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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
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. 1-3429
Maine Public Service Company
(Exact name of registrant as specified in its charter)
Maine 01-0113635
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
209 State Street, Presque Isle, Maine 04769
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 207-768-5811
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $7.00 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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. [ ]
Aggregate market value of the voting stock held by non-affiliates at March
26, 1998: $22,540,422.
The number of shares outstanding of each of the issuer's classes of common
stock as of March 26, 1998.
Common Stock, $7.00 par value - 1,617,250 shares
DOCUMENTS INCORPORATED BY REFERENCE
1. The Company's 1997 Annual Report to Stockholders is incorporated by
reference into Parts I, II and IV.
2. The Company's definitive proxy statement, to be filed pursuant to
Regulation 14A no later than 120 days after December 31, 1997, which is the end
of the fiscal year covered by this report, is incorporated by reference into
Part III.
(Page 1 of 44 pages)
PART I Form 10-K
Item 1. Business
General
The Company was originally incorporated as the Gould Electric
Company in April, 1917 by a special act of the Maine legislature. Its
name was changed to Maine Public Service Company in August, 1929. Until
1947, when its capital stock was sold to the public, it was a subsidiary
of Consolidated Electric & Gas Company. Maine and New Brunswick
Electrical Power Company, Limited, the Company's wholly-owned Canadian
subsidiary (the "Subsidiary") was incorporated in 1903 under the laws of
the Province of New Brunswick, Canada. The properties of the Company
and Subsidiary are operated as a single integrated system.
The Company engages in the production, transmission and
distribution of electric energy to retail and wholesale customers in all
of Aroostook County and a small portion of Penobscot County in northern
Maine. Geographically, the service territory is approximately 120 miles
long and 30 miles wide, with a population of approximately 82,000.
The service area of the Company includes one of the most important
potato growing and processing sections in the United States. In
addition, the area produces wood products, principally pulp wood for
paper manufacturing.
The Subsidiary is primarily a hydro-electric generating company.
It owns and operates the Tinker hydro plant in New Brunswick, Canada,
and sells to the Company the energy not needed to supply its wholesale
New Brunswick customer. During 1997, sales to the Company amounted to
77,323 MWH out of the 102,681 MWH generated for sale at Tinker.
As discussed further in Items 3(a) and (b) of the "Legal
Proceedings" section of this Form 10-K, the Company is proceeding with
the sale of generating assets in accordance with Maine's new electric
utility deregulation law.
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Form 10-K
PART I
Item 1. Business - Continued
The Company and the Subsidiary's net energy production, including
generated and purchased power, required to serve all customers, was
630,457 MWH for the twelve months ended December 31, 1997. The
following table sets forth the sources from which the Company and the
Subsidiary obtained their power requirements in 1997.
1997 Megawatt-hours Generated
Sources of Power or Purchased
Net Generation:
Hydro 107,734
Steam 26,758
Diesel (429)
Total 134,063
Purchases:
Nuclear Generated 0
Fossil Fuel Generated 371,689
Biomass Generated 125,199
Total 496,888
Inadvertent Received (494)
Total System 630,457
As of June 4, 1984, the Company entered into a Power Purchase
Agreement (PPA) with Sherman Power Company, which assigned its interest
in the Agreement to Wheelabrator-Sherman Energy Company (W-S), formerly
Signal-Sherman Energy Company, (a cogenerator), for 17.6 MW of capacity
which began July, 1986. The current contract expires in 2001. As
explained in Item 3(e) of the "Legal Proceedings" section of this Form
10-K, the Company and W-S have agreed to a restructuring of the PPA.
The amended agreement, approved by the MPUC, should help relieve
financial pressure caused by the recent closure of Maine Yankee and help
avoid substantial increases in the Company's retail rates. The Board of
Directors of the Finance Authority of Maine (FAME) has authorized the
issuance and sale of securities which will be used for an up-front
payment to W-S. The Company expects that the financing will be
completed during the second quarter of 1998.
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Form 10-K
PART I
Item 1. Business - Continued
Financial Information about Foreign and Domestic Operations
Financial Information Relating
To Foreign and Domestic Operations
(In Thousands of U.S. Dollars)
1997 1996 1995
Revenues from
Unaffiliated Customers:
Company-United States 54,291 56,521 54,585
Subsidiary-Canada 781 743 694
Intercompany Revenues:
Company-United States 728 683 719
Subsidiary-Canada 1,672 2,424 1,877
Operating Income:
Company-United States 567 4,585 3,997
Subsidiary-Canada 344 703 367
Income (Loss) before Extraordinary Items
Company-United States (2,521) 1,366 503
Subsidiary-Canada 344 745 418
Extraordinary Items, Net of Tax
Company-United States - - (6,236)
Net Income (Loss)
Company-United States (2,521) 1,366 (5,733)
Subsidiary-Canada 344 745 418
Identifiable Assets:
Company-United States 156,207 109,891 107,138
Subsidiary-Canada 7,274 6,823 6,936
The identifiable assets, by company, are those assets used in each
company's operations, excluding intercompany receivables and
investments.
-4-
Form 10-K
PART I
Item 1. Business - Continued
Source of Revenues
In 1997, consolidated operating revenues totaled $55,072,196.
The percentages of revenues derived from customer classes are as
follows:
%
Residential 37.0
Small Commercial and Industrial 31.6
Large Commercial and Industrial 17.2
Public Authorities 1.2
Sales to Wholesale Customers for Resale 3.9
Other Sales and Other Revenues 9.1
Total 100.0
Sales to wholesale customers for resale includes two wholesale
customers that entered into various contracts with the Company in 1996.
