-----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, U3WPEutQoUxwfIDLms0oDkApczbiZhn/nY+wcyvSChc46mdHvff/Lbs8awtj+ZIp qQwkRb4tGUiWE2PQiF8C4A== 0000009548-97-000023.txt : 19971117 0000009548-97-000023.hdr.sgml : 19971117 ACCESSION NUMBER: 0000009548-97-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 001-10922 FILM NUMBER: 97721089 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 3ND 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 SEPTEMBER 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 September 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 ----- ----- BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF INCOME 000's Omitted Except Per Share Amounts (UNAUDITED)
Three Months Ended Nine Months Ended Sept. 30, Sept. 30, Sept. 30, Sept. 30, 1997 1996 1997 1996 ---------- ---------- ---------- ---------- ELECTRIC OPERATING REVENUES $ 47,557 $ 47,355 $ 137,969 $ 138,668 ---------- ---------- ---------- ---------- OPERATING EXPENSES: Fuel for generation and purchased power $ 23,440 $ 21,167 $ 68,728 $ 57,112 Other operation and maintenance 7,526 7,873 23,223 23,369 Depreciation and amortization 2,583 1,868 7,749 5,603 Amortization of Seabrook Nuclear Unit 424 424 1,274 1,274 Amortization of contract buyouts 6,530 5,229 16,987 15,608 Taxes - Property and payroll 1,239 1,220 4,062 3,803 State income (117) 164 (679) 694 Federal income 30 993 (830) 3,298 ---------- ---------- ---------- ---------- $ 41,655 $ 38,938 $ 120,514 $ 110,761 ---------- ---------- ---------- ---------- OPERATING INCOME $ 5,902 $ 8,417 $ 17,455 $ 27,907 ---------- ---------- ---------- ---------- OTHER INCOME AND (DEDUCTIONS): Allowance for equity funds used during construction $ 63 $ 85 $ 246 $ 270 Other, net of applicable income taxes 227 301 770 891 ---------- ---------- ---------- ---------- $ 290 $ 386 $ 1,016 $ 1,161 ---------- ---------- ---------- ---------- INCOME BEFORE INTEREST EXPENSE $ 6,192 $ 8,803 $ 18,471 $ 29,068 ---------- ---------- ---------- ---------- INTEREST EXPENSE: Long-term debt $ 5,581 $ 5,798 $ 17,058 $ 17,840 Other 924 882 2,407 2,642 Allowance for borrowed funds used during construction (125) (172) (485) (562) ---------- ---------- ---------- ---------- $ 6,380 $ 6,508 $ 18,980 $ 19,920 ---------- ---------- ---------- ---------- NET INCOME (LOSS) $ (188) $ 2,295 $ (509) $ 9,148 DIVIDENDS ON PREFERRED STOCK 344 384 1,033 1,160 ---------- ---------- ---------- ---------- EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (532) $ 1,911 $ (1,542) $ 7,988 ========== ========== ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES 7,363 7,344 7,363 7,328 ========== ========== ========== ========== EARNINGS (LOSS) PER COMMON SHARE, based on the weighted average number of shares outstanding during the period $ (.07) $ .26 $ (.21) $ 1.09 ========== ========== ========== ========== DIVIDENDS DECLARED PER COMMON SHARE $ .00 $ .18 $ .00 $ .54 ========== ========== ========== ========== 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 September 30, 1997 resulted in a loss of $.07 per common share, compared to earnings of $.26 per common share for the quarter ended September 30, 1996. The decline in earnings is largely due to the difficulties at the Maine Yankee nuclear power plant, in which the Company has a 7% interest. In May 1997, the effort and expense associated with the attempt to restart the plant was reduced pending a closer evaluation of the appropriate options, and in August the decision was made to permanently shut down and decommission the plant. Until spending was reduced in May, the Company was bearing both its share of the costs of attempting to return the plant to service and the necessity to purchase replacement power in the interim. This burden will be easing now that the decision has been made to close the plant. 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 and plant closure, excluding funds already collected, is $930 million (undiscounted). The Company has recorded its 7% share, $65.1 million, less $1.1 million of its share of Maine Yankee's expenditures since September 1, 1997 as a regulatory asset and decommissioning liability at September 30, 1997. The Company expects Maine Yankee 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. In a related matter, in early September, 1997, the Maine Public Utilities Commission (MPUC) released the report of a consultant it had retained to perform a management audit of Maine Yankee for the period January 1, 1994 to June 30, 1997. The report contained both positive and negative conclusions, the latter explaining that: Maine Yankee's decision in December, 1996 to proceed with the steps necessary to restart its nuclear generating plant at Wiscasset, Maine, was "imprudent"; that Maine Yankee's May 27, 1997, decision to reduce restart expenses while exploring a possible sale of the plant was "inappropriate," based on the consultant's finding that a more objective and comprehensive competitive analysis at the time "might have indicated a benefit for restarting" the plant; and that those decisions resulted in Maine Yankee incurring $95.9 million in "unreasonable" costs. On October 24, 1997, the MPUC issued a Notice of Investigation initiating an investigation of the prudence of the Maine Yankee shutdown decision and of the operation of Maine Yankee prior to the shutdown, and announced that it had directed its consultant to extend its review to include those areas. The Company does not know how the MPUC plans to use the consultant's report or any negative conclusions of its investigation. 