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This Statement is effective for financial statements issued for periods ending after December 31, 1997, including interim periods; earlier application is not permitted. The application of this Statement currently does not impact the Company's EPS calculations. In June 1997 the FASB issued Statement No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. This Statement is effective for fiscal years beginning after December 15, 1997. Management does not believe the implementation of this Statement will have any significant effect on the Company's financial statements. In June 1997 the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information", which establishes standards for the way public enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This Statement requires that a public business enterprise report financial and descriptive information about its reportable operating segments, which are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. This Statement is effective for financial statements for periods beginning after December 15, 1997. Management is evaluating this Statement to determine what information will be required to be disclosed. OTHER This Form 10-Q contains forward-looking statements. 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. Factors that might cause such differences include, but are not limited to, those discussed in the following risk factors: Future economic conditions, relationship with lenders, earnings retention and dividend payout policies, electric utility restructuring, developments in the legislative, regulatory and competitive environments in which the Company operates, and other circumstances that could affect revenues and costs. 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. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS 000's Omitted (Unaudited) ASSETS June 30, Dec. 31, 1997 1996 --------- --------- INVESTMENT IN UTILITY PLANT: Electric plant in service, at original cost $ 330,664 $ 317,833 Less - Accumulated depreciation and amortization 92,155 87,736 --------- --------- $ 238,509 $ 230,097 Construction work in progress 12,659 18,554 --------- --------- $ 251,168 $ 248,651 Investments in corporate joint ventures: Maine Yankee Atomic Power Company $ 5,256 $ 5,014 Maine Electric Power Company, Inc. 236 125 --------- --------- $ 256,660 $ 253,790 --------- --------- OTHER INVESTMENTS, principally at cost $ 4,854 $ 4,813 --------- --------- FUNDS HELD BY TRUSTEE, at cost $ 21,192 $ 21,199 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 366 $ 1,274 Accounts receivable, net of reserve 16,402 20,691 Unbilled revenue receivable 7,781 9,230 Inventories, at average cost: Material and supplies 3,009 2,994 Fuel oil 358 303 Prepaid expenses 648 1,672 Deferred Maine Yankee refueling costs 2,660 896 --------- --------- Total current assets $ 31,224 $ 37,060 --------- --------- DEFERRED CHARGES: Investment in Seabrook Nuclear Project, net of accumulated amortization of $27,625 in 1997 and $26,775 in 1996 $ 31,217 $ 32,067 Costs to terminate purchased power contracts, net of accumulated amortization of $46,855 in 1997 and $36,398 in 1996 161,246 171,703 Deferred regulatory assets 30,050 29,498 Demand-side management costs 2,169 2,632 Other 4,259 3,867 --------- --------- Total deferred charges $ 228,941 $ 239,767 --------- --------- Total assets $ 542,871 $ 556,629 ========= ========= See notes to the consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS 000's Omitted (Unaudited) June 30, Dec. 31, STOCKHOLDERS' INVESTMENT AND LIABILITIES 1997 1996 --------- --------- CAPITALIZATION: Common stock investment $ 107,311 $ 108,321 Preferred stock 4,734 4,734 Preferred stock subject to mandatory redemption exclusive of current sinking fund requirements 10,701 10,671 Long-term debt, net of current portion 258,709 274,221 --------- --------- Total capitalization $ 381,455 $ 397,947 --------- --------- CURRENT LIABILITIES: Notes payable - banks $ 33,000 $ 32,500 --------- --------- Other current liabilities - Current portion of long-term debt and sinking fund requirements on pre- ferred stock $ 18,061 $ 15,447 Accounts payable 15,089 13,433 Dividends payable 329 1,687 Accrued interest 3,796 3,719 Customers' deposits 326 360 Deferred fuel revenue 504 1,008 --------- --------- Total other current liabilities $ 38,105 $ 35,654 --------- --------- Total current liabilities $ 71,105 $ 68,154 --------- --------- DEFERRED CREDITS AND RESERVES: Deferred income taxes - Seabrook $ 16,213 $ 16,651 Other accumulated deferred income taxes 55,349 54,806 Deferred regulatory liability 7,948 8,446 Unamortized investment tax credits 2,074 2,179 Accrued pension 617 640 Other 8,110 7,806 --------- --------- Total deferred credits and reserves $ 90,311 $ 90,528 --------- --------- Total Stockholders' Investment and Liabilities $ 542,871 $ 556,629 ========= ========= See notes to the consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION 000's Omitted (Unaudited) Jun. 30, Dec. 31, 1997 1996 ---------- ---------- COMMON STOCK INVESTMENT Common stock, par value $5 per share- $ 36,817 $ 36,817 Authorized -- 10,000,000 shares Outstanding -- 7,363,424 shares in 1997 and 1996 Amounts paid in excess of par value 56,969 56,969 Retained earnings 13,525 14,535 ---------- ---------- Total common stock investment $ 107,311 $ 108,321 ---------- ---------- PREFERRED STOCK-Non participating, cumulative- Par value $100 per share, authorized 600,000 shares Not redeemable or redeemable solely at the option of the issuer- 7%, Noncallable, 25,000 shares, authorized and outstanding $ 2,500 $ 2,500 4.25%, Callable at $100, 4,840 shares, and outstanding 484 484 4%, Series A, Callable at $110, 17,500 shares, authorized and outstanding 1,750 1,750 ---------- ---------- $ 4,734 $ 4,734 ---------- ---------- 8.76%, Subject to mandatory redemption requirements- Callable at 104.38% if called on or prior to December 27, 1997, 150,000 shares authorized and 120,000 shares outstanding in 1997 and 1996 $ 12,295 $ 12,265 Less: Sinking fund requirements 1,594 1,594 ---------- ---------- $ 10,701 $ 10,671 ---------- ---------- LONG-TERM DEBT First Mortgage Bonds- 6.75% Series due 1998 $ 2,500 $ 2,500 10.25% Series due 2019 15,000 15,000 10.25% Series due 2020 30,000 30,000 8.98% Series due 2022 20,000 20,000 7.38% Series due 2002 20,000 20,000 7.30% Series due 2003 15,000 15,000 12.25% Series due 2001 6,476 7,375 ---------- ---------- $ 108,976 $ 109,875 Less: Current maturity and sinking fund requirements 4,467 1,854 ---------- ---------- Total first mortgage bonds $ 104,509 $ 108,021 ---------- ---------- Variable rate demand pollution control revenue bonds Series 1983 due 2009 $ 4,200 $ 4,200 ---------- ---------- Other Long-Term Debt- Finance Authority of Maine - Taxable Electric Rate Stabilization Revenue Notes, 7.03% Series 1995A, due 2005 $ 126,000 $ 126,000 ---------- ---------- Medium Term Notes, Variable interest rate - LIBO Rate plus 2%, due 2000 $ 36,000 $ 48,000 Less: Current portion of long-term debt 12,000 12,000 ---------- ---------- $ 24,000 $ 36,000 ---------- ---------- Total long-term debt $ 258,709 $ 274,221 ---------- ---------- Total Capitalization $ 381,455 $ 397,947 ========== ========== See notes to the consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 000's Omitted (Unaudited) 1997 1996 --------- --------- CASH FLOWS FROM OPERATIONS: Net income (loss) $ (321)$ 6,853 Adjustments to reconcile net income (loss) to net cash provided by(used in) operations: Depreciation and amortization 5,166 3,735 Amortization of Seabrook Nuclear Project 850 850 Amortization of contract buyouts 10,457 10,379 Other amortizations 860 535 Allowance for equity funds used during construction (183) (185) Cost to terminate demand-side management contract - (1,703) Deferred income tax provision (1,181) 2,027 Deferred investment tax credits (105) (88) Changes in assets and liabilities: Deferred fuel revenue and Maine Yankee (2,268) 235 refueling costs Accounts receivable, net and unbilled revenue 5,738 331 Accounts payable 1,656 (1,027) Accrued interest 