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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal year ended DECEMBER 31, 1997 Commission File No. 0-505
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BANGOR HYDRO-ELECTRIC COMPANY
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(Exact Name of Registrant as specified in its charter)
MAINE 01-0024370
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(State of Incorporation) (I.R.S. Employer ID No.)
33 STATE STREET, BANGOR, MAINE 04401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 207-945-5621
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
COMMON STOCK, $5 PAR VALUE NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $5 Par value
(7,363,424 shares outstanding at March 20, 1998)
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7% Preferred Stock, $100 Par Value
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4 1/4% Preferred Stock, $100 Par Value
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4% Preferred Stock Series A, $100 Par Value
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value on March 20, 1998 of the voting stock held by
non-affiliates of the registrant was $66.1 million.
The information required by Part III Items 10, 11, 12 and 13 is
incorporated by reference from the registrant's proxy statement which will be
filed with the Securities and Exchange Commission within 120 days of the
close of the registrant's fiscal year ended December 31, 1997.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
PAGE
----
Cover Page 1
Index 2
PART I:
Items 1 through 2 - Business; Properties 5
- General 5
- Certain Issues Facing the Company 7
- Construction Program 7
- Rates and Regulation 7
- Seabrook 11
- Joint Ventures 11
- Employees 13
- Power Supply Sources 13
- Company-owned Generation 13
- Power Purchase Contracts 14
- Maine Yankee 16
- Environmental Matters 22
- Executive Officers of the Company 23
Item 3: Legal Proceedings 24
Item 4: Submission of Matters to a Vote of Security Holders 24
PART II:
Item 5: Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6: Selected Financial Data 26
Item 7: Management's Discussion and Analysis of Results of
Operations and Financial Condition 28
Item 8: Financial Statements & Supplementary Data 43
- Consolidated Statements of Income 43
- Consolidated Balance Sheets 44
- Consolidated Statements of Capitalization 46
- Consolidated Statements of Cash Flows 47
- Consolidated Statements of Common Stock Investment 48
- Notes to Consolidated Financial Statements 49
1) Nature of Operations and Summary of Significant
Accounting Policies 49
2) Income Taxes 51
3) Common and Preferred Stock 53
4) Lending Agreements and Monetization of Power
Sale Contract 54
5) Postretirement Benefits 56
6) Jointly Owned Facilities and Power Supply
Commitments 59
7) Recovery of Seabrook Investment and Sale of
Seabrook Interest 65
8) Unaudited Quarterly Financial Data 66
9) Contingencies 66
10) Fair Value of Financial Instruments 67
11) Industry Restructuring and Rate Regulation 67
12) Derivative Financial Instruments 70
13) Subsequent Events 71
14) New Accounting Pronouncements 72
Report of Independent Accountants 73
Item 9: Changes in and Disagreements with Audit Firms on
Financial Disclosures 74
PART III:
Item 10: Directors and Executive Officers of the Registrant 74
Item 11: Executive Compensation 74
Item 12: Security Ownership of Certain Beneficial Owners
and Management 74
Item 13: Certain Relationships and Related Transactions 74
PART IV:
Item 14: Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 75
Signatures 76
Report of Independent Accountants 77
Schedule VIII - Reserves for Doubtful Accounts and Insurance 78
EXHIBIT INDEX:
Exhibits Filed Herewith 79
Exhibits Incorporated Herein by Reference 80
FORWARD LOOKING INFORMATION - In addition to the historical information
contained herein, this report contains a number of statements that are
"forward-looking" as defined in the Private Securities Litigation Reform Act
of 1995. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated in the
forward-looking statements. Readers should not place undue reliance on
forward-looking statements, which reflect management s view only as of the
date hereof. The Company undertakes no obligation to publicly revise these
forward-looking statements to reflect subsequent events or circumstances.
Factors that might cause such differences include, but are not limited to,
future economic conditions, relationship with lenders, earnings retention and
dividend payout policies, electric utility restructuring, developments in the
legislative, regulatory and competitive environments in which the Company
operates, and other circumstances that could affect revenues and costs.
PART I
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ITEMS 1 THROUGH 2 BUSINESS; PROPERTIES
- --------------------------------------------------------------
GENERAL
--------
The Company is a public utility engaged in the generation, purchase,
transmission, distribution and sale of electric energy, with a service area
of approximately 5,275 square miles having a population of approximately
191,000 people. The Company serves approximately 105,000 customers in
portions of the counties of Penobscot, Hancock, Washington, Waldo,
Piscataquis and Aroostook. The Company also sells energy to other utilities
for resale. The Company has three material wholly-owned subsidiaries.
Penobscot Hydro Co., Inc. ("PHC") was incorporated in 1986 to own the
Company's 50% interest in a joint venture, Bangor-Pacific Hydro Associates
("Bangor-Pacific"), which redeveloped the West Enfield hydroelectric project
(the "West Enfield Project"). Bangor Var Co., Inc. ("Bangor Var Co.") was
incorporated in 1990 to hold the Company's 50% interest in a partnership
which owns certain facilities used in the Hydro-Quebec Phase II transmission
project ("HQ-II") in which the Company is a participant. For a further
discussion of Penobscot Hydro Co. and Bangor Var Co., see "Joint Ventures."
Finally, Bangor Energy Resale, Inc. was formed in 1997 as a special purpose
vehicle to permit Bangor Hydro's use of a power sales agreement as collateral
for a bank loan. For a further discussion of this transaction, see Item 7,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Recent Events Affecting The Electric Utility Industry And The
Company - Existing Lending Agreements and Monetization of Power Sale
Contract".
In 1997, 30.5% of the Company's kilowatt hour ("KWH") sales were to
residential customers, 29.5% were to commercial customers, 39.3% were to
industrial customers and 0.7% were to other customers. For additional
information concerning the Company's sales, see Item 6, "Selected Financial
Data", below.
The Company's KWH sales are generally higher during the winter months,
with the winter peak electric demand usually 15% higher than the summer peak.
The maximum peak electric demand that the Company's system experienced during
the 1997-1998 winter, as of March 20, 1998, was approximately 277.06
megawatts ("MW") on December 15, 1997. At that time the Company had
approximately 338.44 MW of generating capacity and firm purchased power,
comprised of 104 MW from Company-owned generating units, 9.6 MW from Hydro
Quebec, 54.8 MW from non-utility power producers, and 170.0 MW from short
term economy purchases.
The Company owns 7% of the common stock of Maine Yankee Atomic Power
Company, which owns and, prior to its permanent closure in 1997, operated an
880 MW nuclear generating plant in Wiscasset, Maine. Maine Yankee, which had
commenced commercial operation on January 1, 1973, is the only nuclear
facility in which the Company has an ownership interest. The Company s equity
ownership in the plant had entitled the Company to about 7% of the output
pursuant to a cost-based power contract. Pursuant to a contract with Maine
Yankee, the Company is obligated to pay its pro rata share of Maine Yankee's
operating expenses, including decommissioning costs. In addition, under a
Capital Funds Agreement entered into by the Company and the other sponsor
utilities, the Company may be required to make its pro rata share of future
capital contributions to Maine Yankee if needed to finance capital
expenditures. See "Maine Yankee" and Item 7, "Management's Discussion and
Analysis of Results of Operations and Financial Condition - Recent Events
Affecting The Electric Utility Industry And The Company - Maine Yankee".
The Company, along with the major investor-owned utilities of New
England, has been a party to the New England Power Pool Agreement ("NEPOOL")
since 1971. NEPOOL provides for joint planning and operation of generating
and transmission facilities in New England, and governs generating capacity
reserve obligations and provisions regarding the use of major transmission
lines. The Company, as a member of NEPOOL, has a capability responsibility
which involves carrying an allocated share of a New England capacity
requirement which is determined for each period based on certain regional
reliability criteria. On December 1, 1996, the members of NEPOOL, including
the Company, entered into the 33rd Amendment to the NEPOOL Agreement which
provided for a substantial restructuring of NEPOOL. This revised agreement,
together with NEPOOL's Open Access Transmission Tariff were filed with the
Federal Energy Regulatory Commission on December 31, 1996 and were
subsequently approved. Pursuant to this restructuring, effective July 1,
1997 an independent system operator, ISO-New England, assumed oversight of
the operations and integration of the NEPOOL transmission and generation with
respect to reliability and market operations. The intent of these changes in
NEPOOL is to increase competition in the market for electric generation.
The Company is subject to the regulatory authority of the Maine Public
Utilities Commission ("MPUC") as to retail rates, accounting, service
standards, territory served, the issuance of securities and various other
matters. The Company is also subject to the jurisdiction of the Federal
Energy Regulatory Commission ("FERC") as to certain matters, including
licensing of its hydroelectric stations and rates for wholesale purchases and
sales of energy and capacity and transmission services. Maine Yankee is
subject to extensive regulation by the Nuclear Regulatory Commission ("NRC").
See "Rates and Regulation."
The principal executive offices of the Company are located at 33 State
Street, Bangor, Maine 04401; telephone (207) 945-5621.
CERTAIN ISSUES FACING THE COMPANY
---------------------------------
CHANGES IN THE ELECTRIC UTILITY INDUSTRY AND IN REGULATION - See Item 7,
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Recent Events Affecting The Electric Utility Industry And The
Company" for a discussion of the effect of competition and related events on
future sales, earnings and dividend policy. That discussion includes a
description of the legislation enacted by the State of Maine to restructure
the electric industry within the state to implement retail competition.
SIGNIFICANT CUSTOMER - Pursuant to a special rate contract approved by the
MPUC, the rate for service provided by the Company to HoltraChem
Manufacturing Company, L.L.C. ("HMC"), a significant customer, is based in
part on a "revenue sharing" arrangement whereby the revenues for service vary
depending on the price and volume of product sold by HMC to its customers.
During 1995, 1996 and 1997, revenue sharing payments from HMC totaled
approximately $4.1 million, $3.5 million and $0.4 million, respectively.
HMC's principal business is selling chlorine and caustic soda, primarily to
the paper industry in the State of Maine. The Company is unable to predict
future market conditions for HMC s products.
OTHER ISSUES - See Item 7, "Management's Discussion and Analysis of Results
of Operations and Financial Condition - Recent Events Affecting The Electric
Utility Industry And The Company" for a discussion of the effect of other
significant issues and events on the Company.
CONSTRUCTION PROGRAM
--------------------
The Company's construction program consists of extensions and
improvements of its transmission and distribution facilities, construction of
new generating stations or capital improvements to existing generating
stations, capital improvements to the Company's internal computer and
information systems and other general projects within the Company's service
area. The Company projects that capital expenditures will aggregate
approximately $45-55 million in the period 1998 through 2000, the majority of
which are expected to be related to extensions and improvements of
transmission and distribution facilities.
RATES AND REGULATION
--------------------
RATE MATTERS - On March 3, 1997, the Company notified the MPUC of its intent
to file for a general increase in rates. Under Maine law, a utility must
ordinarily notify the MPUC two months in advance of the filing of a request
for a general increase in rates and the MPUC then has nine months to
investigate that request. However, under certain circumstances, the MPUC may
allow a utility to implement a requested increase in rates on a temporary
basis pending the conclusion of its investigation of the utility s request
for a general increase in rates.