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 complied with all of these additional requirements, and in September 1997 the Company filed rebuttal testimony with the MPUC, in which the requested rate increase was revised to $22.1 million. Management cannot predict the level of base rate increase which will be obtained in these proceedings. MONETIZATION OF POWER SALE CONTRACT - The Company has been negotiating with interested parties the monetization of a power sale contract with UNITIL Power Corp. ("UNITIL"), a New Hampshire based electric utility. The Company currently provides power to UNITIL at significantly above-market rates, with the contract term ending in the year 2003. Based upon current projections of wholesale electricity markets, it is expected that the rates charged under the UNITIL contract will remain at above-market levels for the remainder of the contract term. Therefore, the assignment of the Company's rights under the contract has a positive present cash value. The Company is currently proceeding to complete a transaction with a financial institution pursuant to a letter of intent that would provide a loan of approximately $25 million in net proceeds secured by the value of the UNITIL contract. As discussed below, the proceeds of such a transaction could be used to finance a portion of the contract restructuring with Penobscot Energy Recovery Company ("PERC") and to resolve outstanding financial covenant issues under the Company's Bank Credit Agreement. The Company cannot predict whether the proposed monetization of the contract will in fact 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 $6 million and installment payments through 2001 totalling an additional $4 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. 5. The municipalities would extend their waste disposal contracts through 2017 and waive their existing rights to an early termination or the buyout of PERC. There are a number of events upon which the proposed transaction is contingent, including approval by the affected municipalities, the rendering of an opinion by bond counsel that the PERC bonds will remain tax-exempt and the financing of necessary cash payments by the Company. 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. BANK CREDIT AGREEMENT - 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 requires the Company to maintain a consolidated fixed charge ratio of 1.5 to 1.0 (defined as the ratio of the sum of the Company s net income, income tax expense and interest expense to the Company s interest expense, subject to a few minor adjustments) and is measured quarterly for the prior four quarters. After the first quarter of 1997, the Company was not in compliance with the fixed charge ratio covenant. The Company obtained temporary waivers of the noncompliance through June 6, 1997. On June 6, 1997 the Company and the lending banks amended the credit agreement. Under the amendment, compliance with the fixed charge ratio covenant was permanently waived for the four quarters ending March 31, 1997 and June 30, 1997. The Company was also out of compliance with the fixed charge ratio covenant for the four quarters ending September 30, 1997 and received temporary waivers of this violation until November 21, 1997. The Company has agreed in principle with the lending banks on a new amendment to the credit agreement which is expected to be executed before the expiration of the temporary waiver. The amendment contemplates that the Company will monetize the UNITIL contract as discussed above before January 15, 1998 in an amount that generates net proceeds of at least $25 million. Under the amendment, the Company would be permitted to proceed with the restructuring of its power purchase contract with PERC and to use $6 million of the proceeds of a monetization of the UNITIL contract to complete the PERC transaction, with the remainder of the proceeds to be used to reduce permanently the borrowing capacity of the existing revolving credit facility. On or before December 31, 1998, the Company must reduce permanently the borrowing capacity under the revolving credit facility by that additional $6 million. The amendment will also establish new financial covenant levels that appear reasonably to be achievable under the Company's current financial forecasts. Although the Company will have no obligation to the lending banks to pursue the UNITIL contract monetization, the effectiveness of the new financial covenants will be contingent upon the completion of the UNITIL transaction on or before January 15, 1998. It is not certain at this time whether the Company will be able, or will choose, to monetize the UNITIL contract within the required time frame. For example, monetization of the UNITIL