77 (1,138) Current and deferred income taxes 201 (371) Accrued postretirement benefit costs 201 681 Other current assets and liabilities, net 920 92 Other, net (1,035) (414) --------- --------- Net Cash Provided By Operations $ 21,033 $ 20,792 --------- --------- CASH FLOWS FROM INVESTING: Construction expenditures $ (7,167)$ (8,027) Allowance for borrowed funds used during construction (360) (390) --------- --------- Net Cash Used In Investing $ (7,527)$ (8,417) --------- --------- CASH FLOWS FROM FINANCING: Dividends on preferred stock $ (691)$ (757) Dividends on common stock (1,325) (2,630) Payments on long-term debt (12,898) (12,798) Payments on mandatory redeemable preferred stock - (1,615) Issuances: Common stock Dividend reinvestment plan (29,953 shares - 338 in 1996) Short-term debt, net 500 5,000 --------- --------- Net Cash Used In Financing $ (14,414)$ (12,462) --------- --------- Net Change in Cash and Cash Equivalents $ (908)$ (87) Cash and Cash Equivalents at Beginning of Period 1,274 1,424 --------- --------- Cash and Cash Equivalents at End of Period $ 366 $ 1,337 ========= ========= Cash Paid During the Six Months For: Interest (Net of Amount Capitalized) $ 12,049 $ 14,066 Income Taxes 91 1,703 ========= ========= See notes to consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 000's Omitted (Unaudited) 1997 1996 ---------- ---------- BALANCE AT JANUARY 1 $ 14,535 $ 10,073 ADD - NET INCOME (LOSS) (321) 6,853 ---------- ---------- $ 14,214 $ 16,926 ---------- ---------- DEDUCT: Dividends - Preferred stock $ 658 $ 724 Common stock - 2,636 Other 31 52 ---------- ---------- $ 689 $ 3,412 ---------- ---------- BALANCE AT JUNE 30 $ 13,525 $ 13,514 ========== ========== See notes to the consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 ------------- (Unaudited) (1) BASIS OF PRESENTATION AND ACCOUNTING POLICIES: --------------------------------------------- Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted in this Form 10-Q pursuant to the Rules and Regulations of the Securities and Exchange Commission. However, in the opinion of Bangor Hydro- Electric Company, the disclosures contained in this Form 10-Q are adequate to make the information presented not misleading. The year end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles. These statements should be read in conjunction with the consolidated financial statements and the notes thereto and all other information included in the 1996 Form 10-K. In the opinion of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments, including normal recurring accruals, necessary to present fairly the financial position as of June 30, 1997 and the results of operations and cash flows for the periods ended June 30, 1997 and 1996. The Company's significant accounting policies are described in the Notes to the Consolidated Financial Statements included in its 1996 Form 10-K filed with the Securities and Exchange Commission. For interim reporting purposes, the Company follows these same basic accounting policies but considers each interim period as an integral part of an annual period. Accordingly, certain expenses are allocated to interim periods based upon estimates of such expenses for the year. (2) INCOME TAXES: ------------ The following table reconciles a provision calculated by multiplying income before federal income taxes by the statutory federal income tax rate to the above provisions for federal income taxes: SIX MONTHS ENDED JUNE 30, ------------------------ 1997 1996 ---- ---- AMOUNT % AMOUNT % (Dollars in Thousands) Federal income tax provision at statutory rate $ (461) (34) $3,450 34 Plus (Less)permanent reductions in tax expense resulting from statutory exclusions from taxable income 52 4 (2) - ----- --- ------ --- Federal income tax provision before effect of temporary differences and investment tax credits $ (409) (30) $3,448 34 Plus (Less) temporary differences that that are flowed through for rate- making and accounting purposes 21 1 (195) (2) (Less) utilization and amortization of investment tax credits (171) (12) (593) (6) ----- --- ------ --- Federal income tax provision $(559) (41) $2,660 26 ===== === ====== === 3) INVESTMENT IN JOINTLY OWNED FACILITIES: -------------------------------------- Condensed financial information for Maine Yankee Atomic Power Company ("Maine Yankee"), Maine Electric Power Company, Inc. ("MEPCO"), Bangor- Pacific Hydro Associates ("BPHA") and Chester SVC Partnership ("Chester") is as follows: MAINE YANKEE MEPCO ------------ ----- (Dollars in Thousands) (Unaudited) Operations for Six Months Ended ---------------------------------- Jun. 30, Jun. 30, Jun. 30, Jun. 30, 1997 1996 1997 1996 OPERATIONS: ------- ------- ------- ------- As reported by investee- Operating revenues $145,733 $84,880 $21,568 $29,559 ======== ======= ======= ======= Earnings applicable to common stock $ 3,624 $ 3,546 $ 545 $ 111 ======== ======= ======= ======= Company's reported equity- Equity in net income $ 254 $ 248 $ 77 $ 16 (Deduct)-Effect of adjusting Company's estimate to actual (5) 1 41 (9) -------- ------- ------- ------- Amounts reported by Company $ 249 $ 249 $ 118 $ 7 ======== ======= ======= ======= MAINE YANKEE MEPCO ------------ ----- (Dollars in Thousands) (Unaudited) Financial Position at ----------------------------------- Jun. 30, Dec. 31, Jun. 30, Dec. 31, 1997 1996 1997 1996 FINANCIAL POSITION: -------- -------- ------- ------- As reported by investee- Total assets $686,536 $602,061 $ 5,068 $10,727 Less- Preferred stock 17,400 18,000 - - Long-term debt 148,665 103,332 520 620 Other liabilities and deferred credits 445,510 409,392 2,663 9,110 -------- -------- ------- ------- Net assets $ 74,961 $ 71,337 $ 1,885 $ 997 ======== ======== ======= ======= Company's reported equity- Equity in net assets $ 5,247 $ 4,994 $ 268 $ 142 (Deduct) Add - Effect of adjusting Company's estimate to actual 9 20 (32) (17) -------- -------- ------- ------- Amounts reported by Company $ 5,256 $ 5,014 $ 236 $ 125 ======== ======== ======= ======= BPHA Chester ----------------- ----------------- (Dollars in Thousands) (Unaudited) Operations for Six Months Ended ------------------------------------- Jun. 30, Jun. 30, Jun. 30, Jun. 30, 1997 1996 1997 1996 ------- ------- -------- ------- OPERATIONS: As reported by investee- Operating revenues $ 3,906 $ 4,330 $ 2,255 $ 2,386 ======= ======= ======= ======= Net Income $ 1,346 $ 1,705 $ - $ - ======= ======= ======= ======= Company's reported equity in net income $ 673 $ 853 $ - $ - ======= ======= ======= ======= Financial Position at -------------------------------------- Jun. 30, Dec. 31, Jun. 30, Dec. 31, 1997 1996 1997 1996 -------- -------- -------- -------- FINANCIAL POSITION: As reported by investee- Total assets $39,827 $39,864 $28,238 $28,898 Less- Long-term debt 29,550 30,600 26,429 27,021 Other liabilities 2,376 2,359 1,809 1,877 ------- ------- ------- ------- Net assets $ 7,901 $ 6,905 $ - $ - ======= ======= ======= ======= Company's reported equity in net assets $ 3,951 $ 3,453 $ - $ - ======= ======= ======= ======= 4. BANK CREDIT AGREEMENT COVENANT COMPLIANCE: ----------------------------------------- The Company's credit agreement with its lending banks contains a number of covenants keyed to the Company's financial condition and performance. One such covenant, contained in its Credit Agreement dated June 30, 1995 with a group of seven banks, required the Company maintain a consolidated fixed charge ratio of 1.5 to 1.0 (defined as the ratio of the sum of the Company s net income, income tax expense and interest expense to the Company s interest expense, subject to a few minor adjustments) on a rolling four quarter basis. After the first quarter 1997 financial results, the Company was not in compliance with this covenant. The Company obtained a temporary waiver of the noncompliance effective through May 15, 1997 and a second waiver effective through June 6, 1997. On June 6, 1997 the Company and the lending banks amended the credit agreement. Under the amendment, compliance with the covenant related to the fixed charge ratio was permanently waived for the four