These contracts contained rates lower than those typically allowed under
FERC's traditional ratemaking. Capitalizing on the availability of low
cost power in New England, the wholesale customers issued a request for
proposal in September, 1994 for their purchased power requirements
effective January 1, 1996. Houlton Water Company (Houlton), selected an
offer from another utility, and began taking service from that utility
starting January 1, 1996. In 1995, sales to Houlton, under an earlier
contract, represented 11.1% of the Company's consolidated MWH sales and
8.4% of consolidated operating revenues, making Houlton the Company's
largest customer for 1995. The remaining wholesale customers, Van Buren
Light and Power District (Van Buren) and Eastern Maine Electric
Cooperative, Inc. (EMEC) selected the Company's six-year proposal, which
cannot be terminated before December 31, 1998. The new rates for these
two customers were effective January 1, 1995. Van Buren and EMEC
represented 4.5% of consolidated MWH sales and 2.5% of consolidated
operating revenues for the year ended December 31, 1997.
During 1996 and 1997, the Company entered into long-term power
contracts with five of its largest customers. In exchange for discounts
from the Company's standard rates, these customers agreed to purchase
all of their electrical requirements from the Company through the year
2000. All five of these customers produced evidence of hardship to
continue operations in the area or were investigating self generation,
criteria that the Maine Public Utilities Commission (MPUC) reviewed
before approving these load-retention contracts.
On November 13, 1995, the Maine Public Utilities Commission
approved a Stipulation signed by Maine Public Service Company, the
-5-
Form 10-K
PART I
Item 1. Business - Continued
Commission Staff and the Maine Public Advocate. This Stipulation, which
became effective January 1, 1996, established a multi-year rate plan for
the Company that will provide our customers with predictable rates
through 1999 and shares operating risks and benefits between the
Company's shareholders and customers. For more information on the rate
plan, see Item 3(g) of the "Legal Proceedings" section of this Form 10-
K.
For additional discussion on revenues, see the 1997 Annual Report
to Stockholders, pages 4 and 5, "Analysis of Financial Condition and
Review of Operations-Operating Revenues and Energy Sales" and pages 9 to
11, "Regulatory Proceedings", which information is incorporated herein
by reference.
Regulation and Rates
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. With respect to wholesale rates and certain
other matters, the Company is or may be subject to the jurisdiction of
the Federal Energy Regulatory Commission (FERC). The Company maintains
its accounts in accordance with the accounting requirements of the FERC
which generally conform with the accounting requirements of the MPUC.
At this time, the Company is not subject to the Public Utilities
Regulatory Policies Act of 1978 ("PURPA") because it has not exceeded
the threshold of 2,000,000,000 kilowatt-hours excluding wholesale sales.
However, the Maine Legislature has by statute instructed the MPUC that
it may consider PURPA standards in rate proceedings before that
Commission.
The generating facilities of the Company and Subsidiary meet the
applicable current environmental regulations of State and Federal
governments of the United States and Provincial and Dominion governments
of Canada, except for the three diesel stations (12 MW) and the oil-
fired generating plant located in Caribou, Maine (23 MW). As discussed
in Item 2. "Properties" below, the oil-fired Steam Units 1 and 2 at the
Caribou facility have been placed on an inactive status. The Maine
Department of Environmental Protection (DEP), in response to the
Company's application for air emission licenses, has indicated that the
application did not demonstrate that Ambient Air Quality Standards and
Increments will not be violated. With the cooperation of the DEP Staff,
the Company is studying what steps, if any, are required for licensing,
and cannot determine at this time what, if any, additional capital
expenditures may be required. As discussed in Items 3(a) and (b) of the
"Legal Proceedings" section of this Form 10-K, the Company is proceeding
-6-
Form 10-K
PART I
Item 1. Business - Continued
with the sale of generating assets in accordance with Maine's new
electric deregulation law.
See the 1997 Annual Report to Stockholders, pages 9 to 11,
"Analysis of Financial Condition and Review of Operations - Regulatory
Proceedings", which information is incorporated herein by reference, for
additional information on regulatory matters.
Franchises and Competition
Except for consumers served at retail by the Company's wholesale
customers, the Company has practically an exclusive franchise to provide
electric energy in the Company's service area. For additional
information on changes to the future structure of the electric utility
industry in Maine, see Item 3(a) of the "Legal Proceedings" section of
this Form 10-K.
Employees
The information with respect to employees is presented in the 1997
Annual Report to Stockholders, page 9, "Employees", which information is
incorporated herein by reference.
Subsidiaries and Affiliated Companies
The Company owns 100% of the Common Stock of Maine and New
Brunswick Electrical Power Company, Limited (the Subsidiary). The
Subsidiary owns and operates the Tinker Station located in the Province
of New Brunswick, Canada. The Tinker Station has five hydro units with
total capacity of 33,500 kilowatts and a small diesel unit of 1,000
kilowatts. The Subsidiary serves the community of Perth-Andover in New
Brunswick, with the remaining energy exported to the Parent Company in
Maine under license of the National Energy Board of Canada. On June 16,
1988, the export license was renewed to 2008.
The Company owns 5% of the Common Stock of Maine Yankee, which
operated an 860 MW nuclear power plant (the "Plant") in Wiscasset,
Maine. On August 6, 1997, the Board of Directors of Maine Yankee voted
to permanently cease power operations and to begin decommissioning the
Plant. 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 Nuclear Regulatory Commission (NRC)
was due to expire on October 21, 2008.