contract may not be in the Company's best interests if the PERC contract restructuring does not proceed. If the monetization is not completed by January 15, 1998, the existing financial covenant levels will remain in place, and it is likely that the Company would be in violation of one or more of them if they are not otherwise renegotiated. There are a number of important variables affecting the Company's future financial performance and cash flow including the outcome of the pending rate case before the MPUC, the continuing costs associated with the Maine Yankee nuclear power plant and the cost to the Company of purchasing power to meet its customers' needs. It is possible that even after the establishment of new financial covenants, the Company will violate one or more of them in the future and that its ability to borrow money under its existing lending relationships will be affected. In addition, it is possible that the Company's future cash needs will exceed the borrowing capacity under the revolving credit facility after the reductions described above, and accordingly, the Company will be required to find new sources of financing. The Company is in the process of exploring the availability of such alternative or additional sources of financing. BANGOR GAS JOINT VENTURE - The Company and Energy Pacific have agreed to form a joint-venture company that will seek approval from the MPUC to build, own and operate a natural gas distribution system to serve the greater Bangor area. The two partners have formed Bangor Gas Company, LLC which, pending the necessary approvals from the MPUC, will provide gas service to residential, commercial and industrial customers in the greater Bangor area. Los Angeles-based Energy Pacific is a joint-venture of Pacific Enterprises and Enova Corporation which are in the process of a corporate merger. Pacific Enterprises is the parent company of Southern California Gas Co., the nation's largest natural gas distribution company. Enova is the parent of San Diego Gas and Electric. Together, the two companies provide natural gas to approximately six million customers in California. Pacific Enterprises and the Company worked together in a partnership to develop the West Enfield Hydro Project in 1986. Company officials estimate the cost to build and implement the new Bangor Gas system to be approximately $40 million. Gas service to Maine will be made economically feasible for the first time by the Maritimes and Northeast Pipeline Project, slated for completion in mid-1999. The new pipeline will extend from the Sable Offshore Energy Project near Sable Island, Nova Scotia through the State of Maine and interconnecting with the Tennessee Gas Pipeline in Dracut, Massachusetts. The route, as proposed, comes through the city of Brewer, providing an opportunity for residences in the greater Bangor marketplace. Consumers currently use fuel oil, electricity and propane to meet their energy needs. Market research indicates that nearly 50 percent of residential customers would have a strong interest in converting to natural gas if prices are lower than other fuels, as would 47 percent of small commercial/industrial customers and 70 percent of large commercial/industrial customers. Research also indicates that natural gas prices are competitive with alternative fuel prices in the Bangor market. 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 remained in effect for the second and third quarters 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 Electric operating revenue increased by $202,000 in the third quarter of 1997 due principally to the impact of the 3.8% temporary rate increase effective on July 1, 1997 and a 5.5% (23.8 million) increase kilowatt hour (KWH) sales (excluding off-system sales) in the 1997 quarter, offset by a $1.7 million reduction in off-system sales and a $614,000 reduction in revenue in the 1997 quarter related to the previously discussed revenue sharing arrangement with the Company's largest industrial customer. Of the KWH sales increase of 23.8 million KWH's, 16.3 million in KWH sales were applicable to one large power special contract customer, who contributes a relatively low profit margin to the Company. Much of the other increased sales in the 1997 quarter can also be attributed to greater usage by other special contract large power customers. Sales to non-special contract customers in the third quarter of 1997 were essentially flat due to the continued sluggish economy. EXPENSES Fuel for generation and purchased power expense increased principally due to the previously mentioned shutdown of Maine Yankee and the increase in its operating and maintenance expenditures. In the third quarter of 1997 the Company incurred approximately $3.0 million in incremental Maine Yankee replacement power costs, as compared to $1.5 million in the third quarter of 1996. Maine Yankee was non-operational for a part of the 1996 quarter due to a voluntary shutdown. The Company has also borne a greater level of Maine Yankee operating costs, which increased by approximately $600,000 in 1997, as compared to the 1996 quarter. The third quarter 1997 expense