On April 1, 1997, the Company filed with the MPUC a Petition for
Temporary Rates to increase its rates by an amount that would increase its
annual revenues by $10 million effective June 1, 1997. In doing so, the
Company cited the continuing impact on the Company s financial condition and
cash flow of the ongoing outage at the Maine Yankee nuclear power plant. The
Company also cited potential noncompliance with financial covenants contained
in its bank credit agreement (including the fixed charge coverage ratio,
discussed below) and the need to maintain adequate borrowing capacity for
working capital purposes, including mandatory debt repayments.
On June 26, 1997, the MPUC issued an order authorizing the Company to
change rates temporarily to increase its annual revenues by approximately
$5.1 million effective July 1, 1997. In doing so, however, the MPUC also
required the Company to accelerate the amortization of the deferred
regulatory asset associated with the 1993 buyout of one of its high-priced
non-utility generator contracts. As a result, revenue produced by the rate
increase did not increase earnings, but it did increase cash flow. Effective
December 12, 1997, the MPUC authorized the Company to revert to the original
amortization schedule of that deferred regulatory asset, thereby permitting
the temporary rate increase previously authorized to impact the Company s
earnings positively from that date on.
On February 9, 1998, the MPUC issued its final order on the Company s
request to increase its rates that it filed in March of 1997. Of the
approximately $22 million increase in annual revenue ultimately requested by
the Company, the MPUC authorized an increase of approximately $13.2 million
(which includes the $5.1 million temporary rate increase discussed above)
annually. While there are many factors that explain the difference between
the MPUC allowance and the Company s requested increase, much of that
difference is attributable to the proposed accounting treatment of various
costs and the deferral of other costs for future consideration, including the
deferral of certain costs associated with Maine Yankee. While those
accounting recommendations will affect the timing of receipt of revenues by
the Company and will require the Company to finance the payment of the
associated costs, they should not significantly affect the Company s earnings
during the period that the new rates are effective.
The MPUC order is based upon a determination that the Company should be
allowed to earn an annual return of 12.75% on common equity. It also includes
a rate plan under which the Company s rates will be subject to certain
reconciliations based upon actual expenditures by the Company and an annual
adjustment beginning on May 1, 1999 to account for inflation with an offset
for assumed increase in productivity. Other than those adjustments, the
Company will not change its rates unless its return on equity exceeds or
falls short of the allowed return by more than 350 basis points. If the
Company's return on equity falls outside of that bandwidth, 50% of the excess
or shortfall will be adjusted for in the Company's rates.
OTHER REGULATION - The MPUC regulates numerous other matters affecting the
Company, including financing, construction of generation and transmission
facilities, credit, collection, conservation and demand side management
programs, low income rate subsidies and purchases from non-utility power
producers.
Maine Yankee is subject to extensive regulation by the NRC. Under its
continuing jurisdiction, the NRC may, after appropriate proceedings, require
modification of nuclear power generating units for which operating or
nonoperating licenses have already been issued, or impose new conditions on
such permits or licenses.
The FERC regulates rates for sales of electricity to other utilities.
In addition, all the Company's hydroelectric projects are licensed by the
FERC. Under the Federal Power Act, upon not less than two years' notice the
United States is empowered to take over and thereafter to maintain and
operate a licensed hydroelectric project at or following the time a license
expires. If the United States elects this option, it must pay the licensee
its net investment in the project, not to exceed fair market value. If the
United States does not elect this option, the FERC may issue a new license to
the existing licensee upon such terms and conditions as are authorized or
required under the then-existing laws and regulations. It may also,
alternatively, issue a new license to a new licensee that has filed a
competing license application. In choosing between competing license
applications, the FERC must issue a license to the applicant whose proposal
is best adapted to serve the public interest.
The following table sets forth certain information with regard to such
licenses.
LICENSED ISSUE DATE OF CURRENT EXPIRATION
PROJECT CAPACITY ORIGINAL LICENSE DATE
------- --------- ---------------- -------------------
Ellsworth 8,900 KW April 12, 1977 December 31, 2018
Howland 1,875 KW September 12, 1980 September 30, 2000
Medway 3,400 KW March 29, 1979 March 31, 1999
Milford 6,400 KW December 31, 1969 Original license
expired
December 31, 1990
currently operating
on year-to-year
license.
Orono 2,332 KW November 10, 1977 Original license
expired
September 25, 1985
currently operating
on year-to-year
license.
Stillwater 1,950 KW August 10, 1978 Original license
expired
December 31, 1993
currently operating
on year-to-year
license.
Veazie 8,400 KW February 18, 1965 Original license
expired
September 25, 1985
currently operating
on year-to-year
license.
West Enfield* 13,000 KW February 3, 1970 June 26, 2024
- ------------------
* Through PHC, the Company has a 50% ownership interest in
Bangor-Pacific, which owns and operates the West Enfield Project.
The Company is actively pursuing the relicensing of the
projects listed above which are operating on year-to-year
licenses. Some of those relicensing proceedings had been delayed
pending completion by the FERC of an Environmental Impact
Statement ("EIS") of sections of the Penobscot River that was
being prepared in connection with the Company's licensing of the
Basin Mills project. That EIS was completed during 1997,
however, the FERC has not yet issued its final order with respect
to those projects. The Company has not received notice that the
United States will exercise its rights to take over any of the
Company's hydroelectric projects, nor have any competing
applications been filed. Under a Federal statute enacted by
Congress in 1986, participation in relicensing proceedings by
governmental agencies and other parties was allowed to increase
significantly. That increased participation may result in more
burdensome and costly conditions imposed upon licensees of
hydroelectric projects. The Company is unable to predict what
terms and conditions, if any, might be included in new licenses
or license renewals granted pursuant to the Company's licensing
applications, or what impact any such terms and conditions might
have on the Company's ability to operate and maintain the
projects economically.
SEABROOK
--------
GENERAL - The Company was a participant in Seabrook from 1978 to
1986, with an ownership interest of 2.17%, or 25 MW, in each of
the two 1150 MW units. Unit 2 was effectively canceled in 1984.
In late 1984, following a lengthy MPUC investigation, the
conclusion of which cast doubt on the wisdom of the Maine
utilities' continued participation in Seabrook, the Company began
efforts to sell its interest in the project. An agreement for
the sale of Seabrook to EUA Power Corp. was reached in mid-1985
and was consummated in November 1986.
In 1985, the MPUC approved an agreement among the Company,
the MPUC Staff and the Public Advocate addressing the recovery
through rates of the Company's investment in Seabrook ("Seabrook
Stipulation"). Although implementation of the Seabrook
Stipulation significantly improved the Company's financial
condition, substantial write-offs were required.
In August 1989, a comprehensive settlement agreement entered
into by current and former joint owners of Seabrook became
effective. Under the agreement, the signatories, representing
virtually all of the ownership interests in Seabrook,
relinquished claims against the lead owner, Public Service
Company of New Hampshire, arising out of Seabrook. As a part of
the settlement, former joint owners, including the Company, were
relieved of certain contingent liabilities.
JOINT VENTURES
--------------
WEST ENFIELD - In 1986, the Company formed PHC, a wholly-owned
subsidiary, which owns the Company's 50% ownership interest in
Bangor-Pacific, a joint venture with a development subsidiary of
Pacific Lighting Corporation. Bangor-Pacific undertook the
redevelopment of an old 3.8 MW hydroelectric plant which the
Company owned on the Penobscot River in Enfield and Howland,
Maine, into a 13 MW facility, the West Enfield Project, and now
operates the facility. Construction costs were shared equally by
the Company and the other joint venturer until Bangor-Pacific
completed its financing and took over ownership of the project,
which occurred in January 1987. Commercial operation of the
redeveloped West Enfield Project began in April 1988.
Bangor-Pacific financed the cost of the redevelopment
through the private placement of $40 million of 9.45% and 10.26%
fixed rate amortizing term notes due 1996 and 2008, respectively,
and $5 million of floating rate amortizing term notes due 1996
(collectively, the "Notes"). The Notes are secured by a mortgage
on the West Enfield Project and a security interest in a 50-year
power contract between the Company and Bangor-Pacific. The
holders of the Notes are without recourse to the joint venture
partners or their parent companies except that each partner has
agreed to make payments in an amount equal to 50% of any amounts
due and unpaid on the Notes but not exceeding distributions
received from Bangor-Pacific in the preceding twelve-month
period.
Under the power contract between the Company and
Bangor-Pacific, if the West Enfield Project operates as
anticipated, payments by the Company to Bangor-Pacific are
estimated at $7.5 million annually (without consideration of any
distributions by the joint venture to the partners). In 1997,
the Company paid approximately $7.1 million to Bangor-Pacific
under this power contract. The Company would be required to make
payments under the contract, regardless of whether any power were
delivered, of approximately $4 million per year. However, the
Company has the right to terminate the contract upon thirty-days'
written notice if the failure to deliver power continues for a
period of 12 consecutive months.
NEPOOL/HYDRO-QUEBEC - The NEPOOL member utilities and
Hydro-Quebec, a utility operating within the province of Quebec,
Canada ("Hydro-Quebec"), have constructed facilities required to
interconnect the electric systems in New England with the
electric system of Hydro-Quebec. The initial stage of the
interconnection consists of a completed and operational 450
kilovolt ("KV") transmission line from the Hydro-Quebec system to
a terminal having an approximate rating of 690 MW at the
Comerford Generating Station ("Comerford") on the Connecticut
River in New Hampshire. The subsequent stage, HQ-II, completed
in 1990, increased the interconnection transfer capability to
approximately 2000 MW by means of a transmission line from
Comerford to a terminal facility at the Sandy Pond Substation in
Massachusetts.
In 1990, the Company formed Bangor Var Co., a wholly owned
corporate subsidiary, the sole function of which is to own a 50%
interest in Chester SVC Partnership ("Chester"), a general
partnership which owns the static var compensator ("SVC"),
electrical equipment which supports the HQ-II transmission line.
A wholly-owned subsidiary of Central Maine Power Company ("CMP")
owns the other 50% interest in Chester. Chester has financed the
acquisition and construction of the SVC through the issuance of
$33 million in principal amount of 10.48% senior notes due 2020,
and up to $3.2 million principal amount of additional notes due
2020 (collectively, the "SVC Notes"). The holders of the SVC
Notes are without recourse to the partners or their parent
companies and may only look to Chester and to the collateral for
payment. Bangor Var Co. accounts for its investment in Chester
under the equity method. Bangor Var Co.'s financial results are
included in the Company's consolidated financial statements.
The New England utilities which participate in HQ-II have
agreed under a FERC-approved contract to bear the cost of
Chester, on a cost-of-service basis, which includes a return on
and of all capital costs.
EMPLOYEES
---------
At December 31, 1997, the Company had 421 full time
employees approximately 53% of whom were represented by a local
union affiliated with the International Brotherhood of Electrical
Workers (AFL-CIO). Union membership is divided into two
bargaining units, 177 employees engaged in electrical, line and
meter related functions and 48 employees engaged in customer
service and credit related functions. The present contract with
electrical, line and meter related workers expires December 31,
1998. The present contract with customer service and credit
related workers expires December 31, 1999. The Company believes
that its relations with its employees are satisfactory.