-7-
Form 10-K
PART I
Item 1. Business - Continued
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, acknowledged 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
-8-
Form 10-K
PART I
Item 1. Business - Continued
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.
The Company's 5% ownership interest in Maine Yankee's common equity
amounted to $4.0 million as of December 31, 1997, and under Maine
Yankee's Power Contracts and Additional Power Contracts, the Company is
responsible for 5% of the costs of decommissioning the Plant. Maine
Yankee's most recent estimate of the cost of decommissioning is $380.4
million, based on a 1997 study by an independent engineering consultant,
plus estimated costs of interim spent-fuel storage of $127.6 million,
for an estimated total cost of $508 million (in 1997 dollars). The
previous estimate for decommissioning, by the same consultant, was
$316.6 million (in 1993 dollars).
On September 1, 1997, Maine Yankee estimated the sum of the future
payments for the closing, decommissioning and recovery of the remaining
investment in Maine Yankee to be approximately $930 million, of which
the Company's 5% share would be approximately $46.5 million. Legislation
enacted in Maine in 1997 calling for restructuring the electric utility
industry provides for recovery of decommissioning costs, to the extent
-9-
Form 10-K
PART I
Item 1. Business - Continued
allowed by federal regulation, through the rates charged by the
transmission and distribution companies. Based on the Maine legislation
and regulatory precedent established by the FERC in its opinion relating
to the decommissioning of the Yankee Atomic nuclear plant, the Company
believes that it is entitled to recover substantially all of its share
of such costs from its customers and, as of December 31, 1997, is
carrying on its consolidated balance sheet a regulatory asset and a
corresponding liability in the amount of $43.4 million, which is the
$46.5 million discussed above net of the Company's post-September 1,
1997 cost-of-service payments to Maine Yankee.
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. The Company has expensed its share of these
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 does not know how the MPUC plans to use the consultant's report,
but believes the report's negative conclusions are unfounded and may be
contradictory. The Company 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 and Central Maine Power
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 joined in this appeal. The MPUC subsequently stayed its
investigation pending the outcome of Maine Yankee's FERC rate case,
while indicating that its consultant would continue its extended review.
The Maine Supreme Court, on motions of the parties, stayed the appeal
pending resolution of the FERC proceeding.
During 1997, the Company incurred Maine Yankee replacement power
costs of approximately $7,302,000, of which $2,324,000 has been deferred
under the Company's rate stabilization plan, and also incurred
-10-
Form 10-K
PART I
Item 1. Business - Continued
additional operating costs of approximately $3.0 million associated with
the efforts to restart and subsequently close Maine Yankee, which have
adversely impacted the Company's earnings.
The February 1, 1998, rate increase, as described in Item 3(g) of
the "Legal Proceedings" section of this Form 10-K, included a portion of
these recoverable 1997 Maine Yankee replacement power costs with the
remaining costs included in the February 1, 1999 rate increase.
However, the collection of future Maine Yankee replacement power costs
will be subject to the MPUC's previously-mentioned prudence review of
the prudency of closing Maine Yankee.
The Company also owns 7.49% of the Common Stock of Maine Electric
Power Company, Inc. (MEPCO). MEPCO owns and operates a 345-KV
(kilovolt) transmission line about 180 miles long which connects the New
Brunswick Power (NB Power) system with the New England Power Pool. The
MEPCO transmission line is also the path by which Wyman No. 4 energy is
delivered northerly into the NB Power system and then wheeled to the
Parent Company through its interconnection with NBEPC at the
international border.
On December 23, 1997, the Company announced the signing of three
separate energy agreements to purchase firm energy and capacity from
Hydro-Quebec (H-Q) and Alternative Energy, Inc.'s Beaver Power Plant in
Ashland, Maine (AEI) for the replacement of Maine Yankee power, and to
market surpluses in partnership with Cinergy, an electric utility
headquartered in Cincinnati, Ohio. However, the Company and H-Q were
unable to agree on final terms and conditions and agreed to terminate
their energy agreement effective March 13, 1998. The Company is
negotiating an agreement with NB Power to supply additional energy not
provided by AEI to service our customers. The Company and Cinergy will
continue their efforts to jointly market available power in Maine and
New England.
-11-
Form 10-K
PART I
Item 1. Business - Continued
Executive Officers
The executive officers of the registrant are as follows:
Office
Continuously
Name Age Held Since
Paul R. Cariani President and Chief 57 6/1/94
Executive Officer
Frederick C. Bustard Vice President, 60 6/1/96
Power Supply & Environment
Larry E. LaPlante Vice President, 46 6/1/96
Finance, Administration and Treasurer
Stephen A. Johnson Vice President, 50 6/1/90
Customer Service and
General Counsel
Secretary and Clerk
Paul R. Cariani has been an employee of the Company since November
1, 1977, starting as an Assistant to the Treasurer. In May 1978, he was
appointed Assistant Treasurer until his election as Treasurer, Secretary
and Clerk, on March 1, 1983. In May 1985, he was elected Vice
President-Finance and Treasurer effective June 1, 1985. On February 25,
1992, Mr. Cariani was elected a Director of the Company to fill an
existing vacancy on the Board. On May 11, 1993, he was elected
Executive Vice President, Chief Financial Officer and Treasurer,
effective June 1, 1993. Effective June 1, 1994, he was elected
President and CEO, replacing the retiring G. Melvin Hovey. Mr. Hovey
remains Chairman of the Board of Directors.