included $490,000 related to an early retirement plan at Maine Yankee. Also affecting the increased expense in the 1997 quarter was the previously discussed increase in KWH sales, as well as an overall increase in the price of purchased power in 1997 as compared to 1996. Offsetting these increases was the $1.7 million reduction in off-system sales in the 1997 quarter. Other operation and maintenance (O&M) expense decreased by $347,000 in the third quarter of 1997, due principally to a $150,000 decrease in bad debt expense 1997 quarter, a $102,000 decrease in advertising expenses incurred by the Company's advertising agency, and a $96,000 decrease in postretirement medical costs in the 1997 quarter as compared to 1996. O&M payroll expense increased by $193,000 due principally to a 2.5% union wage rate increase effective January 1, 1997, various wage rate increases to nonunion personnel, and lower levels of payroll being charged to the Company's capital program in the third quarter of 1997. The $715,000 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 third 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. Amortization of contract buyouts increased by $1.3 million in the 1997 quarter as compared to 1996. With the July 1, 1997 temporary rate increase, the MPUC 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. The increase in property and other taxes in the third 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 third quarter of 1997 as compared to earnings in the 1996 quarter. Income tax expense in the 1997 quarter was reduced by $184,000 in investment tax credits recorded in 1996 for financial reporting purposes, which were subsequently unable to be utilized when the 1996 federal income tax return was filed in the third quarter of 1997. The decrease in income associated with allowance for funds used during construction (AFUDC) was principally a function of lower levels of construction work in progress in the 1997 quarter. Long-term debt interest expense decreased $217,000 in the third quarter of 1997 as compared to 1996 due to $12 million and $1 million principal repayments on the Company's $60 million medium term notes in June 1997 and September 1997, respectively, 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, increased by $42,000 due a higher weighted average short-term debt interest rate in the 1997 quarter, offset by a $1.7 million reduction in weighted average short-term borrowings outstanding in the third quarter of 1997. NINE MONTHS OF 1997 AS COMPARED TO THE NINE MONTHS OF 1996 EARNINGS The nine months ended September 30, 1997 resulted in a loss of $.21 per common share, compared to earnings of $1.09 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 $9.3 million in incremental Maine Yankee replacement power costs, as compared to $2.7 million in 1996. The Company's share of Maine Yankee operating costs increased by approximately $2.6 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 a $1.3 million 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 $.29 loss per common share in the 1997 period. REVENUES Electric operating revenue for the 1997 period decreased by $699,000 as compared to 1996. There was a $2.9 million decrease in off-system sales in 1997, and revenue sharing from the Company's largest industrial customer decreased by $2.5 million in 1997. While there was an overall 3.84% increase in total KWH sales (excluding off-system sales) in 1997 over 1996, associated revenues increased by only 3.29% due to the effect of adjusting prices downward to some customers in order to retain sales that would otherwise be lost to competitive pressures, offset by the impact of the 3.8% rate increase on July 1, 1997. Of the 3.84% total increase in KWH sales in 1997, approximately 78% are related to the largest special contract customers. Positively impacting revenues in 1997 were the sale of air emission allowances and revenue associated with the shared distribution savings with another utility mentioned above. 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 $146,000 decrease in other O&M expense in the 1997 period was due to the previously mentioned reasons. The decreases were offset to some extent by recording a $216,000 adjustment for obligations due under a demand-side management contract. The increases in depreciation and amortization, amortization of contract buyouts, and property and other taxes in the 1997 period as compared to 1996 were due to the previously mentioned reasons. The decrease in income tax expense in the 1997 period was due to the previously discussed reasons. Income tax expense in the 1996 period 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. The decreases in AFUDC and long-term debt and other interest expense in the 1997 period were also due principally to reasons previously discussed. The decrease in Other income, net was due primarily to the write-off of start-up costs associated with non-core business ventures by the Company in 1997. LIQUIDITY AND CAPITAL RESOURCES The Consolidated Statements of Cash Flows reflect events in the first nine months of 1997 and 1996 as they affect the Company's liquidity. Net cash