POWER SUPPLY SOURCES
--------------------
GENERAL - In order to meet its load growth and reserve
obligations under NEPOOL, the Company, in addition to utilizing
its own generating capacity, acquires capacity and energy through
contracts with other utilities and independent generation
facilities and through joint ownership of generating facilities.
The Company estimates that it has, or can acquire, sufficient
generating capacity, through a combination of wholly-owned and
jointly-owned generating facilities and purchased power
contracts, to meet its anticipated load growth through the
1990's.
The Company's sources of generation for electric sales to its
customers (net of off-system sales to other utilities) for 1997,
1996 and 1995 by type of fuel is shown below.
SOURCE 1997 1996 1995
------ ---- ---- ----
Hydroelectric (Company*)....... 13% 17% 14%
Nuclear Generation (Maine Yankee) 0% 19% 1%
Oil (Company)................... 4% 2% 3%
Biomass/Refuse (purchased)...... 6% 6% 6%
NEPOOL/other purchases.......... 77% 56% 76%
---- ---- ----
Total....................... 100% 100% 100%
---- ---- ----
- ---------------
* Includes purchases from the West Enfield Project, in which the
Company has a 50% ownership interest.
COMPANY-OWNED GENERATION
------------------------
The Company, as a tenant in common with other utilities,
owns 8.33%, or approximately 50 MW, of William F. Wyman Unit No.
4 ("Wyman 4"), a 600 MW oil-fired generating unit in Yarmouth,
Maine, constructed and operated by CMP as the lead owner. The
Company is entitled to 8.33% of the energy produced by Wyman 4
and pays the same percentage of the unit's operating expenses.
The Company owns two oil-fired generating units located at
its Graham Station in Veazie, Maine ("Graham"), currently in
deactivated reserve status, having a total capacity of 47 MW, as
well as eleven internal combustion generation units located at
three stations having a total capacity of 21 MW. The Company
also owns seven hydroelectric stations having a total capacity of
about 30 MW (excluding PHC's ownership interest in the West
Enfield Project). All of the Company's hydroelectric stations
are licensed under the Federal Power Act. See "Rates and
Regulation."
On February 9, 1998, the Company filed its plan for
divesting its generation-related assets with the MPUC in
accordance with the electric utility industry restructuring
provisions signed into law last year. This plan could result in
the identification of proposed purchasers by mid-summer 1998.
Further regulatory approvals will then be required to actually
complete the sale. The Company is offering a total of 166 MW of
generation assets, including both Company-owned facilities and
the resale of certain purchase power contracts that extend beyond
March 1, 2000, the scheduled implementation date for retail
electric competition within the State of Maine.
In addition, the Company owns approximately 600 miles of
transmission lines and approximately 3,600 miles of distribution
lines to serve its customers. Other properties consist of
office, garage and warehouse facilities at various locations in
its service area.
POWER PURCHASE CONTRACTS
------------------------
The following chart sets forth information concerning the
Company's major power purchase contracts exclusive of Maine
Yankee.
CONTRACTED QUANTITY OF
SELLER TERM OF CONTRACT CAPACITY OR ENERGY
- ---------- ---------------------- ------------------------
Bangor-Pacific* August 21, 1986 through Total output of energy
(Hydroelectric) May 31, 2024, at which from facility with name
time Company can either plate rating of not more
purchase the facility than 16 MW
at its fair market value
or extend the contract
for an additional 15
years (if the West
Enfield Project's FERC
license is also
extended)
Penobscot Energy January 21, 1984 through Total output of firm
Recovery Company February 28, 2018 energy; minimum annual
("PERC")(Refuse) delivery of 105,000,000
KWH up to a maximum of
166,440,000 KWH per
calendar year
Great Northern No Fixed Term Approximately 20 MW
Paper Co.
(Cogeneration)
New England November 1, 1994 through 30 MW and associated energy
Power Company October 31, 1999 from two designated nuclear
units
New England January 1, 1996 through 25 MW and associated energy
Power Company October 31, 1998 from a designated system
contract
New Brunswick April 1, 1996 through 10 MW system purchase of
Power October 31, 1998 capacity and energy (months
of April-October only)
New Brunswick June 8, 1997 through 60 MW system purchase of
Power December 31, 1999 capacity and energy
Great Bay Power January 1,1996 through 10 MW and associated energy
Corporation March 31, 1998 from a designated nuclear
(through PECO unit (November-March only)
Energy Company)
- -----------------
* Through PHC, the Company has a 50% ownership interest in
Bangor-Pacific, which owns and operates the West Enfield Project.
For further details with respect to certain of these
contracts, see Note 6 of the Notes to Consolidated Financial
Statements.
The Company purchases energy from, and sells energy to, New
Brunswick Electric Power Commission utilizing the transmission
facilities of Maine Electric Power Company, Inc. ("MEPCO"), in
which the Company owns a 14.2% equity interest. MEPCO owns and
operates a 345 KV transmission line running from Wiscasset, Maine
to the Maine/New Brunswick border. The Company interconnects
with this line in Orrington, Maine.
The Company also purchases energy on a short-term basis from
time to time when it is economical to do so to displace higher
cost energy from other sources.
MAINE YANKEE
------------
General - The Company owns 7% of the common stock of Maine
Yankee, which owns and, prior to its permanent closure in 1997,
operated an 880 MW nuclear generating plant in Wiscasset, Maine.
Maine Yankee, which had commenced commercial operation on January
1, 1973, is the only nuclear facility in which the Company has an
ownership interest. The Company s equity ownership in the plant
had entitled the Company to about 7% of the output pursuant to a
cost-based power contract. Pursuant to a contract with Maine
Yankee, the Company is obligated to pay its pro rata share of
Maine Yankee's operating expenses, including decommissioning
costs. In addition, under a Capital Funds Agreement entered into
by the Company and the other sponsor utilities, the Company may
be required to make its pro rata share of future capital
contributions to Maine Yankee if needed to finance capital
expenditures.
PERMANENT SHUTDOWN OF THE MAINE YANKEE PLANT - On August 6, 1997,
the Board of Directors of Maine Yankee voted to permanently cease
power operations at its nuclear generating plant at Wiscasset,
Maine (the "Plant") and to begin decommissioning the Plant. As
reported in detail in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, its Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1997, June 30, 1997
and September 30, 1997 and its Reports on Form 8-K dated May 27,
1997 and February 19, 1997, and reported in more condensed form
below, the Plant experienced a number of operational and
regulatory problems and has been shut down since December 6,
1996. The decision to close the Plant permanently was based on
an economic analysis of the costs, risks and uncertainties
associated with operating the Plant compared to those associated
with closing and decommissioning it. The Plant's operating
license from the NRC was scheduled to expire on October 21, 2008.
RECENT OPERATING HISTORY - The Plant generally provided reliable
and low-cost power from the time it commenced operations in late
1972 to 1995. Beginning in early 1995, however, Maine Yankee
encountered various operational and regulatory difficulties with
the Plant. In 1995, the Plant was shut down for almost the
entire year to repair a large number of steam generator tubes
that were exhibiting defects. Shortly before the Plant was to go
back on-line in December 1995, a group with a history of opposing
nuclear power released an undated, unsigned, anonymous, letter
alleging that in 1988 Yankee Atomic (then an affiliated
consultant of Maine Yankee) and Maine Yankee had used the results
of a faulty computer code as a basis to apply to the NRC for an
increase in the Plant's power output. In response to the
allegation, on January 3, 1996, the NRC issued a Confirmatory
Order that restricted the Plant to 90 percent of its licensed
thermal operation level, which restriction was still in effect
when the Plant was permanently shut down.
As a result of the controversy associated with the
allegations, the NRC, at the request of the Governor of Maine,
conducted an intensive Independent Safety Assessment ("ISA") of
the Plant in the summer and fall of 1996. On October 7, 1996,
the NRC issued its ISA report, which found that while the Plant
had been operated safely, there were weaknesses that needed to be
addressed, which would require substantial additional spending by
Maine Yankee. On December 10, 1996, Maine Yankee responded to
the ISA report, acknowledge many of the weaknesses, and
committed to revising its operations and procedures to address
the NRC's criticisms.
Another result of the controversy associated with the
allegations was an investigation of Maine Yankee initiated by the
NRC's Office of Investigations ("OI"), which, in turn, referred
certain issues to the United States Department of Justice ("DOJ")
for possible criminal prosecution. Subsequently, on September
27, 1997, the DOJ, through the United States Attorney for Maine,
announced that its review had revealed no grounds for criminal
prosecution. The Company believes that the OI investigation,
however, could ultimately result in the imposition of civil
penalties, including fines, on Maine Yankee.
In 1996 the Plant was generally in operation at the 90-
percent level from late January to early December, except for a
two-month outage from mid-July to mid-September. The Plant was
shut down again on December 6, 1996, to address several concerns,
and has not operated since then. The precipitating event causing
the shutdown was the need to evaluate and resolve cable-
separation compliance issues, and on December 18, 1996, the NRC
issued a Confirmatory Action Letter requiring the Plant to remain
shut down until Maine Yankee's plan for resolving the cable-
separation issues was accepted by the NRC. Subsequently, Maine
Yankee uncovered additional issues, including among others, the
possibility of having to replace defective fuel assemblies,
address additional cable-separation issues, and determine the
condition of the Plant's steam generators, all of which
contributed to further operational uncertainty. On January 29,
1997, the Plant was placed on the NRC's Watch List, and on
January 30, 1997, the NRC issued a supplemental Confirmatory
Action Letter requiring the resolution of additional concerns
before the Plant could be restarted.
In December 1996 Maine Yankee requested proposals from
several utilities with large and successful nuclear programs to
provide a management team, and ultimately contracted with Entergy
Nuclear, Inc., effective February 13, 1997, for management
services that included providing a new president and regulatory
compliance officer. The Entergy-provided management team made
progress in addressing technical issues, but a number of
operational and regulatory uncertainties remained. On May 27,
1997, the Board of Directors of Maine Yankee voted to minimize
spending while preserving the options of restarting the Plant or
conveying ownership interests to a third party. After
unsuccessful negotiations with one prospective purchaser, Maine
Yankee found no other interest in purchasing the Plant and, based
on its economic analysis, closed the Plant permanently.
As required by the NRC, on August 7, 1997, Maine Yankee
certified to the NRC that Maine Yankee had permanently ceased
operations and that all fuel assemblies had been permanently
removed from the Plant's reactor vessel. On August 27, 1997,
Maine Yankee filed the required Post-Shutdown Activities Report
with the NRC, describing its planned post-shutdown activities and
a proposed schedule.