Frederick C. Bustard was elected to the position of Vice President,
Power Supply & Environment effective June 1, 1996. He has been a full-
time employee of the Company since June 15, 1959 in various engineering
capacities until July 1, 1980, when he was appointed Assistant to the
President. On June 1, 1983, he was elected Vice President, Engineering
& Operations. On September 1, 1988, he was elected to the new position
of Vice President of Customer Service and Division Operations, a
position he held until his reappointment to Vice President of
Engineering & Operations on June 1, 1990.
-12-
Form 10-K
PART I
Item 1. Business - Continued
Larry E. LaPlante was elected to the position of Vice President,
Finance, Administration and Treasurer on June 1, 1996. He has been an
employee of the Company since November 4, 1983, starting as Controller.
In May, 1984, he was also appointed Assistant Secretary and Assistant
Treasurer until his election as Vice President, Finance and Treasurer
effective June 1, 1994.
Stephen A. Johnson was elected to the new position of Vice
President, Customer Service and General Counsel, effective June 1, 1990.
Mr. Johnson also continues in his capacity as Secretary and Clerk of the
Company, a position he has held since June 1, 1985. Mr. Johnson was
appointed General Counsel of the Company on March 5, 1985. On September
1, 1988, he was elected Vice President of Administration and General
Counsel, a position he held until his election as Vice President,
Customer Service and General Counsel. Prior to joining the Company Mr.
Johnson was the General Counsel of the Maine Public Advocate Office from
1983 to 1985 and prior to that was a Staff Attorney of the Maine Public
Utilities Commission.
Each executive office is a full-time position and has been the
principal occupation of each officer since first elected. All officers
were elected to serve until the next annual election of officers and
until their successors shall have been duly chosen and qualified. The
next annual election of officers will be on May 12, 1998.
There are no family relationships among the executive officers.
-13-
Form 10-K
PART I
Item 2. Properties
The Company owns and operates electric generating facilities
consisting of: oil-fired steam units with a total capability of 23,000
kilowatts, diesel generation totaling 12,300 kilowatts, and hydro-
electric facilities of 2,300 kilowatts. The Subsidiary owns and
operates a hydro-electric plant of 33,500 kilowatts and a small diesel
unit with 1,000 kilowatt capacity. As discussed in Items 3(a) and (b)
of the "Legal Proceedings" section of this Form 10-K, the Company is
proceeding with the sale of generating assets in accordance with the
State's new electric deregulation law.
The Board of Directors authorized placing on inactive status Steam
Units 1 and 2 of the Company's Caribou Generating Facility in Caribou,
Maine effective January 1, 1996 and were expected to remain inactive for
five years or longer. These two units, which represent 23 MW of
capacity, have become surplus to the Company's needs due to the closure
of Loring Air Force Base and the loss in 1996 of the Company's largest
customer, the Houlton Water Company. During the Units' inactive period,
the plant equipment will be protected and maintained by the installation
of a dehumidification system that will permit the Plant to return to
service in approximately six months.
Steam Unit No. 1 went into operation in the early 1950s and Unit
No. 2, in the mid 1950s. The Company still has a diesel generation
station of approximately 7 MW and a hydro facility of approximately 1 MW
and will continue to employ 11 employees at the Caribou facility.
As of December 31, 1997, the Company and Subsidiary had
approximately 443 pole miles of transmission lines and the Company owned
approximately 1,608 miles of distribution lines.
The Company is a part-owner of a 600,000 kilowatt oil-fired steam
unit built by Central Maine Power Company at its Wyman Station in
Yarmouth, Maine. The Company's share of that unit is 3.3455%, or
approximately 20,000 kilowatts.
Substantially all of the properties owned by the Company are
subject to the liens of the First and Second Mortgage Indentures and
Deeds of Trust.
-14-
Form 10-K
PART I
Item 3. Legal Proceedings
(a) Restructuring of Maine's Electric Utility Industry.
In the Company's Form 10-K for December 31, 1996 as well as
the Form 10-Q for the quarter ended June 30, 1997, the Company
described electric utility restructuring efforts in Maine,
including the Maine Public Utilities Commission's (MPUC)
recommendation to the legislature. After months of hearings
and deliberations, the Maine legislature passed L.D. 1804, "An
Act to Restructure the State's Electric Industry", which the
Governor signed into law on May 29, 1997.
The principal provisions of the new law are as follows:
1) Beginning on March 1, 2000, all consumers of electricity
have the right to purchase generation services directly from
competitive electricity suppliers who will not be subject to
rate regulation.
2) By March 1, 2000, the Company, Central Maine Power
Company (CMP) and Bangor Hydro-Electric Company (BHE) must
divest of all generation related assets and business functions
except for:
(a) contracts with qualifying facilities, such as the
Company's power contract with Wheelabrator-Sherman (W-S),
and conservation providers;
(b) nuclear assets, namely, the Company's investment in
the Maine Yankee Atomic Power Company, however, the MPUC
may require divestiture on or after January 1, 2009;
(c) facilities located outside the United States, i.e.,
the Company's hydro facility in New Brunswick, Canada;
and
(d) assets that the MPUC determines necessary for the
operation of the transmission and distribution services.
The MPUC can 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. See item (b) below
regarding the divestiture of the Company's generating assets.
3) Billing and metering services will be subject to
competition beginning March 1, 2002, but permits the MPUC to
establish an earlier date, no sooner than March 1, 2000.