provided by operations decreased by $1.7 million in the 1997 period due principally to the incremental costs incurred to replace the Company's share of Maine Yankee's output, additional Maine Yankee operating costs and $2.7 million in costs associated with the refueling outage at the Plant. The Company's cash flows were 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. Positively impacting cash flows in the 1997 period was the payment of $360,000 in income taxes, as compared to $2.3 million in income tax payments in 1996. The Company made approximately $2.0 million less in interest payments in the 1997 period as compared to 1996. Also enhancing cash flows from operations in 1997 was an improvement in accounts receivable collections. In the third quarter of the 1997, the Company received $2.6 million from a large customer, who prepaid its electric usage for a one year period. Finally, in the 1996 period, the Company expended $1.7 million to terminate a demand-side management contract. 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. The Company also made a $1 million principal payment on the Medium Term Notes on September 30, 1997. 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 $504,000 through the issuance of 45,593 new common shares. For a discussion of the status of the Company's Credit Agreement with its lending banks, see "Bank Credit Agreement" above. 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 Sept.30, Dec. 31, 1997 1996 --------- --------- INVESTMENT IN UTILITY PLANT: Electric plant in service, at original cost $ 336,909 $ 317,833 Less - Accumulated depreciation and amortization 94,544 87,736 --------- --------- $ 242,365 $ 230,097 Construction work in progress 12,271 18,554 --------- --------- $ 254,636 $ 248,651 Investments in corporate joint ventures: Maine Yankee Atomic Power Company $ 5,388 $ 5,014 Maine Electric Power Company, Inc. 236 125 --------- --------- $ 260,260 $ 253,790 --------- --------- OTHER INVESTMENTS, principally at cost $ 5,065 $ 4,813 --------- --------- FUNDS HELD BY TRUSTEE, at cost $ 21,537 $ 21,199 --------- --------- CURRENT ASSETS: Cash and cash equivalents $ 1,078 $ 1,274 Accounts receivable, net of reserve 16,381 20,691 Unbilled revenue receivable 8,975 9,230 Inventories, at average cost: Material and supplies 2,942 2,994 Fuel oil 233 303 Prepaid expenses 387 1,672 Deferred Maine Yankee refueling costs 2,573 896 --------- --------- Total current assets $ 32,569 $ 37,060 --------- --------- DEFERRED CHARGES: Investment in Seabrook Nuclear Project, net of accumulated amortization of $28,049 in 1997 and $26,775 in 1996 $ 30,793 $ 32,067 Costs to terminate purchased power contracts, net of accumulated amortization of $53,385 in 1997 and $36,398 in 1996 153,865 171,703 Maine Yankee decommissioning costs 63,961 - Deferred regulatory assets 30,000 29,498 Demand-side management costs 1,937 2,632 Other 3,183 3,867 --------- --------- Total deferred charges $ 283,739 $ 239,767 --------- --------- Total assets $ 603,170 $ 556,629 ========= ========= See notes to the consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED BALANCE SHEETS 000's Omitted (Unaudited) Sept.30, Dec. 31, STOCKHOLDERS' INVESTMENT AND LIABILITIES 1997 1996 --------- --------- CAPITALIZATION: Common stock investment $ 106,779 $ 108,321 Preferred stock 4,734 4,734 Preferred stock subject to mandatory redemption, exclusive of current sinking fund requirements 10,716 12,265 Long-term debt, net of current portion 244,643 272,627 --------- --------- Total capitalization $ 366,872 $ 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 preferred stock $ 30,172 $ 15,447 Accounts payable 10,986 13,433 Dividends payable 329 1,687 Accrued interest 4,897 3,719 Customers' deposits 306 360 Deferred revenue 2,712 1,008 --------- --------- Total other current liabilities $ 49,402 $ 35,654 --------- --------- Total current liabilities $ 82,402 $ 68,154 --------- --------- DEFERRED CREDITS AND RESERVES: Deferred income taxes - Seabrook $ 15,987 $ 16,651 Other accumulated deferred income taxes 55,543 54,806 Maine Yankee decommissioning liability 63,961 - Deferred regulatory liability 7,736 8,446 Unamortized investment tax credits 2,018 2,179 Accrued pension 605 640 Other 8,046 7,806 --------- --------- Total deferred credits and reserves $ 153,896 $ 90,528 --------- --------- Total Stockholders' Investment and Liabilities $ 603,170 $ 556,629 ========= ========= See notes to the consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION 000's Omitted (Unaudited)
Sept. 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 56,970 56,969 Retained earnings 12,992 14,535 -------- -------- Total common stock investment $ 106,779 $ 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, authorized 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 $ 12,310 $ 12,265 Less: Sinking fund requirements 1,594 1,594 -------- -------- $ 10,716 $ 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 5,521 7,375 -------- -------- $ 108,021 $ 109,875 Less: Current maturity and sinking fund requirements 4,278 1,854 -------- -------- Total first mortgage bonds $ 103,743 $ 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 35,000 48,000 -------- -------- $ 161,000 $ 174,000 Less: Current portion of long-term debt 24,300 12,000 -------- -------- $ 136,700 $ 162,000 -------- -------- Total long-term debt $ 244,643 $ 274,221 -------- -------- Total Capitalization $ 366,872 $ 397,947 ======== ======== See notes to the consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 000's Omitted (Unaudited)