quarters ending March 31, 1997 and June 30, 1997. This financial covenant will be in effect again for the four quarters ending September 30, 1997. The Company projects that at the end of the third quarter in 1997 it will likely not maintain compliance with this financial covenant. Failure to comply with this financial covenant, absent a waiver or further amendment, is an Event of Default under the Credit Agreement that may result in restrictions on the Company s continuing access to adequate borrowing capacity for working capital purposes, including mandatory debt repayments. The Company will be negotiating with the lenders to amend the credit agreement and remove the likely event of noncompliance with the financial covenant. Management cannot predict the outcome of these negotiations. The Medium Term Note has continued to be presented as long-term in the consolidated balance sheet as management feels this is the most appropriate presentation. The amendment also changed the terms of another financial covenant, the Consolidated Total Debt Ratio, for the second quarter of 1997, to ensure compliance by the Company. The Company was in compliance with all financial covenants as of June 30, 1997. The amended credit agreement changed the repayment terms of the Company's medium term notes. $12 million in principal was repaid on June 9, 1997, and principal payments are now payable on a quarterly basis (as opposed to the original schedule of $12 million in payments each June 30), beginning September 30, 1997 at a rate of $1 million each for the quarters ending September 30, 1997 and December 31, 1997, $4 million for the quarter ending March 31, 1998, and $6 million for the quarter ending June 30, 1998. This quarterly schedule will also be in effect for each quarter in the period from September 30, 1998 through June 30, 2000. Also included in the amended credit agreement were requirements for the disposition of proceeds from the Company's sale/assignment to a third party of its power sale contract with another utility (See Sale/Assignment of Power Sale Contract below) and the terms under which the Company may raise funds to restructure its power purchase contract with the Penobscot Energy Recovery Company. 5. MAINE YANKEE: ------------ As previously reported, Maine Yankee has been shut down since December 6, 1996, and was expected to remain off-line at least until August 1997. Also as previously reported, on May 27, 1997, the Board of Directors of Maine Yankee voted to reduce maintenance-and-repair spending at the Plant and announced that Maine Yankee was considering permanent closure based on economic concerns and uncertainty about operation of the Plant; and on the same day the Maine Yankee Board indicated that it had also been exploring a sale of the Plant to PECO Energy Company ("PECO"). For a detailed discussion of the background of the current shutdown, including events leading to the Plant's being placed on the "watch list" by the Nuclear Regulatory Commission ("NRC") and other significant regulatory and operational issues, management changes, and investigations of Maine Yankee by the NRC and the United States Department of Justice, see the Company's 1996 Form 10-K, its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1997, and its Current Report on Form 8-K dated May 27, 1997. On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at the Plant and begin the process of decommissioning the Plant. The formal vote followed an announcement by the Maine Yankee Board on August 1, 1997, that Maine Yankee and PECO, after two months of intensive negotiations, had been unable to arrive at "a mutually beneficial framework for agreement" on a sale of the Plant to PECO. The decision to shut down the Plant was based on an economic analysis of the costs, risks and uncertainties associated with operating the Plant compared to those associated with closing and decommissioning the Plant. Prior to the shutdown vote the Company had been incurring substantial costs to support Maine Yankee's efforts to return the Plant to service as