MANAGEMENT AUDIT - On September 2, 1997, the MPUC released the
report of a consultant it had retained to perform a management
audit of Maine Yankee for the period January 1, 1994, to June 30,
1997. The report contained both positive and negative
conclusions, the latter including: that Maine Yankee's decision
in December 1996 to proceed with the steps necessary to restart
the Plant was "imprudent", that Maine Yankee's May 27, 1997
decision to reduce restart expenses while exploring a possible
sale of the Plant was "inappropriate", based on the consultant's
finding that a more objective and comprehensive competitive
analysis at that time "might have indicated a benefit for
restarting" the Plant; and that those decisions resulted in Maine
Yankee incurring $95.9 million in "unreasonable" costs. On
October 24, 1997, the MPUC issued a Notice of Investigation
initiating an investigation of the shutdown decision and of the
operation of the Plant prior to shutdown, and announced that it
had directed its consultant to extend its review to include those
areas. The Company believes the report's negative conclusions
are unfounded and may be contradictory. The Company has been
charging its share of the Maine Yankee expenses against income,
and believes it would have substantial constitutional and
jurisdictional grounds to challenge any effort in an MPUC
proceeding to alter wholesale Maine Yankee rates made effective
by the FERC. On November 7, 1997, Maine Yankee initiated a legal
challenge to the MPUC investigation in the Maine Supreme Judicial
Court alleging that such an investigation falls exclusively
within the jurisdiction of the FERC and that the MPUC
investigation is therefore barred on constitutional grounds. The
Company filed a similar legal challenge on the same day. The
MPUC subsequently stayed its investigation pending the outcome of
Maine Yankee's FERC rate case, in which the MPUC is
participating, while indicating that its consultant would
continue its extended review.
MAINE YANKEE DEBT RESTRUCTURING AND FERC RATE PROCEEDING - Maine
Yankee entered into agreements in August 1997 with the holders of
its outstanding First Mortgage Bonds and its lender banks (the
"Standstill Agreements") under which the bondholders and banks
agreed that they would not assert that the August 1997 voluntary
permanent shutdown of the Plant constituted a covenant violation
under Maine Yankee's First Mortgage Indenture or its two bank
credit agreements. The parties also agreed in the Standstill
Agreements to maintain Maine Yankee's bank borrowing at a level
below that of the prior aggregate bank commitments, which level
Maine Yankee considered adequate for its foreseeable needs. The
Standstill Agreements, as extended in October 1997, were to
terminate on January 15, 1998, by which date Maine Yankee was to
have reached agreement on restructured debt arrangements
reflecting its decommissioning status. On November 6, 1997,
Maine Yankee filed a rate proceeding with the FERC reflecting the
Plant's decommissioning status and requesting an effective date
of January 15, 1998, for the amendments to Maine Yankee's Power
Contracts and Additional Power Contracts, which revise Maine
Yankee's wholesale rates and clarify and confirm the obligations
of Maine Yankee's sponsors to continue to pay their shares of
Maine Yankee's costs during the decommissioning period.
On January 14, 1998, the FERC issued an "Order Accepting for
Filing and Suspending Power Sales Contract Amendment, and
Establishing Hearing Procedures" (the "FERC Order") in which the
FERC accepted for filing the rates associated with the amended
Power Contracts and made them effective January 15, 1998, subject
to refund. The FERC also granted intervention requests,
including among others, those of the MPUC, Maine Yankee's largest
bondholder, and two of its lender banks, denied the request of an
intervenor group to summarily dismiss part of the filing, and
ordered that a public hearing be held concerning the prudence of
Maine Yankee's decision to shut down the Plant and on the
justness and reasonableness of Maine Yankee's proposed rate
amendments. The Company expects the prudence issue to be pursued
vigorously by several intervenors, including among others the
MPUC, which stayed its own prudence investigation pending the
outcome of the FERC proceeding after the jurisdictional challenge
by Maine Yankee and the Company discussed above. The Company
cannot predict the outcome of the FERC proceeding.
On January 15, 1998, Maine Yankee, its bondholders and
lender banks revised the Standstill Agreements and extended their
term to April 15, 1998, subject to satisfying certain milestone
obligations during the term of the extension. One such
obligation was that Maine Yankee must have accepted, by February
12, 1998, an underwritten commitment to refinance its bonds and
bank debt, subject only to closing conditions reasonably capable
of being satisfied by April 15, 1998, and reasonably satisfactory
to the bondholders and banks. Maine Yankee accepted such a
commitment prior to the deadline, received regulatory approval of
the refinancing on March 9, 1998, and is negotiating final loan
documentation and preparing for a closing before April 15.
OTHER MAINE YANKEE SHAREHOLDERS - Higher nuclear-related costs
are also affecting other stockholders of Maine Yankee in varying
degrees. Central Maine Power Company, the largest individual
stockholder in Maine Yankee with a 38% ownership interest,
reported in February, 1998 that it expected to require an
additional retail rate increase under its MPUC-approved
Alternative Rate Plan due to its poor financial performance
resulting from increased Maine Yankee-related obligations. Under
that Alternative Rate Plan, Central Maine is permitted to recover
through a retail rate increase only one half of the difference
between the low end of return on equity bandwidth of 7.05% and
its reported 1997 earnings of 1.04%. Maine Public Service
Company, a 5% stockholder, cited problems in satisfying financial
covenants in loan documents, reduced its common stock dividend
substantially in early March 1997 and obtained rate relief.
Northeast Utilities (20% stockholder through three subsidiaries),
which is also adversely affected by the substantial additional
costs associated with the three shut-down Millstone nuclear units
and the permanently shut-down Connecticut Yankee unit, as well as
significant regulatory issues in Connecticut and New Hampshire,
has implemented an indefinite suspension of its quarterly common
stock dividends. Largely as a result of nuclear-related costs,
Northeast Utilities reported a loss of $135 million for 1997 and
continues to experience difficulty in satisfying loan covenants.
A default by a Maine Yankee stockholder in making payments under
its Power Contract or Capital Funds Agreement could have a
material adverse effect on Maine Yankee, depending on the
magnitude of the default, and would constitute a default under
Maine Yankee's bond indenture and its two major credit agreements
unless cured within applicable grace periods by the defaulting
stockholder or other stockholders. The Company cannot predict,
however, what effect, if any, the financial difficulties being
experienced by some Maine Yankee stockholders will have on Maine
Yankee or the Company.
NUCLEAR FUEL STORAGE - Federal legislation enacted in 1987
directed the DOE to proceed with the studies necessary to develop
and operate a permanent high-level waste (spent fuel) disposal
site a Yucca Mountain, Nevada. The legislation also provided for
the possible development of a Monitored Retrievable Storage
("MRS") facility and abandoned plans to identify and select a
second permanent disposal site. An MRS facility would provide
temporary storage for high-level waste prior to eventual
permanent disposal. The DOE has indicated that the permanent
disposal site is not expected to open before 2010, although
originally scheduled to open in 1998.
On April 15, 1997, the United States Senate approved
the"Nuclear Waste Policy Act of 1997", (S. 104), which would
reform the federal policy for managing spent nuclear fuel and
instruct the DOE to develop an integrated management system,
including a central storage facility, for such fuel. The bill
would require the DOE to accept such nuclear fuel from commercial
nuclear power plants and would establish a licensing process that
would result in the storage of such fuel at a central federal
facility beginning no later than June 30, 2003, if all the
necessary approvals are obtained. The DOE would also be required
to continue site characterization work at Yucca Mountain as a
permanent disposal site. On October 30, 1997, the House of
Representatives approved a bill (H.R. 1270) with generally
similar objectives. Action to resolve the differences in the two
bills was deferred to 1998.
In June 1994, several nuclear utilities other than Maine
Yankee filed suit against the DOE. The utilities sought a
declaration from the United States Court of Appeals for the
District of Columbia that the Nuclear Waste Policy Act of 1982
required the DOE to take responsibility for spent nuclear fuel in
1998. On July 23, 1996, the court held that the DOE is obligated
"to start disposing of [spent nuclear fuel] no later than January
31, 1998." The DOE did not appeal the decision, but announced in
December 1996 that it anticipated it would be unable to start
accepting spent nuclear fuel for disposal by January 31, 1998. A
large number of nuclear utilities and state regulators filed a
new lawsuit against the DOE in January 1997 seeking to force the
DOE to honor its obligation to store spent nuclear fuel and
seeking other appropriate relief. On November 14, 1997, the U.S.
Court of Appeals for the District of Columbia Circuit confirmed
the DOE's obligation. On February 19, 1998, Maine Yankee filed a
petition in the same court seeking to compel the DOE to take
Maine Yankee's spent fuel from the Plant site "as soon as
physically possible," alleging that removing the spent fuel on
the DOE's indicated schedule would delay the decommissioning of
the Maine Yankee Plant indefinitely. The Company cannot predict
the ultimate results of the lawsuits.
NUCLEAR INSURANCE - In accordance with the Price-Anderson Act,
the limit of liability for a nuclear-related accident is
approximately $8.9 billion. The primary layer of insurance for
the liability is $200 million of coverage provided by the
commercial insurance market. The secondary coverage is
approximately $8.7 billion, based on 110 licensed reactors. The
secondary layer is based on a retrospective premium assessment of
$79.275 million per nuclear accident per licensed reactor,
payable at a rate not exceeding $10 million per year per
accident. In addition, the retrospective premium is subject to
inflation-based indexing at five-year intervals and, if the sum
of all public liability claims and legal costs arising from any
nuclear accident exceeds the maximum amount of financial
protection, each licensee can be assessed an additional 5 percent
($3.775 million) of the maximum retrospective assessment.
In addition to the insurance required by the Price-Anderson
Act, Maine Yankee carries all-risk nuclear property damage
insurance in the amount of $500 million plus additional excess
nuclear property insurance. Maine Yankee, in recognition of the
reduced risk posed by the shutdown and defueled nuclear reactor,
reduced the amount of excess nuclear property damage insurance
purchased from the nuclear electric utility insurance company,
effective September 15, 1997, from $2.25 billion to $560 million.
This reduced the total amount of nuclear property damage coverage
to $1.06 billion, the minimum amount of nuclear property damage
insurance then required by regulation. The all-risk nuclear
property damage insurance of $500 million is obtained from the
commercial insurance market and is not subject to retrospective
premium assessments. The excess insurance of $560 million is
provided by a nuclear electric utility industry insurance company
through a combination of current premiums, retrospective premium
assessments and reinsurance. Each participating utility may be
assessed a retrospective premium of up to 5 times its premium
with respect to industry losses in any policy year.
LOW-LEVEL WASTE DISPOSAL - The federal Low-Level Radioactive
Waste Policy Amendments Act (the "Waste Act"), enacted in 1986,
required operating disposal facilities to accept low-level
nuclear waste from other states until December 31, 1992. Maine
did not satisfy its milestone obligation under the Waste Act
requiring submission of a site license application by the end of
1991, and therefore, became subject to surcharges on its waste
and did not have access to regulated disposal facilities after
the end of 1992. Maine Yankee then began storing all low-level
waste generated at an on-site storage facility. On July 1, 1995,
however, the State of South Carolina restored access to its
facility and Maine Yankee has been shipping its low-level waste
to the South Carolina facility for disposal.
The states of Maine, Texas and Vermont have been pursuing
the implementation of a compact for the disposal of low-level
waste at a site in Texas. The compact provides for Texas to take
Maine's low-level waste over a 30-year period for disposal at a
planned facility in west Texas. In return, Maine would be
required to pay $25 million, assessed to Maine Yankee by the
State of Maine, payable in two equal installments, the first
after ratification by Congress and the second upon commencement
of operation of the Texas facility. In addition, the company
would be assessed a total of $2.5 million for the benefit of the
Texas county in which the facility would be located and would
also be responsible for its pro-rata share of the Texas governing
commission's operating expenses. The Maine Low-Level Radioactive
Waste Authority suspended its search for a suitable disposal site
in Maine and ceased operations in 1994.