1997 1996 --------- --------- Cash Flows From Operations: Net income (loss) $ (509) $ 9,148 Adjustments to reconcile net income (loss) to net cash provided by(used in) operations: Depreciation and amortization 7,749 5,603 Amortization of Seabrook Nuclear Project 1,274 1,274 Amortization of contract buyouts 16,987 15,608 Payment received related to contract buyout 1,000 1,000 Other amortizations 1,255 1,145 Allowance for equity funds used during construction (246) (270) Cost to terminate demand-side management contract - (1,703) Deferred income tax provision and investment tax credits (1,562) 3,307 Changes in assets and liabilities: Deferred fuel revenue and Maine Yankee (2,433) 386 refueling costs Accounts receivable, net and unbilled revenue 4,565 (1,036) Accounts payable (2,447) (735) Accrued interest 1,178 161 Current and deferred income taxes 210 (1,026) Accrued postretirement benefit costs 455 1,046 Deferred revenue 2,460 - Other current assets and liabilities, net 1,353 121 Other, net (972) (2,001) ---------- ---------- Net Cash Provided By Operations $ 30,317 $ 32,028 ---------- ---------- Cash Flows From Investing: Construction expenditures $ (13,330) $ (13,054) Allowance for borrowed funds used during construction (485) (562) ---------- ---------- Net Cash Used In Investing $ (13,815) $ (13,616) ---------- ---------- Cash Flows From Financing: Dividends on preferred stock $ (1,020) $ (1,119) Dividends on common stock (1,325) (3,950) Payments on long-term debt (14,853) (13,646) Payments on mandatory redeemable preferred stock - (1,615) Issuances: Common stock Dividend reinvestment plan (45,593 shares in 1996) - 504 Short-term debt, net 500 1,500 ---------- ---------- Net Cash Used In Financing $ (16,698) $ (18,326) ---------- ---------- Net Change in Cash and Cash Equivalents $ (196) $ 86 Cash and Cash Equivalents at Beginning of Period 1,274 1,424 ---------- ---------- Cash and Cash Equivalents at End of Period $ 1,078 $ 1,510 ========== ========== Cash Paid During the Nine Months For: Interest (Net of Amount Capitalized) $ 17,119 $ 19,112 Income Taxes 360 2,348 ========== ========== See notes to consolidated financial statements.
BANGOR HYDRO-ELECTRIC COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 000's Omitted (Unaudited) 1997 1996 ---------- ---------- BALANCE AT JANUARY 1 $ 14,535 $ 10,073 ADD - NET INCOME (LOSS) (509) 9,148 ---------- ---------- $ 14,026 $ 19,221 ---------- ---------- DEDUCT: Dividends - Preferred stock $ 988 $ 1,086 Common stock - 3,959 Other 46 74 ---------- ---------- $ 1,034 $ 5,119 ---------- ---------- BALANCE AT SEPTEMBER 30 $ 12,992 $ 14,102 ========== ========== See notes to the consolidated financial statements. BANGOR HYDRO-ELECTRIC COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 September 30, 1997 and the results of operations and cash flows for the periods ended September 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 multi- plying income before federal income taxes by the statutory federal income tax rate to the above provisions for federal income taxes: NINE MONTHS ENDED SEPT. 30, -------------------------- 1997 1996 ---- ---- Amount % Amount % -------- --- -------- --- (Dollars in Thousands) Federal income tax provision at statutory rate $ (505) 34 $4,695 34 Plus (Less)permanent reductions in tax expense resulting from statutory exclusions from taxable income 104 7 (6) - ----- --- ------ --- Federal income tax provision before effect of temporary differences and investment tax credits $ (401) 27 $4,689 34 Plus (Less) temporary differences that that are flowed through for rate- making and accounting purposes 26 4 (234) (2) (Less) utilization and amortization of investment tax credits (43) (3) (637) (4) ----- --- ------ --- Federal income tax provision $(418) 28 $3,818 28 ===== === ====== === 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 Nine Months Ended ---------------------------------- Sept.30, Sept.30, Sept.30, Sept.30, 1997 1996 1997 1996 OPERATIONS: ------- -------- ------- ------- As reported by investee- Operating revenues $198,716 $132,412 $23,838 $44,752 ======== ======== ======= ======= Earnings applicable to common stock $ 5,455 $ 4,986 $ 1,004 $ 165 ======== ======== ======= ======= Company's reported equity- Equity in net income $ 382 $ 349 $ 143 $ 23 (Deduct)-Effect of adjusting Company's estimate to actual (1) (2) (21) (12) -------- -------- ------- ------- Amounts reported by Company $ 381 $ 347 $ 122 $ 11 ======== ======== ======= ======= MAINE YANKEE MEPCO --------------- ----------------- (Dollars in Thousands) (Unaudited) Financial Position at ----------------------------------- Sept.30, Dec. 31, Sept.30, Dec. 31, 1997 1996 1997 1996 FINANCIAL POSITION: -------- -------- ------- ------- As