well as additional costs for replacement power. The Maine Yankee Board's decision to close the Plant should mitigate the costs the Company would otherwise incur in 1997 through a phasing down of Maine Yankee's operations and maintenance costs. The need to purchase replacement power will continue. Maine Yankee's most recent estimate of the total costs of decommissioning was $369.4 million (in 1996 dollars), of which approximately $183 million had been collected as of June 30, 1997. Maine Yankee is in the process of developing an updated decommissioning cost estimate, which the Company anticipates will be higher than the 1993 estimate, and expects to file the revised decommissioning cost study with the FERC in the fall of 1997 as part of a rate filing reflecting the permanent shutdown of the Plant. The decision to permanently cease power operations at the Plant and begin the process of decommissioning the Plant, the Company, in the third quarter of 1997, will be recording a liability for its share of the estimated cost of decommissioning the Plant. A regulatory asset will also be established for this estimated amount, since the Company believes the cost of decommissioning will be recoverable from customers in rates. As discussed above, the electric utility restructuring legislation provides for the transmission and distribution company to include Maine Yankee decommissioning costs in its rates. 6. RECLASSIFICATIONS: ----------------- Certain 1996 amounts have been reclassified to conform with the presentation used in Form 10-Q for the quarter ended June 30, 1997. BANGOR HYDRO-ELECTRIC COMPANY FORM 10-Q FOR PERIOD ENDING JUNE 30, 1997 PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders on May 13, 1997. The only matter submitted to a vote was the election of three Class II Directors for terms ending in 2000. The following persons were elected to fill those positions pursuant to the corresponding tabulations of votes: TOTAL VOTE FOR TOTAL VOTE AGAINST -------------- ------------------ Robert S. Briggs 742,973 51,181 William C. Bullock, Jr. 744,962 49,192 G. Clifton Eames 742,414 51,740 The terms of the following Directors, members of Class I and Class III, continued after the annual meeting: Jane J. Bush David M. Carlisle Alton E. Cianchette Marion M. Kane Norman A. Ledwin Carroll R. Lee ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K EXHIBITS - None REPORTS ON FORM 8-K - Two Current Reports on Form 8-K dated May 28, 1997 and June 27, 1997 were filed during the second quarter of 1996, regarding the decision by Maine Yankee Atomic Power Company s Board of Directors to consider permanent closure of the plant (8-K dated May 28, 1997) and Bangor Hydro-Electric Company s agreement to restructure its power purchase agreement with the Penobscot Energy Recovery Company suspension and the allowance of a temporary rate increase by the Maine Public Utilities Commission designed to increase revenues by $5.1 million on an annual basis (8-K dated June 27, 1997). BANGOR HYDRO-ELECTRIC COMPANY FORM 10-Q FOR PERIOD ENDED JUNE 30, 1997 The information furnished in this report reflects all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim period. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANGOR HYDRO-ELECTRIC COMPANY (Registrant) /s/ Frederick S. Samp ----------------------------- Dated: August 13, 1997 Frederick S. Samp Vice President - Finance & Law (Chief Financial Officer) EX-27 2 FINANCIAL DATA SCHEDULE/BANGOR HYDRO-ELECTRIC CO.
UT This schedule contains summary financial information extracted from Bangor Hydro-Electric Company's Form 10Q for the Second Quarter 1997 and is qualified in its entirety by reference to such Form 10Q. 0000009548 BANGOR HYDRO-ELECTRIC COMPANY 1,000 6-MOS DEC-31-1997 JUN-30-1997 PER-BOOK 238,509 44,197 31,224 228,941 0 542,871 36,817 56,969 13,525 107,311 10,701 4,734 258,709 0 33,000 0 16,467 1,594 0 0 110,355 542,871 90,412 (1,422) 80,281 78,859 11,553 726 12,279 12,600 (321) 689 (1,010) 0 22,224 21,033 ($0.14) ($0.14)
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