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Form 10-K
PART I
Item 3. Legal Proceedings - Continued
4) The Company, through an unregulated affiliate, may market
and sell electricity both within and outside its current
service territory, without limitation. Both CMP and BHE are
limited to 33% of the load within their respective service
territories, but may sell an unlimited amount outside their
service territories. Consumer-owned utilities are allowed to
market and sell within their service territories, but the MPUC
can limit or prohibit competition in their service territory,
if the tax-exempt status of the consumer-owned utility is
threatened.
5) The Company, through a regulated affiliate, will continue
to provide transmission and distribution services which will
be subject to continued regulation by the MPUC.
6) Maine electric utilities will be permitted a reasonable
opportunity to recover legitimate, verifiable and unmitigable
costs that are otherwise unrecoverable as a result of retail
competition in the electric utility industry. The MPUC shall
determine these stranded costs by considering:
a) the utility's regulatory assets related to
generation, i.e., the Company's unrecovered Seabrook
investment;
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, i.e.,
the W-S contract.
By July 1, 1999, the MPUC will have estimated the stranded
costs for the Company and the manner for the collection of
these costs by the transmission and distribution company.
Customers reducing or eliminating their consumption of
electricity by switching to self-generation, conversion to
alternative fuels or utilizing demand-side management measures
cannot be assessed exit or entry fees. The Company estimates
its stranded costs to be approximately $85 million, based on
the completion of the W-S contract restructuring, market power
estimates beyond 2000 and regulatory treatment of the
Company's remaining Seabrook investment, but does not include
any benefits from the Company's sale of generating assets.
The MPUC shall include in the rates charged by the
-16-
Form 10-K
PART I
Item 3. Legal Proceedings - Continued
transmission and distribution utility decommissioning expenses
for Maine Yankee. In 2003 and every three years thereafter
until the stranded costs are recovered, the MPUC shall review
and revaluate the stranded cost recovery.
7) All competitive providers of retail electricity must be
licensed and registered with the MPUC and meet certain
financial standards, comply with customer notification
requirements, adhere to customer solicitation requirements and
are subject to unfair trade practice laws. Competitive
electricity providers must have at least 30% renewable
resources in their energy portfolios, including hydro-electric
generation.
8) A standard-offer service will be available, ensuring
access for all customers to reasonably priced electric power.
Unregulated affiliates of CMP and BHE providing retail
electric power are prohibited from providing more than 20% of
the load within their respective service territories under the
standard offer service, while any unregulated affiliate of the
Company does not have a similar restriction.
9) Unregulated affiliates of CMP and BHE marketing and
selling retail electric power must adhere to specific codes of
conduct, including, among others:
a) employees of the unregulated affiliate providing
retail electric power must be physically separated from
the regulated distribution affiliate and cannot be
shared;
b) the regulated distribution affiliate must provide
equal access to customer information;
c) the regulated distribution company cannot
participate in joint advertising or marketing programs
with the unregulated affiliate providing retail electric
power;
d) the distribution company and its unregulated
affiliated provider of retail electric power must keep
separate books of accounts and records; and
(e) the distribution company cannot condition or tie the
provision of any regulated service to the provision of
-17-
Form 10-K
PART I
Item 3. Legal Proceedings - Continued
any service provided by the unregulated affiliated
provider of electricity.
The MPUC shall determine the extent of separation
required in the case of the Company to avoid cross-
subsidization and shall consider all similar relevant
issues as well as the Company's small size.
10) Employees, other than officers, displaced as a result of
retail competition will be entitled to certain severance
benefits and retraining programs. These costs will be
recovered through charges collected by the regulated
distribution company.
11) Other provisions of the new law include provisions for:
a) consumer education;
b) continuation of low-income programs and demand side
management activities;
c) consumer protection provisions;
d) new enforcement authority for the MPUC to protect
consumers.
The MPUC will conduct several rulemaking proceedings
associated with the new restructuring law. The Company is
presently reviewing its business operations and the
opportunities that the new restructuring law presents.
(b) Maine Public Service Company, Divestiture of Generation
Assets, MPUC Docket No. 97-670
As reported in item (a) above, the Company is required to
obtain the MPUC's approval of a plan to divest itself of all
its generation assets by January 1, 1999. On September 9,
1997, the Company, pursuant to this Legislation, submitted to
the MPUC its plan for divesting itself of all its power
entitlements and generation assets, including its Canadian
subsidiary. A hearing was held on this plan on December 18,
1997. By Order issued February 20, 1998, the MPUC approved
the Company's plan and ordered it to proceed to divest itself
of its generation assets in accordance with the plan.
Any final sale of the Company's generation assets must be
approved by the MPUC. In its Order approving the divestiture
-18-
Form 10-K
PART I
Item 3. Legal Proceedings - Continued
plan, the MPUC noted a number of concerns that it would
address when the final sale was brought before it for
approval. These concerns included whether the sale of the
assets of the Canadian subsidiary should be delayed pending
the development of a retail market for electricity in Canada
or until the MPUC completes its final study on the efficiency
of competitive markets in northern Maine (see item (c) below)
and whether any sale would create, or exacerbate, a
concentration of generation market power to the detriment of
MPS's customers.
MPS has received and reviewed bids for its generation assets
and power entitlements and is now in the process of
negotiating the terms of sale with the successful bidders.
The Company cannot predict the exact terms of any final sale
of these properties nor whether, or under what terms, that
sale will be approved by the MPUC.