reported by investee- Total assets $700,356 $602,061 $ 4,197 $10,727 Less- Preferred stock 17,400 18,000 - - Long-term debt 148,665 103,332 470 620 Other liabilities and deferred credits 457,499 409,392 1,407 9,110 -------- -------- ------- ------- Net assets $ 76,792 $ 71,337 $ 2,320 $ 997 ======== ======== ======= ======= Company's reported equity- Equity in net assets $ 5,375 $ 4,994 $ 329 $ 142 (Deduct) Add - Effect of adjusting Company's estimate to actual 13 20 (93) (17) -------- -------- ------- ------- Amounts reported by Company $ 5,388 $ 5,014 $ 236 $ 125 ======== ======== ======= ======= BPHA Chester ----------------- ----------------- (Dollars in Thousands) (Unaudited) Operations for Nine Months Ended ------------------------------------- Sept.30, Sept.30, Sept.30, Sept.30, 1997 1996 1997 1996 ------- ------- -------- ------- OPERATIONS: As reported by investee- Operating revenues $ 5,506 $ 6,289 $ 3,442 $ 3,595 ======= ======= ======= ======= Net Income $ 1,639 $ 2,368 $ - $ - ======= ======= ======= ======= Company's reported equity in net income $ 820 $ 1,184 $ - $ - ======= ======= ======= ======= Financial Position at -------------------------------------- Sept. 30, Dec. 31, Sept. 30, Dec. 31, 1997 1996 1997 1996 -------- -------- -------- -------- FINANCIAL POSITION: As reported by investee- Total assets $39,146 $39,864 $27,859 $28,898 Less- Long-term debt 29,025 30,600 26,133 27,021 Other liabilities 2,377 2,359 1,726 1,877 ------- ------- ------- ------- Net assets $ 7,744 $ 6,905 $ - $ - ======= ======= ======= ======= Company's reported equity in net assets $ 3,872 $ 3,453 $ - $ - ======= ======= ======= ======= 4. MONETIZATION OF POWER SALE CONTRACT: ----------------------------------- The Company has been negotiating with interested parties the monetization of a power sale contract with UNITIL Power Corp. ("UNITIL"), a New Hampshire based electric utility. The Company currently provides power to UNITIL at significantly above-market rates, with the contract term ending in the year 2003. Based upon current projections of wholesale electricity markets, it is expected that the rates charged under the UNITIL contract will remain at above-market levels for the remainder of the contract term. Therefore, the assignment of the Company's rights under the contract has a positive present cash value. The Company is currently proceeding to complete a transaction with a financial institution pursuant to a letter of intent that would provide a loan of approximately $25 million in net proceeds secured by the value of the UNITIL contract. As discussed below, the proceeds of such a transaction could be used to finance a portion of the contract restructuring with Penobscot Energy Recovery Company ("PERC") and to resolve outstanding financial covenant issues under the Company's Bank Credit Agreement. The Company cannot predict whether the proposed monetization of the contract will in fact occur. 5. 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 $6 million and installment payments through 2001 totalling an additional $4 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. 5. The municipalities would extend their waste disposal contracts through 2017 and waive their existing rights to an early termination or the buyout of PERC. There are a number of events upon which the proposed transaction is contingent, including approval by the affected municipalities, the rendering of an opinion by bond counsel that the PERC bonds will remain tax-exempt and the financing of necessary cash payments by the Company. 6. 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 requires the Company to maintain a consolidated fixed charge ratio of 1.5 to 1.0 (defined as the ratio of the sum of the Company s net income, income tax expense and interest expense to the Company s interest expense, subject to a few minor adjustments) and is measured quarterly for the prior four quarters. After the first quarter of 1997, the Company was not in compliance with the fixed charge ratio covenant. The Company obtained temporary waivers of the noncompliance through June 6, 1997. On June 6, 1997 the Company and the lending banks amended the credit agreement. Under the amendment, compliance with the fixed charge ratio covenant was permanently waived for the four quarters ending March 31, 1997 and June 30, 1997. The amendment also 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. The Company was also out of compliance with the fixed charge ratio covenant for the four quarters ending September 30, 1997 and received temporary waivers of this violation until November 21, 1997. The Company has agreed in principle with the lending banks on a new amendment to the credit agreement which is expected to be executed before the expiration of the temporary waiver. The amendment contemplates that the Company will monetize the UNITIL contract discussed above before January 15, 1998 in an amount that generates net proceeds of at least $25 million. Under the amendment, the Company would be permitted to proceed with the restructuring of its power purchase contract with PERC and to use $6 million of the