The compact is before the Congress for ratification and was
approved by the House Of Representatives in October 1997. The
Senate has deferred action on the bill until 1998. Since the
Plant has permanently stopped operating, the compact is less
beneficial to Maine Yankee than it would have been if the Plant
had remained in operation, due to the new schedule for Maine
Yankee's shipments and the anticipated schedule for opening the
Texas facility. Maine Yankee cannot predict whether the final
required ratification of the Texas compact or other regulatory
approvals will be obtained, but Maine Yankee intends to utilize
its on-site storage facility as well as dispose of low-level
waste at the South Carolina site or other available sites in the
interim and continue to cooperate with the State of Maine in
pursuing all appropriate options.
HAZARDOUS SUBSTANCE SITE - Maine Yankee has been notified by the
Maine Department of Environmental Protection ("DEP") that it is
one of many potentially responsible parties under the Maine
Uncontrolled Hazardous Substance Sites law for having arranged
for the transport of hazardous substances to sites owned by the
Portland Bangor Waste Oil Company that have been designated
uncontrolled hazardous substance sites by the DEP. Under the
Maine law, each responsible party is jointly and severally liable
for costs associated with the abatement, cleanup or mitigation of
the hazards at such a site. Since the investigations by the DEP
and Maine Yankee are in their early stages and a large number of
potentially responsible parties is involved, The Company cannot
now predict the amount of costs that Maine Yankee will ultimately
be required to assume. Environmental costs that are unrelated to
the decommissioning and dismantlement of the Plant site could
generally be considered to be operation and maintenance costs to
be recovered through Maine Yankee's billing process.
Site characterization work at the Plant site, an initial
part of the decommissioning process, and related activities could
give rise to additional environmental issues.
ENVIRONMENTAL MATTERS
---------------------
The Company is regulated by the United States Environmental
Protection Agency ("EPA") as to compliance with the Federal Water
Pollution Control Act, the Clean Air Act, and several federal
statutes governing the treatment and disposal of hazardous
wastes. The Company is also regulated by the Maine Department of
Environmental Protection ("MDEP") under various Maine
environmental statutes. Although the Company is actively engaged
in complying with these federal and state acts and statutes, the
costs of which are significant, it has not, to date, encountered
material difficulties in connection with such compliance.
In 1992, the Company received notice from the MDEP that it
was investigating the cleanup of several sites in Maine that were
used in the past for the disposal of waste oil and other
hazardous substances, and that the Company, as a generator of
waste oil that was disposed at those sites, may be liable for
certain cleanup costs. The Company learned in October 1995 that
the EPA placed one of the sites on the National Priorities List
("NPL") under the Comprehensive Environmental Response,
Compensation, and Liability Act.
With respect to the NPL site, the Company was one of 15 PRPs
to receive a Special Notice from the EPA in May 1997, requiring
reimbursement of past costs, amounting to $5,639,780, as well as
future costs at the site. The Special Notice also urged the PRPs
to enter into an Administrative Order on Consent to conduct or
finance response actions at the site. In response to the Special
Notice, a group of PRPs, including Bangor Hydro, is close to
signing an agreement with the EPA to fund ongoing monitoring at
the site. The Company's share of this effort is expected to be
approximately $20,000. According to the EPA's volumetric
ranking, the Company's ranks 13th with a total contribution to
the site of 1.10781 percent.
As to the other site, which has been listed by the MDEP as
an Uncontrolled Hazardous Substance Site, the Company is
considered a de minimis generator.
The Company estimates that during 1998 it will spend
approximately $370,000 in operations expenses and $75,000 in
capital expenditures to comply with environmental standards for
air, water and hazardous materials.
EXECUTIVE OFFICERS OF THE COMPANY
---------------------------------
The following are the present executive officers of the
Company with all positions and offices held. There are no family
relationships between any of them nor are there any arrangements
pursuant to which any were selected as officers.
Name Age Office and Year First
Elected
- ----- --- ---------------------
Robert S. Briggs 54 President & Chief
Executive
Officer since
January 1991
Carroll R. Lee 48 Senior Vice
President and
Chief Operating Officer
since
December, 1996
Frederick S. Samp 47 Vice President-Finance &
Law since 1995; Treasurer
since
1995; Chief Financial
Officer
since 1995
Paul A. LeBlanc 50 Vice President - Human
Resources
& Information Services
since
November, 1996
Each of the executive officers has for more than the last
five years been an officer or employee of the Company. Mr.
Briggs was Vice President and General Counsel from 1979 until
1987, Vice President-Law and Public Affairs from 1987 until 1988,
Executive Vice President & Chief Operating Officer from 1988
until 1989 and President and Chief Operating Officer from 1989
until 1991. From 1983 through 1984, Mr. Lee was Vice
President-Power Supply and Planning and he served as Vice
President-Engineering and Operations from 1985 until 1987, Vice
President-Planning & Development from 1987 until 1990 and Vice
President-Operations from 1990 until 1996. Mr. Samp was
Corporate Counsel, Corporate Secretary and Clerk from 1985 until
1988 and General Counsel, Corporate Secretary and Clerk from 1988
until 1995. Mr. LeBlanc was Vice President-Administration from
1978 until 1987, Vice President-Customer Services from 1987 until
1988 and Assistant to the President from 1988 until 1996.
ITEM 3 LEGAL PROCEEDINGS
- ------ -----------------
See Note 9 to the Company's Financial Statements for a
discussion of potential liabilities under the Comprehensive
Environmental Response, Compensation, and Liability Act.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
Not applicable.
PART II
- -------
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
- ------ -------------------------------------------------
STOCKHOLDER MATTERS
-------------------
As of December 31, 1997, there were 6,868 holders of record
of the Company's common stock.
The Company's common stock is traded on the New York Stock
Exchange ("NYSE") under the symbol "BGR".
The following table sets forth the high and low prices for
the Common Stock as reported by the NYSE. The prices shown do
not include commissions.
DIVIDENDS
DECLARED
FISCAL PERIOD HIGH LOW PER SHARE
- ------------- ---- --- ---------
1996
- ----
First Quarter................ $12 1/2 $10 1/4 $.18
Second Quarter............... 11 10 .18
Third Quarter................ 10 3/ 9 7/8 .18
Fourth Quarter............... 10 3/8 9 1/4 .18
1997
- ----
First Quarter................ $9 1/2 $6 $.00
Second Quarter............... 6 1/4 4 7/8 .00
Third Quarter................ 6 3/8 5 1/4 .00
Fourth Quarter............... 6 11/16 5 1/16 .00
1998
- ----
First Quarter
(through March 20, 1998).. $8 1/2 $6 1/4 $.00
In June of 1995, the Board reduced the quarterly dividend on common stock
by $.15 from $.33 per share to $.18 per share, resulting in a reduction in
the indicated annual rate from $1.32 to $.72. At its March 19, 1997 meeting,
the Board of Directors determined that the payment of common stock dividends
should be suspended, and to date, no additional common stock dividend has
been declared.
The Company's credit agreements with its lending banks and the Finance
Authority of Maine contain a number of covenants keyed to the Company's
financial condition and performance. One such covenant prohibits the Company
from paying out in dividends on its common stock more than 50% of its
earnings applicable to common stock in any calendar year.
ITEM 6
- ------
SELECTED FINANCIAL DATA
- -----------------------
SIX YEAR STATISTICAL SUMMARY
Bangor Hydro-Electric Company
1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
MEGAWATT HOURS (MWH) GENERATED AND PURCHASED
Hydro Generation (Company) 262,377 321,532 275,810 271,616 275,694 305,011
Nuclear Generation (Maine Yankee) - 348,719 13,606 456,871 395,665 368,641
Oil (Company) 69,580 26,912 50,706 35,759 47,115 80,770
Biomass/Refuse 159,990 163,279 177,558 190,218 281,260 307,451
NEPOOL/Other Purchases 1,583,093 1,359,116 1,540,530 958,363 937,431 767,306
- --------------------------------------------------------------------------------------------------------------------------
Total Generated & Purchased 2,075,040 2,219,558 2,058,210 1,912,827 1,937,165 1,829,179
Less Line Losses and Company Use 141,426 140,128 136,908 135,561 131,764
- --------------------------------------------------------------------------------------------------------------------------
Remainder - MWH sold 2,075,040 2,078,132 1,918,082 1,775,919 1,801,604 1,697,415
==========================================================================================================================
CLASSIFICATION OF SALES - MWH
Residential 533,161 536,490 513,076 516,470 515,242 521,889
Commercial 523,043 512,433 511,720 507,285 500,488 490,861
Industrial 680,226 647,985 686,386 611,876 615,314 563,734
Lighting 8,780 8,945 9,547 9,416 9,590 9,876
Wholesale 3,841 4,486 10,961 11,705 10,311 10,462
- --------------------------------------------------------------------------------------------------------------------------
Total MWH Billed to Customers 1,749,051 1,710,339 1,731,690 1,656,752 1,650,945 1,596,822
Unbilled Sales - Net Increase (Decrease) 33,011 2,998 4,658 6,366 2,001 (11,832)
- --------------------------------------------------------------------------------------------------------------------------
Total Delivered Sales (MWH) 1,782,062 1,713,337 1,736,348 1,663,118 1,652,946 1,584,990
(Less) Interruptible Sales 265,438 237,553 295,818 231,128 254,359 208,066
- --------------------------------------------------------------------------------------------------------------------------
Total Firm Delivered Sales (MWH) 1,516,624 1,475,784 1,440,530 1,431,990 1,398,587 1,376,924
Off-System Sales 145,680 364,795 181,734 112,801 148,658 112,425
- --------------------------------------------------------------------------------------------------------------------------
Total Energy Sales (MWH) 1,927,742 2,078,132 1,918,082 1,775,919 1,801,604 1,697,415
==========================================================================================================================
ELECTRIC OPERATING REVENUES AND EXPENSES (000'S)
OPERATING REVENUES
Residential 67,532 $ 66,805 $ 66,061 $ 64,008 $ 64,244 $ 66,429
Commercial 55,965 54,168 55,030 53,410 53,599 53,806
Industrial 41,356 38,947 39,929 37,040 39,508 39,340
Lighting 2,065 2,032 2,051 2,010 1,915 1,933
Wholesale 310 314 859 937 903 895
- --------------------------------------------------------------------------------------------------------------------------
Total Revenue From Customers 167,228 $ 162,266 $ 163,930 $ 157,405 $ 160,169 $ 162,403
Unbilled Sales-Net Increase (Decrease) 2,375 408 210 1,450 (237) (964)
- --------------------------------------------------------------------------------------------------------------------------
Total Revenue 169,603 $ 162,674 $ 164,140 $ 158,855 $ 159,932 $ 161,439
(Less) Interruptible Revenue 11,215 9,537 11,149 8,450 8,876 8,331
- --------------------------------------------------------------------------------------------------------------------------
Total Firm Revenue 158,388 $ 153,137 $ 152,991 $ 150,405 $ 151,056 $ 153,108
Off-System Revenue 13,615 18,384 14,098 12,750 15,326 13,857