(c) Interim Report by the Maine Public Utilities Commission and
the Maine Attorney General Regarding Market Power Issues
Raised by the Prospect of Retail Competition in the Electric
Industry, MPUC Docket No. 97-877
The Legislation described in item (a) above required the Maine
Department of the Attorney General and the MPUC to jointly
conduct a study of the various market power issues presented
by the introduction of retail competition into Maine's
electric utility industry. A final report in this matter is
due by December 31, 1998. On February 2, 1998, the MPUC and
the Attorney General issued its interim report in this matter.
This interim report did not reach any final conclusion or make
any recommendations, but did note certain areas of concern.
Among the principal areas of concern are:
- whether the proposed regulation of transactions between
a utility and its marketing affiliate will be sufficient
to prevent market dominance by the affiliate or whether
an outright ban on affiliate marketing is preferable.
- that "special circumstances" in the Company's service
territory (such as its direct physical isolation from the
New England power grid) indicates that it may be subject
to a high degree of market power. Accordingly, the
interim report noted, without further elaboration, that
-19-
Form 10-K
PART I
Item 3. Legal Proceedings - Continued
the Final Report would "evaluate several possible
legislative adjustments".
In a related matter, and again as required by the Legislation
described in item (a), the MPUC, on January 26, 1998, opened
an investigation into the feasibility of a direct physical
interconnection between the Company's service territory and
the New England power grid (MPUC Docket No. 97-586). The MPUC
expects to issue a draft report on this matter by December 1,
1998. The Company will be directly involved in this
investigation.
The Company cannot at this time predict either the ultimate
conclusions of the studies described above or the effect of
these studies upon the proposed sale of the Company's
generation assets or the prospect of retail competition in the
Company's service territory.
(d) Maine Public Service Company, Request For Open Access
Transmission Tariff, FERC Docket No. ER 95-836-000.
On March 31, 1995, the Company filed an open access
transmission tariff with the Federal Energy Regulatory
Commission (FERC). This tariff provides fees for various
types and levels of transmission and transmission-related
services that are required by transmission customers. The
tariff, as filed, substantially increases some of the fees for
transmission services and provides separate fees for various
transmission-related services. On May 31, 1995, the FERC
approved the filed tariff, subject to refund. The filing has
been vigorously contested by the Company's wholesale
customers. On May 31, 1996, the FERC issued Order 888, a
final rule on open transmission access and stranded cost
recovery. As a result the Company has refiled its tariff to
comply with the Order. A decision by the FERC regarding the
fees under the Company's tariff is not expected until later in
1998. The Company cannot predict the FERC's ultimate decision
in this matter.
(e) Restructured Purchase Power Agreement with Wheelabrator-
Sherman
The Company has a Power Purchase Agreement (PPA) with the
Wheelabrator-Sherman Energy Company (W-S) under which the
Company is obligated to purchase the entire output (up to
126,582 MWH) of a 17.6 MW biomass plant owned by W-S. The
-20-
Form 10-K
PART I
Item 3. Legal Proceedings - Continued
current term of the PPA runs through December 31, 2000 and may
be renewed by either party for an additional fifteen years at
prices to be determined by mutual agreement or, absent mutual
agreement, by the MPUC.
On October 15, 1997, the Company and W-S agreed to amend the
PPA. Under the terms of this amendment, W-S has agreed to
reductions in the price of purchased power of approximately
$10 million over the PPA's current term in exchange for up-
front payments of $8.7 million. The Company and W-S have also
agreed to renew the PPA for an additional six years at agreed-
upon prices. The Company believes the amended PPA will help
relieve the financial pressure caused by the recent closure of
Maine Yankee as well as the need for substantial increases in
its retail rates, and is therefore in the best interests of
the Company, its customers and shareholders.
In order to finance the upfront payment to W-S, the Company
concluded that it must obtain funds from the Finance Authority
of Maine (FAME); absent FAME financing the Company does not
believe it can obtain the funds on terms sufficiently economic
to justify the arrangement with W-S. The amended PPA must be
approved by the MPUC if FAME financing is to be obtained. The
Company's request for this approval was given the MPUC Docket
No. 97-727. The Company also asked the MPUC for a
determination that any so-called stranded costs created by the
amended PPA will be recoverable from customers to the extent
permitted by Maine law.
On December 22, 1997, the MPUC approved the amended PPA and
determined that the additional costs created by the amended
PPA will be treated as stranded cost. On February 19, 1998,
the FAME Board of Directors voted to provide the Company with
the financing necessary to support the amended PPA. The
Company is now in the process of negotiating the precise terms
of this financing and expects to actually implement the
restructured PPA by May 1, 1998, but cannot predict the exact
timing or the terms and conditions of the necessary financing.
(f) Maine Public Utilities Commission Investigation of the
Operation and Shutdown of Maine Yankee Atomic Power Company
Generating Facility in Wiscasset, Maine, MPUC Docket No. 97-
781
On October 24, 1997, the MPUC issued a Notice of Investigation
regarding the August, 1997 shutdown of the Maine Yankee Power
-21-
Form 10-K
PART I
Item 3. Legal Proceedings - Continued
Plant (see Item 1. "Subsidiaries and Affiliated Companies",
above). The MPUC stated that the "permanent shutdown of the
plant presents significant ratemaking issues" such as
replacement power costs and stranded cost issues, for all
three of Maine Yankee's Maine owners. The announced scope of
the investigation is therefore intended to focus on "two
separate generic prudence questions .... presented in
determining the reasonableness of increased purchased power
costs and reasonableness of the recovery of the unamortized
Maine Yankee investment:
1. Was the decision to shut down the Maine Yankee Plant
prudent?