proceeds of a monetization of the UNITIL contract to complete the PERC transaction, with the remainder of the proceeds to be used to reduce permanently the borrowing capacity of the existing revolving credit facility. On or before December 31, 1998, the Company must reduce permanently the borrowing capacity under the revolving credit facility by that additional $6 million. The amendment will also establish new financial covenant levels that appear reasonably to be achievable under the Company's current financial forecasts. Although the Company will have no obligation to the lending banks to pursue the UNITIL contract monetization, the effectiveness of the new financial covenants will be contingent upon the completion of the UNITIL transaction on or before January 15, 1998. It is not certain at this time whether the Company will be able, or will choose, to monetize the UNITIL contract within the required time frame. For example, monetization of the UNITIL contract may not be in the Company's best interests if the PERC contract restructuring does not proceed. If the monetization is not completed by January 15, 1998, the existing financial covenant levels will remain in place, and it is likely that the Company would be in violation of one or more of them if they are not otherwise renegotiated. There are a number of important variables affecting the Company's future financial performance and cash flow including the outcome of the pending rate case before the MPUC, the continuing costs associated with the Maine Yankee nuclear power plant and the cost to the Company of purchasing power to meet its customers' needs. It is possible that even after the establishment of new financial covenants, the Company will violate one or more of them in the future and that its ability to borrow money under its existing lending relationships will be affected. In addition, it is possible that the Company's future cash needs will exceed the borrowing capacity under the revolving credit facility after the reductions described above, and accordingly, the Company will be required to find new sources of financing. The Company is in the process of exploring the availability of such alternative or additional sources of financing. 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. 7. 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 and plant closure, excluding funds already collected, is $930 million (undiscounted). The Company has recorded its 7% share, $65.1 million, less $1.1 million of its share of Maine Yankee's expenditures since September 1, 1997 as a regulatory asset and decommissioning liability at September 30, 1997. The Company expects Maine Yankee 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. In a related matter, in early September, 1997, the Maine Public Utilities Commission (MPUC) released the report of a consultant it had retained to perform a management audit of Maine Yankee for the period January 1, 1994 to June 30, 1997. The report contained both positive and negative conclusions, the latter explaining that: Maine Yankee's decision in December, 1996 to proceed with the steps necessary to restart its nuclear generating plant at Wiscasset, Maine, was "imprudent"; that Maine Yankee's May 27, 1997, decision to reduce restart expenses while exploring a possible sale of the plant was "inappropriate," based on the consultant's finding that a more objective and comprehensive competitive analysis at the time "might have indicated a benefit for restarting" the plant; and that those decisions resulted in Maine Yankee incurring $95.9 million in "unreasonable" costs. On October 24, 1997, the MPUC issued a Notice of Investigation initiating an investigation of the prudence of the Maine Yankee shutdown decision and of the operation of Maine Yankee prior to the shutdown, and announced that it had directed its consultant to extend its review to include those areas. The Company does not know how the MPUC plans to use the consultant's report or any negative conclusions of its investigation. 8. RECLASSIFICATIONS: ----------------- Certain 1996 amounts have been reclassified to conform with the presentation used in Form 10-Q for the quarter ended September 30, 1997. BANGOR HYDRO-ELECTRIC COMPANY FORM 10-Q FOR PERIOD ENDING SEPTEMBER 30, 1997 PART II Item 6. Exhibits and Reports on Form 8-K - ------ -------------------------------- Exhibits - None. -------- Reports on Form 8-K - None. ------------------- BANGOR HYDRO-ELECTRIC COMPANY FORM 10-Q FOR PERIOD ENDED SEPTEMBER 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) Dated: November 14, 1997 /s/ Frederick S. Samp ---------------------- 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 Form 10Q - 3rd Quarter 1997 and is qualified in its entirety by reference to such 10Q. 0000009548 BANGOR HYDRO-ELECTRIC COMPANY 1,000 9-MOS DEC-31-1997 SEP-30-1997 PER-BOOK 242,365 44,497 32,569 283,739 0 603,170 36,817 56,970 12,992 106,779 10,716 4,734 244,643 0 33,000 0 28,578 1,594 0 0 173,126 603,170 137,969 (1,509) 122,023 120,514 17,455 1,016 18,471 18,980 (509) 1,033 (1,542) 0 22,307 30,317 (.21) (.21)
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