- --------------------------------------------------------------------------------------------------------------------------
Total Operating Revenues 183,218 $ 181,058 $ 178,238 $ 171,605 $ 175,258 $ 175,296
==========================================================================================================================
OPERATING EXPENSES
Fuel Used in Generation 92,792 $ 78,477 $ 98,684 $ 104,132 $ 116,386 $ 114,943
Operating and Maintenance Expense 32,471 32,441 35,711 33,498 29,474 27,042
Depreciation and Amortization 35,104 29,965 20,544 10,333 6,447 6,789
Taxes 3,168 10,249 6,306 8,803 8,866 9,499
- --------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 163,535 $ 151,132 $ 161,245 $ 156,766 $ 161,173 $ 158,273
==========================================================================================================================
SUMMARY OF OPERATIONS (000'S)
Operating Revenue 187,324 $ 187,374 $ 184,914 $ 174,098 $ 177,972 $ 176,789
Operating Expenses 163,535 151,132 161,245 156,766 161,173 158,273
Other Income (including equity AFDC) 1,292 1,466 760 1,308 (2,657)* 1,690
Interest Expense (net of borrowed AFDC) 25,467 26,425 20,092 11,183 8,805 9,952
- --------------------------------------------------------------------------------------------------------------------------
Net Income (386) $ 11,283 $ 4,337 $ 7,457 $ 5,337 * $ 10,254
Less Preferred Dividends 1,376 1,537 1,702 1,652 1,646 1,613
- --------------------------------------------------------------------------------------------------------------------------
Earnings on Common Stock (1,762) $ 9,746 $ 2,635 $ 5,805 $ 3,691 * $ 8,641
==========================================================================================================================
SELECTED FINANCIAL DATA
Total Assets (000's) 600,583 $ 556,629 $ 566,076 $ 381,250 $ 373,521 $ 288,867
ELECTRIC PLANT (000'S)
Total Electric Plant 358,878 $ 341,526 $ 323,664 $ 303,637 $ 281,606 $ 255,601
Depreciation Reserve 96,595 87,736 81,934 75,667 71,184 67,645
- --------------------------------------------------------------------------------------------------------------------------
Net Electric Plant 262,283 $ 253,790 $ 241,730 $ 227,970 $ 210,422 $ 187,956
==========================================================================================================================
CAPITALIZATION (000'S)
Short-Term Debt 34,000 $ 32,500 $ 35,000 $ 27,000 $ 36,000 $ 15,000
Long-Term Debt 243,643 274,221 288,075 116,367 119,126 100,685
Redeemable Preferred Stock 9,137 10,670 12,070 13,740 15,168 15,102
Preferred Stock 4,734 4,734 4,734 4,734 4,734 4,734
Common Equity 106,558 108,321 103,192 105,658 93,944 82,230
- --------------------------------------------------------------------------------------------------------------------------
Total 398,072 $ 430,446 $ 443,071 $ 267,499 $ 268,972 $ 217,751
==========================================================================================================================
CAPITAL STRUCTURE RATIOS (%)
Short-Term Debt 8.5% 7.5% 7.9% 10.1% 13.4% 6.9%
Long-Term Debt 61.2% 63.7% 65.0% 43.5% 44.3% 46.2%
Preferred Stock 3.5% 3.6% 3.8% 6.9% 7.4% 9.1%
Common Stock 26.8% 25.2% 23.3% 39.5% 34.9% 37.8%
- --------------------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
==========================================================================================================================
MISCELLANEOUS STATISTICS
Shares Outstanding (Average) 7,363,424 7,336,174 7,264,360 6,947,746 5,862,411 5,393,306
Shares Outstanding (Year End) 7,363,424 7,363,424 7,301,557 7,185,143 6,225,394 5,420,955
Number of Stockholders (Year End) 6,868 7,734 8,250 7,705 7,511 7,325
Earnings per Common Share -0.24 $ 1.33 $ 0.36 $ 0.84 $ 0.63 * $ 1.60
Dividends Declared per Common Share - $ 0.72 $ 0.87 $ 1.32 $ 1.32 $ 1.32
Book Value per Common Share 14.47 $ 14.71 $ 14.13 $ 14.71 $ 15.09 $ 15.17
Return on Common Equity -1.64% 9.09% 2.51% 5.55% 3.99%* 10.60%
Ratio of AFDC to Common Stock Earnings -48% 12% 48% 45% 143%* 28%
Ratio of Earnings to Fixed Charges 0.86 1.50 1.14 1.49 1.04 * 1.96
Payout Ratio - 54% 242% 157% 210%* 82.5
Percentage of Construction Expenditures
Funded Internally 100% 100% 100% 86% 72% 70%
==========================================================================================================================
RESIDENTIAL CUSTOMER DATA
Average Number of Customers 90,433 89,769 86,194 85,041 84,211 83,305
Kilowatt-Hours per Customer 5,896 5,976 5,953 6,073 6,118 6,265
Revenue per Customer 746.76 $ 744.19 $ 766.42 $ 752.67 $ 762.89 $ 797.42
Revenue per Kilowatt-Hour in cents 12.67 12.45 12.88 12.39 12.47 12.73
==========================================================================================================================
MISCELLANEOUS SYSTEM DATA
Net System Capability at Time of Peak
(MW) Firm 344.44 373.04 330.01 340.45 341.17 342.39
System Peak Demand (MW) (Winter Peak) 277.06 274.32 267.98 275.84 267.42 253.27
Reserve Margin at Time of Peak 24.0% 36.0% 23.2% 23.4% 27.6% 35.2%
System Load Factor 79.0% 77.0% 79.9% 73.5% 76.4% 77.2%
==========================================================================================================================
* Includes the reserve established on certain licensing activites in 1993 ($5.6 million after taxes or $.95 per common
share). (See note 6).
ITEM 7
- ------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RECENT EVENTS AFFECTING THE ELECTRIC UTILITY INDUSTRY AND THE COMPANY
RESTRUCTURING THE INDUSTRY - Over the last several years, there have
been a number of legislative and regulatory initiatives throughout the
United States designed to restructure the traditional vertically
integrated electric utility industry. These initiatives typically
encourage or require the disaggregation of existing electric utility
functions into transmission and distribution activities on the one hand
and electrical generation and marketing activities on the other. They
are intended to introduce competition into markets for the production
and supply of electric energy while maintaining transmission and
distribution systems owned and maintained by more traditionally
regulated utilities. This industry restructuring poses a number of
logistical and policy questions including 1) the most efficient way to
spin-off electric generation and related assets from existing electric
utilities, 2) the extent to which existing utilities can or should be
permitted to participate in the competitive markets, 3) the extent to
which the remaining transmission and distribution utilities should be
allowed to recover through rates charged to their customers costs that
have been incurred in order to meet their historical public service
obligations but become "stranded" by the introduction of competition
into traditionally regulated markets, 4) the mechanisms through which
those stranded costs can best be recovered and 5) the uninterrupted
supply of electric energy for those consumers who do not or cannot
arrange independently for the purchase of electric energy.
In 1995, the Maine Legislature initiated a process for the development
of electric utility restructuring that culminated in "An Act to
Restructure the State's Electric Industry", which the Governor signed
into law on May 29, 1997. The principal provisions of the new law are
as follows:
1) Beginning on March 1, 2000, all consumers of electricity shall have
the right to purchase generation services directly from competitive
electricity suppliers who will not be subject to rate regulation.
2) By March 1, 2000, the Company must divest of all generation related
assets and business functions except for:
a) contracts with "qualifying facilities" (generally, those non -
utility generators from whom the Company was required to purchase what
turned out to be high - cost power generated by renewable resources
pursuant to the Public Utilities Regulatory Policies Act of 1978
(PURPA)) and conservation providers;
b) nuclear assets, namely, the Company's investment in the Maine Yankee
Atomic Power Company nuclear generating plant (Maine Yankee);
c) assets that the Maine Public Utilities Commission (MPUC) determines
necessary for the operation of the transmission and distribution
services.
The MPUC may grant an extension of the divestiture deadline if the
extension will improve the selling price. For assets not divested, the
utilities are required to sell the rights to the energy and capacity
from these assets. The Company must submit to the MPUC its divestiture
plan no later than January 1, 1999. The Company's plan has already been
submitted.
3) Billing and metering services will be subject to competition
beginning March 1, 2002, but the legislation permits the MPUC to
establish an earlier date, no sooner than March 1, 2000.
4) The Company, through an unregulated affiliate, may market and sell
electricity both within and outside its current service territory, but
limited to 33% of the load within the Company's service territory. In
addition, such an unregulated affiliate could not, itself, own any
generation assets.
5) The Company will continue to provide transmission and distribution
services which will continue to be subject to regulation by the MPUC.
6) If after March 1, 2000, 10% or more of the stock of a regulated
transmission and distribution utility is purchased by an entity, the
purchasing entity and any related entity may not sell or offer for sale
generation service to any retail customer of electric energy in the
state of Maine. In addition, if the transmission and distribution
utility has a marketing affiliate (see item 4 above), the MPUC might
require divestiture of that affiliate.
7) Maine electric utilities will be permitted a reasonable opportunity
to recover legitimate, verifiable and unmitigable costs that are
otherwise unrecoverable as a result of retail competition in the
electric utility industry (the so-called "stranded costs"). The MPUC
shall determine these stranded costs by considering:
a) the utility's regulatory assets related to generation;
b) the difference between net plant investment in generation assets
compared to the market value for those assets; and
c) the difference between future contract payments and the market value
of the purchased power contracts.
The Company must pursue all reasonable means to reduce its potential
stranded costs and to receive the highest possible value for generation
assets and contracts, including the exploration of all reasonable and
lawful opportunities to reduce the cost to ratepayers of contracts with
qualifying facilities. By July 1, 1999, the MPUC must estimate the
stranded costs for the Company and the manner for the collection of
those costs by the transmission and distribution company. Customers
reducing or eliminating their consumption of electricity by switching
to self-generation, conversion to alternative fuels or using demand-
side management measures cannot be assessed exit or entry fees. The
MPUC must include in the rates charged by the transmission and
distribution utility decommissioning expenses for Maine Yankee. In 2003
and every three years thereafter until the stranded costs are
recovered, the MPUC must review and reevaluate the stranded cost
recovery.
8) All competitive providers of retail electricity must be licensed and
registered with the MPUC and meet certain financial standards, comply
with customer notification requirements, adhere to customer
solicitation requirements and are subject to unfair trade practice
laws. Competitive electricity providers must have at least 30% of the
electricity that they sell at retail in Maine derived from renewable
resources (such as most types of hydroelectric plants and plants that
would be qualifying facilities under PURPA).
9) A standard-offer service will be available for all customers. If the
Company were to have an unregulated affiliate competitive electricity
provider, it would be prohibited from providing more than 20% of the
load within the Company's service territory under the standard - offer
service.