2. Was the plant prematurely shut down because the plant had
been operated or was operating imprudently?"
As an owner of Maine Yankee, the Company was made a party to
this investigation.
The Company believes the MPUC's jurisdiction over Maine Yankee
costs and prudence issues is preempted by the Federal Power
Act and FERC jurisdiction. If, however, the MPUC should
successfully assert jurisdiction over these issues and, if it
disallowed substantial amounts of the Maine Yankee-related
expenses in retail rates, the effect on the Company's
financial condition would be material and adverse. On
November 7, 1997, Central Maine Power and Maine Yankee
initiated legal challenges 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's investigation is therefore barred on
constitutional grounds. The Company joined that appeal on
November 13, 1997.
On December 2, 1997, the MPUC issued an Order staying the
investigation. The MPUC noted that Maine Yankee had begun a
rate proceeding before the FERC on November 6, 1997, which
could address the prudence issues raised in the MPUC's own
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 MPUC "if we feel it
necessary to investigate those matters after the FERC
proceeding ends." The Company cannot therefore predict
-22-
Form 10-K
PART I
Item 3. Legal Proceedings - Continued
whether the MPUC will reopen its investigation once the FERC
proceeding is concluded.
As a result, the Maine Supreme Judicial Court, on December 15,
1997, upon motion by Maine Yankee and its Maine owners, stayed
all proceedings in the appeal until the first to occur of
either December 31, 1998 or the 30th day after the conclusion
of the FERC's investigation.
(g) Maine Public Utilities Commission Approves Rate Increase
Pursuant to Previously Approved Rate Plan, MPUC Docket
No. 97-830.
Reference is made to the Company's Form 10-K for December 31,
1996 where the Company's rate stabilization plan approved by
the Maine Public Utilities Commission (MPUC) (Docket No. 95-
052) in November, 1995 is described. In addition, in the
Company's Form 8-K filed November 19, 1997, the Company
announced its annual filing under the rate plan.
On November 13, 1997, the Company filed with the MPUC its
annual rate increase pursuant to the Company's rate plan. The
filing supported an annual increase in retail rates of 7.6%
effective February 1, 1998 consisting of the following:
- 2.75% specified annual increase provided in the rate
plan;
- 2.22% increase for 50% of the Maine Yankee replacement
power costs in accordance with the Maine Yankee plant
outage provisions of the rate plan; and
- 2.63% increase in accordance with the profit-sharing
mechanism of the rate plan since earnings for the review
period, i.e. the twelve months ended September 30, 1997,
were more than 300 basis points below the target return
on equity.
Additional capacity payments to restart Maine Yankee and
incremental replacement power costs have adversely impacted
the Company's 1997 earnings and triggered the rate plan
profit-sharing mechanism noted above. The Company's ability
to increase its rates for the profit-sharing and for 50% of
Maine Yankee replacement power costs is subject to the MPUC's
pending review of the prudency of the decision to close Maine
Yankee (see item (f) above).
-23-
Form 10-K
PART I
Item 3. Legal Proceedings - Continued
In addition, the Company had amended its November, 1997 filing
requesting that the savings from the restructured
Wheelabrator-Sherman (W-S) Contract, as approved by the MPUC
on December 22, 1997 (see item (e) above) be used to offset
future Maine Yankee replacement power costs. However, this
treatment was again subject to the results of the MPUC's
review of the prudency of closing Maine Yankee. The
restructuring of the W-S Contract requires an up-front payment
of approximately $8.7 million, which the Company intends to
finance from funds obtained from the Finance Authority of
Maine (FAME), under its rate stabilization program.
On January 15, 1998, the Public Advocate and the Company, with
the support of the MPUC Staff, reached an agreement on the
rate increase for February 1, 1998. The principal elements of
the stipulation are as follows:
- the rate increase effective February 1, 1998 was 3.9%,
consisting of the specified increase of 2.75% and
approximately $562,000 of the 1997 recoverable Maine
Yankee replacement power costs (1.15%);
- the minimum rate increase effective February 1, 1999 will
be 3.1%, consisting of a specified increase of 2% and the
remaining recoverable 1997 Maine Yankee replacement power
costs of $523,000;
- Maine Yankee replacement power costs for the period
October 1, 1997 through September 30, 1998 will be offset
by the 1998 savings under the restructured W-S contract,
with the recovery of any incremental Maine Yankee
replacement power costs subject to a final order by the
MPUC in its previously mentioned review of the prudency
of closing Maine Yankee;
- the Company wrote off in 1997 unamortized Maine Yankee
refueling outage costs of approximately $1,458,000;
- the Company waives its right to collect additional revenues for
the profit-sharing review period, i.e. the twelve months ended
September 30, 1997, since the earnings deficiency was the result
of the closing of Maine Yankee and, based on the 3.9% increase
granted by the MPUC, the Company expects to earn a reasonable
rate of return in 1998 without these additional revenues;
- a customer service and reliability standards penalty will
be suspended pending review of these standards during the
rate plan's mid-term review in September of 1998.
-24-
Form 10-K
PART I
Item 3. Legal Proceedings - Continued
This agreement was approved by the MPUC on January 26, 1998.