10) An unregulated affiliate of the Company marketing and selling
retail electric power must adhere to specific codes of conduct,
including, among others:
a) employees of the unregulated affiliate providing retail electric
power must be physically separated from the regulated distribution
affiliate and cannot be shared;
b) the regulated transmission and distribution affiliate must provide
equal access to customer information;
c) the regulated transmission and distribution company cannot
participate in joint advertising or marketing programs with the
unregulated affiliate providing retail electric power;
d) the transmission and distribution company and its unregulated
affiliated provider of retail electric power must keep separate books
of accounts and records; and
e) the transmission and distribution company cannot condition or tie
the provision of any regulated service to the provision of any service
provided by the unregulated affiliated provider of electricity.
11) Employees, other than officers, displaced as a result of retail
competition will be entitled to certain severance benefits and
retraining programs. These costs will be recovered through charges
collected by the regulated transmission and distribution company.
12) Other provisions of the new law include provisions for:
a) consumer education;
b) continuation of low-income programs and demand-side management
activities;
c) consumer protection provisions;
d) new enforcement authority for the MPUC to protect consumers.
In view of the Maine restructuring legislation, the Company has been
reviewing and revising its business plans. The Company believes its
basic business will continue to be as a regulated transmission and
distribution utility. The Company will also pursue opportunities in
other regulated or unregulated business activities that are compatible
with the Company's basic business. The Company presently believes that
it will be less likely to engage in activities that would require
isolation from its basic business, such as the approach the
restructuring law has taken governing the relationship between a
regulated transmission and distribution utility and any affiliated
entity intending to engage in marketing and selling electricity. The
Company has made no final determination whether it will establish such
an affiliate in order to continue the marketing and selling of
electricity after March 1, 2000.
MAINE YANKEE - The Company owns 7% of the common stock of Maine Yankee,
which owns and, prior to its permanent closure in 1997, operated an 880
megawatt (MW) nuclear generating plant in Wiscasset, Maine. The
Company's equity ownership in the plant entitled the Company to about
7% of the output pursuant to a cost-based power contract. Since the
plant began operation in 1972, it has provided a source of power for
the Company and its customers at a cost consistently below the cost of
power otherwise available in bulk power markets.
Following a year long shutdown for repairs to the steam generators in
1995, Maine Yankee came under intense regulatory scrutiny in a series
of events beginning in December 1995 with an anonymous letter about an
allegedly faulty computer program. The events evolved into a number of
investigations by Maine Yankee's primary licensing authority, the
United States Nuclear Regulatory Commission (NRC) and by Maine Yankee
itself. Concerns included compliance with NRC regulations, conformance
of the plant to design specifications, adequacy and condition of
components and systems, and management issues. During the evolution of
these events, the NRC itself became subject to public criticism about
the adequacy of its regulatory activities and its relationship with
nuclear plant licensees, and in response, the NRC implemented changes
in its approach to oversight of licensees that had the effect of
amplifying the regulatory scrutiny.
Maine Yankee operated for part of 1996, but under a restriction imposed
by the NRC that limited its operation to 90% of full power capacity
pending the resolution of various issues. In early December 1996 the
plant was shut down to address cable-separation and associated issues.
Subsequently, Maine Yankee also determined that a substantial portion
of the nuclear fuel in the reactor was defective and had to be
replaced, thereby extending the outage into a refueling outage. During
this extended outage, the plant owners analyzed in-depth the viability
of continued operation of the plant. While the plant was shut down, the
Company incurred incremental replacement power costs of approximately
$1 million per month in addition to its 7% share of the costs expended
in the owners' efforts to return the plant to service. On May 27, 1997,
the Board of Directors of Maine Yankee voted to reduce maintenance and
repair spending at the plant and announced that Maine Yankee was
considering permanent closure based on economic concerns and
uncertainty about operation of the plant. On August 6, 1997, the Board
voted to cease power operations at the plant permanently and to begin
the process of decommissioning the plant. The decision to shut down the
plant was based on an economic analysis of the costs, risks and
uncertainties associated with operating the plant compared to those
associated with closing and decommissioning the plant. The decision to
close the plant should mitigate the costs the Company would otherwise
incur through a phasing down of Maine Yankee's operations and
maintenance costs. The need to purchase replacement power will
continue.
Maine Yankee's most recent estimate of the total costs of
decommissioning and plant closure, excluding funds already collected,
is $930 million (undiscounted). The Company's share of this estimated
cost is $65.1 million and was recorded as a regulatory asset and
decommissioning liability at September 30, 1997.
In a related matter, in early September, 1997, the MPUC released the
report of a consultant it had retained to perform a management audit of
Maine Yankee for the period January 1, 1994 to June 30, 1997. The
report contained both positive and negative conclusions, the latter
explaining that: Maine Yankee's decision in December, 1996, to proceed
with the steps necessary to restart its nuclear generating plant at
Wiscasset, Maine, was "imprudent"; that Maine Yankee's May 27, 1997,
decision to reduce restart expenses while exploring a possible sale of
the plant was "inappropriate," based on the consultant's finding that a
more objective and comprehensive competitive analysis at the time
"might have indicated a benefit for restarting" the plant; and that
those decisions resulted in Maine Yankee incurring $95.9 million in
"unreasonable" costs. If any of these costs are determined to have been
imprudently incurred, by FERC or the MPUC, the Company may be required
to write down a portion of its investment in Maine Yankee. On October
24, 1997, the MPUC issued a Notice of Investigation initiating an
investigation of the prudence of the Maine Yankee shutdown decision and
of the operation of Maine Yankee prior to the shutdown, and announced
that it had directed its consultant to extend its review to include
those areas.
On December 2, 1997, the MPUC issued an Order staying the
investigation. The MPUC noted that Maine Yankee had begun a rate
proceeding before the Federal Energy Regulatory Commission (FERC) on
November 6, 1997, which could address the prudence issues raised in the
MPUC's investigation. The MPUC therefore stayed its investigation in
order "to avoid unnecessary duplicative efforts by all parties
involved". The MPUC reserved the right to reopen the investigation
particularly if FERC declines to address the prudence issues of concern
to the Commission "if we feel it necessary to further investigate these
matters after the FERC proceeding ends." The Company cannot therefore
predict whether the MPUC will reopen its investigation once the FERC
proceeding is concluded.
THE COMPANY'S RESPONSE TO PRESSURES CAUSED BY THE CLOSURE OF MAINE
YANKEE - The operational problems that have plagued Maine Yankee since
1995 and its final closure in 1997 have placed a significant strain on
the Company's financial resources and have had a substantially negative
impact on the Company's earnings in 1995, 1996 and 1997. The Maine
Yankee experience aggravated the financial pressure the Company was
already under as a result of its attempt to avoid rate increases,
expand its revenues through marketing efforts, and otherwise deal with
emerging competitive pressures. In response, the Company has reduced
its expenditures for ongoing operation and maintenance and for capital
improvements where it reasonably can. In addition, the Company focused
on three major areas - rate relief, restructuring another high-cost
power contract, and relations with its lenders - each of which is
discussed below.
RATE CASE - On March 3, 1997, the Company notified the MPUC of its
intent to file for a general increase in rates.
Under Maine law, a utility must ordinarily notify the MPUC two months
in advance of the filing of a request for a general increase in rates
and the MPUC then has nine months to investigate that request. However,
under certain circumstances, the MPUC may allow a utility to implement
a requested increase in rates on a temporary basis pending the
conclusion of its investigation of the utility's request for a general
increase in rates.
On April 1, 1997, the Company filed with the MPUC a Petition for
Temporary Rates to increase its rates by an amount that would increase
its annual revenues by $10 million effective June 1, 1997. In doing so,
the Company cited the continuing impact on the Company's financial
condition and cash flow of the ongoing outage at the Maine Yankee
nuclear power plant. The Company also cited potential noncompliance
with financial covenants contained in its bank credit agreement
(including the fixed charge coverage ratio, discussed below) and the
need to maintain adequate borrowing capacity for working capital
purposes, including mandatory debt repayments.
On June 26, 1997, the MPUC issued an order authorizing the Company to
change rates temporarily to increase its annual revenues by
approximately $5.1 million effective July 1, 1997. In doing so,
however, the MPUC also required the Company to accelerate the
amortization of the deferred regulatory asset associated with the 1993
buyout of one of its high-priced non-utility generator contracts. As a
result, revenue produced by the rate increase did not increase
earnings, but it did increase cash flow. Effective December 12, 1997,
the MPUC authorized the Company to revert to the original amortization
schedule of that deferred regulatory asset, thereby permitting the
temporary rate increase previously authorized to impact the Company's
earnings positively from that date on.
On February 9, 1998, the MPUC issued its final order on the Company's
request to increase its rates that it filed in March of 1997. Of the
approximately $22 million increase in annual revenue ultimately
requested by the Company, the MPUC authorized an increase of
approximately $13.2 million (which includes the 5.1 million temporary
rate increase discussed above) annually. While there are many factors
that explain the difference between the MPUC allowance and the
Company's requested increase, much of that difference is attributable
to the proposed accounting treatment of various costs and the deferral
of other costs for future consideration, including the deferral of
certain costs associated with Maine Yankee. While those accounting
recommendations will affect the timing of receipt of revenues by the
Company and will require the Company to finance the payment of the
associated costs, they should not significantly affect the Company's
earnings during the period that the new rates are effective.
The MPUC order is based upon a determination that the Company should be
allowed to earn an annual return of 12.75% on common equity. It also
includes a "rate plan" under which the Company's rates will be subject
to certain reconciliations based upon actual expenditures by the
Company and an annual adjustment beginning on May 1, 1999 to account
for inflation with an offset for assumed increases in productivity.
Other than those adjustments, the Company will not change its rates
unless its return on equity exceeds or falls short of the allowed
return by more than 350 basis points. If the Company's return on equity
falls outside of that bandwidth, 50% of the excess or shortfall will be
adjusted for in the Company's rates.
RESTRUCTURING OF POWER PURCHASE CONTRACT - The Company has been working
to restructure a power purchase contract with the Penobscot Energy
Recovery Company (PERC), its last remaining high-priced non-utility
generator contract that offers a potential for substantial savings.
PERC owns a waste-to-energy facility in Orrington, Maine that provides
solid waste disposal services to many communities in central, eastern
and northern Maine. The contract requires the Company to purchase the
electricity output of the plant until 2018 at a price that is presently
above the cost of alternative sources of power, and, in the Company's
opinion, is likely to remain so. The Company has been working with PERC
and the affected municipalities at a restructuring of the power
contract that would result in substantial savings for the Company and
would continue to allow PERC to meet the solid waste disposal needs of
Maine communities. The Company has reached an agreement with PERC and a
committee representing the municipalities that includes the following
major components:
1) The Company would make an up-front payment to PERC of $6 million and
installment payments over the next four years following consummation of
the transaction totalling an additional $4 million. These funds would
be retained by PERC to meet operation and debt service reserve
requirements of the PERC plant.
2) As of December 31, 1997, the PERC plant was financed in part by
tax-exempt municipal revenue bonds in the principal amount of $47.9
million payable pursuant to a sinking fund schedule and finally
maturing in 2004. The credit on those bonds is enhanced by letters of
credit issued by a group of banks. Those bonds would be restructured to
extend the maturity date to 20 years from the date of closing. The
bonds would continue to be tax-exempt and their credit would be
enhanced by the moral obligation of the state of Maine under the
auspices of the Finance Authority of Maine (FAME) pursuant to the State
of Maine's Electric Rate Stabilization Program. The extended maturity
of low-cost bonds would, therefore, provide savings to be shared by the
parties.
3) The Company would continue to purchase power at the rates
established under the existing PERC contract. Payments would be made to
a trust from which disbursements would be made according to the
following priorities:
a) debt service and expense, including all principal and interest;
b) trustee and bond related fees and expenses;
c) all operating and maintenance expenses of the PERC plant;
d) operating and management fees paid to the PERC partners pursuant to
a partnership operating agreement;
e) payment to the PERC owners of any savings in interest expense
resulting from the prepayment of bonds; and
f) except for cash reserve requirements, all remaining cash would be
distributed 1/3 to the Company, 1/3 to the PERC owners and 1/3 to the
participating municipalities.
4) The Company would issue warrants for the purchase of two million
shares of its common stock, one million each to the PERC owners and the
participating municipalities. The warrants would be exercisable within
ten years of their issuance and would entitle the holder to purchase
common stock for $7 per share (subject to adjustment under certain
circumstances). No warrants may be exercised within the first nine
months after their issuance, and they would become exercisable in
500,000 share blocks following the expiration of nine months, 21
months, 33 months and 45 months from the closing date. Upon exercise,
the Company would have the option, instead of providing common stock,
to pay cash equal to the difference between the then market price of
the stock and the exercise price of $7 per share times the number of
shares as to which exercise is made. The MPUC has established a cap on
ratepayers' exposure to the cost of the warrants. Ratepayer costs are
limited to the difference between the higher of $15 per share or the
book value per share at the time the warrants are exercised and the $7
exercise price. The Company would not recover any costs above the cap
from ratepayers.
5) The municipalities would extend their waste disposal contracts
through 2017 and waive their existing rights to an early termination or
the buyout of PERC.
There are a number of events upon which the proposed transaction is
contingent, including approval by the affected municipalities, the
rendering of an opinion by bond counsel that the PERC bonds will remain
tax-exempt and the financing of necessary cash payments by the Company.
The Company and the other parties to the transaction are tentatively
planning a closing in the spring of 1998.
Depending in part on the ultimate cost of the warrants, it is projected
that the restructured PERC contract will result in net cost savings
with a present value of $30 40 million over the remaining life of the
contract. That projection is based upon a number of assumptions about
future events and the markets for electricity.
EXISTING LENDING AGREEMENTS AND MONETIZATION OF POWER SALE CONTRACT -
The Company has been negotiating with interested parties the
monetization of a power sale contract with UNITIL Power Corp. (UNITIL),
a New Hampshire based electric utility. The Company currently provides
power to UNITIL at significantly above-market rates, with the contract
term ending in the year 2003. Based upon current projections of
wholesale electricity markets, it is expected that the rates charged
under the UNITIL contract will remain at above-market levels for the
remainder of the contract term. Therefore, the assignment of the
Company's rights under the contract has a positive present cash value.
The Company is currently proceeding to complete a transaction with a
financial institution pursuant to a letter of intent that would provide
a loan of approximately $25 million in net proceeds secured by the
value of the UNITIL contract. As discussed below, the proceeds of such
a transaction could be used to finance a portion of the contract
restructuring with PERC and to resolve outstanding financial covenant
issues under the Company's credit agreement with its lending banks.
The credit agreement with the Company's lending banks contains a number
of covenants keyed to the Company's financial condition and
performance. One such covenant requires the Company to maintain a
consolidated fixed charge ratio of 1.5 to 1.0 (defined as the ratio of
the sum of the Company's net income, income tax expense and interest
expense to the Company's interest expense, subject to a few minor
adjustments) and is measured quarterly for the prior four quarters.
After the first quarter of 1997, the Company was not in compliance with
the fixed charge ratio covenant. The Company obtained temporary waivers
of the noncompliance through June 6, 1997.
On June 6, 1997 the Company and the lending banks amended the credit
agreement. Under the amendment, compliance with the fixed charge ratio
covenant was permanently waived for the four quarters ending March 31,
1997 and June 30, 1997. The Company was also out of compliance with the
fixed charge ratio covenant for the four quarters ending September 30,
1997 and December 31, 1997 and has received temporary waivers of those
violations until March 31, 1998. On November 20, 1997, the Company and
the lending banks amended the agreement as part of a plan to reduce the
level of the banks' credit commitment and reestablish the financial
covenants to levels that the Company anticipates it can reasonably
achieve. Under the amendment (as subsequently modified), if the Company
monetizes the UNITIL contract as discussed above before March 31, 1998
in an amount that generates the net proceeds contemplated, it will be
permitted to proceed with the restructuring of its power purchase
contract with PERC and to use $6 million of the proceeds of the
monetization to complete the PERC transaction, with the remainder of
the proceeds to be used to reduce permanently the borrowing capacity of
the existing revolving credit facility. On or before December 31, 1998,
the Company must further reduce permanently the borrowing capacity
under the revolving credit facility by that additional $6 million. The
amendment also establishes new financial covenant levels that appear
reasonably achievable under the Company's current financial forecasts,
although there are a number of important variables that could affect
the Company's ability to meet those covenants in the future.
As of this writing, the monetization of the power sale contract with
UNITIL has not occurred, and only temporary waivers have been received
for the covenant violations for the four quarters ending September 30,
1997 and December 31, 1997. Consequently, the Company has classified
its $34 million of medium term notes as current liabilities as of
December 31, 1997. If the UNITIL transaction occurs, permanent waivers
will, pursuant to the credit agreement, become effective, and the
medium term notes will be reclassified as long-term liabilities.
The Company also anticipates that during 1998 or beyond, future cash
needs may exceed the borrowing capacity under the revolving credit
facility after the reductions described above, and accordingly, the
Company may be required to find new sources of financing. The Company
is in the process of exploring the alternatives available for such
additional sources of financing. The Company expects to be able to
obtain funds necessary to meet its obligations as they arise.
COMMON STOCK DIVIDENDS - In June of 1995, the Board reduced the
quarterly dividend on common stock by $.15 from $.33 per share to $.18
per share, resulting in a reduction in the indicated annual rate from
$1.32 to $.72. At its March 19, 1997 meeting, the Board of Directors
determined that the payment of common stock dividends should be
suspended, and to date, no additional common stock dividend has been
declared.
STORM DAMAGE - Beginning on January 5, 1998, much of the state of Maine
experienced weather conditions that included snow, sleet and freezing
rain, culminating in a sleet storm on January 7, 8 and 9. Heavy icing
conditions caused trees to fall into power lines and also caused power
lines to fall from the added weight of the ice. Damage to transmission
and distribution equipment was widespread throughout the Company's
service territory. One of the Company's major transmission lines
serving the eastern part of its service territory was entirely
destroyed for a stretch of approximately eight miles. By January 9, an
estimated 60,000, or roughly 60%, of the Company's customers were
without power at the same time due to damage from the storm. The
Governor of Maine declared a state of emergency, and President Clinton
declared the state of Maine a federal disaster area.
The effort to restore power and repair transmission and distribution
equipment was extensive. Lineworkers and tree crews from throughout the
eastern United States and Canada participated in the effort, and by
January 18, power had been restored to all but a few of the Company's
customers. The cost of the restoration is still being determined but it
is expected to total as much as $5 million or more. The MPUC has issued
an order authorizing the Company to defer incremental storm damage
expenses for future recovery through the rates charged to customers.
The MPUC is expected to investigate the prudence of the costs incurred
and to establish a time frame for the recovery of the prudently
incurred costs. The Company believes its storm damage costs were
prudently incurred and that it should, therefore, be allowed to recover
them in rates.
PROPOSED GAS PROJECT -The Company and Energy Pacific, LLC (Energy
Pacific) have formed a joint-venture company, Bangor Gas Company, LLC,
that is currently seeking approval from the MPUC to build, own and
operate a natural gas distribution system to serve the greater Bangor
area.
Los Angeles-based Energy Pacific is a joint-venture of Pacific
Enterprises and Enova Corporation, which are in the process of a
corporate merger. Pacific Enterprises is the parent company of Southern
California Gas Company, the nation's largest natural gas distribution
company. Enova is the parent of San Diego Gas and Electric Company.
Together, the two companies provide natural gas to approximately six
million customers in California. Pacific Enterprises and the Company
worked together in a partnership to develop the West Enfield Hydro
Project in 1986.
Gas service to Maine will be made economically feasible for the first
time by the Maritimes and Northeast Pipeline Project, slated for
completion in mid-1999. The new pipeline will extend from the Sable
Offshore Energy Project near Sable Island, Nova Scotia, through the
state of Maine and interconnect with the Tennessee Gas Pipeline in
Dracut, Massachusetts. The route, as proposed, comes near the Bangor
area, providing an opportunity for retail gas distribution in the
greater Bangor marketplace.
Company officials estimate the cost to build and implement the new
Bangor Gas system to be approximately $40 million. The Company is not
obligated to make material capital contributions to the joint-venture
in the near term.
DIVESTITURE OF GENERATION ASSETS - On February 9, 1998, the Company
filed its plan for divesting its generation-related assets with the
MPUC in accordance with the electric utility industry restructuring
provisions signed into law last year. This plan could result in the
identification of proposed purchasers by mid-summer 1998. Further
regulatory approvals will then be required to actually complete the
sale. The Company is offering a total of 166 MW of generation assets.
OTHER - Management's discussion and analysis of results of operations
and financial condition contains items that are "forward-looking" as
defined in the Private Securities Litigation Reform Act of 1995. These
statements are subject to certain risks and uncertainties that could
cause actual results to differ materially from those anticipated in the
forward-looking statements. Readers should not place undue reliance on
forward-looking statements, which reflect management's view only as of
the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect subsequent events or
circumstances. Factors that might cause such differences include, but
are not limited to, future economic conditions, relationship with
lenders, earnings retention and dividend payout policies, electric
utility restructuring, developments in the legislative, regulatory and
competitive environments in which the Company operates, and other
circumstances that could affect revenues and costs.
LIQUIDITY, CAPITAL REQUIREMENTS, AND CAPITAL RESOURCES
The Consolidated Statements of Cash Flows reflect events for the years
ended December 1997, 1996 and 1995 as they affect the Company's
liquidity. Net cash provided by operations was $36.4 million in 1997,
$44.8 million in 1996 and a negative $164.5 million in 1995. The
principal reason for the decrease in cash flows from operations in 1997
was the impact of Maine Yankee. The Company incurred approximately
$10.7 million in additional Maine Yankee operating and replacement
power costs in 1997 as compared to 1996. Also, the Company incurred
$2.7 in Maine Yankee refueling outage costs in 1997. The Company's cash
flows were improved with the 3.8% temporary rate increase effective
July 1, 1997. Positively impacting cash flows in the 1997 period was
the payment of $545,000 in income taxes, as compared to $2.3 million in
income tax payments in 1996. The Company made approximately $2 million
less in interest payments in 1997 as compared to 1996. Also enhancing
cash flows from operations in 1997 was an improvement in accounts
receivable collections for one of th