The Company was not able to attain its interest coverage tests
for the fourth quarter of 1997, but the Banks have granted a
waiver. For 1998, the Banks have agreed to amend these
interest coverage tests to deal with these additional Maine
Yankee costs. Based on the Company's current projections, the
Company believes that it can attain these amended interest
coverage tests. The Company believes that its rate plan deals
effectively with the closing of Maine Yankee, with customers
and shareholders sharing the burden equally. However, the
Company cannot predict what the MPUC's decisions will be
concerning the prudency of closing Maine Yankee. If the
Company is adversely impacted by the MPUC prudency decision,
or if the Company is unable to complete the financing for the
restructured Wheelabrator-Sherman contract, the Company may be
required to seek an emergency rate increase and will review
all cash expenditures, including the level of dividends.
-25-
Form 10-K
PART I
Item 4. Submission of Matters To a Vote of Security Holders
At the Company's Annual Meeting of Stockholders, held on
May 13, 1997, the only matter voted upon was the
uncontested election of the following directors to serve
until the 2000 Annual Meeting of Stockholders, each of
whom received the votes shown:
Non-votes and
Nominee For Against Abstentions
Robert E. Anderson 1,320,381 49,395 247,474
Nathan L. Grass 1,320,279 49,497 247,474
J. Paul Levesque 1,319,315 50,461 247,474
-26-
Form 10-K
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is listed and traded on the
American Stock Exchange. As of December 31, 1997, there were
1,436 holders of record of the Company's Common Stock.
Dividend data and market price related to the Common Stock are
tabulated as follows for the two most recent calendar years:
Dividends
Market Price Dividends Declared
High Low Paid Per Share Per Share
1997
First Quarter $18-3/8 $14-1/8 $ .46 $ .25
Second Quarter $14-3/4 $11-3/8 .25 .25
Third Quarter $12-7/8 $10-3/16 .25 .25
Fourth Quarter $12-13/16 $11-3/8 .25 .25
Total Dividends $1.21 $1.00
1996
First Quarter $22-3/8 $19 $ .46 $ .46
Second Quarter $20-3/8 $16-7/8 .46 .46
Third Quarter $19-1/8 $17-3/8 .46 .46
Fourth Quarter $19-1/2 $17-1/8 .46 .46
Total Dividends $1.84 $1.84
Dividends declared within the quarter are paid on the first day of
the succeeding quarter.
See Note 7 to the financial statements incorporated herein by
reference concerning restrictions on payment of dividends on
Common Stock.
Item 6. Selected Financial Data
A five-year summary of selected financial data (1993-1997) is
included on page 13 of the Company's 1997 Annual Report to
Stockholders, which summary is incorporated herein by
reference.
-27-
Form 10-K
PART II
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The information required to be furnished in response to this
Item is submitted as pages 4 to 12, Exhibit 13, 1997 Annual
Report to Shareholders, which pages are hereby incorporated
herein by reference. Information regarding "Construction" is
also furnished in Note 10, "Commitments, Contingencies, and
Regulatory Matters", of the Notes to the Consolidated
Financial Statements, pages 25 to 29 of the 1997 Annual Report
to Shareholders, which pages are hereby incorporated herein by
reference.
-28-
Form 10-K
PART II
Item 8. Financial Statements and Supplementary Data
(a) The following financial statements and supplementary
data are included in the Company's 1997 Annual Report to
Stockholders on pages 14 through 29 and page 34, and are
incorporated herein by reference:
Statements of Consolidated Operations for the years
ended December 31, 1997, 1996 and 1995.
Statements of Consolidated Cash Flows for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets as of December 31, 1997
and 1996.
Statements of Consolidated Common Shareholders'
Equity for the years ended December 31, 1997, 1996
and 1995.
Consolidated Statements of Capitalization as of
December 31, 1997 and 1996.
Notes to Consolidated Financial Statements.
Independent Accountants' Report.
Item 9. Changes In And Disagreements With Accountants On
Accounting and Financial Disclosure
For many years, including fiscal year 1995, the firm of Deloitte &
Touche, LLP, (Deloitte & Touche) independent public accountants, was
engaged by the Company as the principal independent accountant to
audit the Company's financial statements. On March 1, 1996, the
Company's entire Board of Directors, based on a recommendation of the
Audit Committee of the Board, voted to engage the firm of Coopers &
Lybrand, L.L.P., (Coopers & Lybrand) independent public accountants,
as the Company's principal accountant beginning with the 1996 fiscal
year audit and not to use the services of Deloitte & Touche. This
change in accountants followed the Company's issuance, in November
1995, of a request for proposal to six major independent accounting
firms to audit the Company's financial statements. The Company issued
this request solely to determine whether it could reduce the fees it
pays for accounting services. Three firms, including Deloitte &
Touche and Coopers and Lybrand, responded to the request. Based
solely upon the Audit Committee's review of those responses, and the
terms of the request, the Board determined to engage Coopers &
Lybrand, whose bid was substantially lower than any
-29-
Form 10-K
PART II
Item 9. Changes In And Disagreements With Accountants On
Accounting and Financial Disclosure - Continued
other received by the Company, as the Company's principal
accountant for a term of at least three years, beginning in
fiscal year 1996. As a result of this vote, the Company
informed Deloitte & Touche that it would not renew its year to
year engagement letter with that firm.
Deloitte & Touche's report on the Company's financial
statements for fiscal year 1995 did not contain an adverse
opinion or disclaimer of opinion or any modification or
qualification.
At no time during the Company's two most recent fiscal years
of Deloitte & Touche's engagement or any time thereafter has
there been any disagreement between the Company and the firm
on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure. At no
time during the Company's two most recent fiscal years of
Deloitte & Touche's engagement or any time thereafter did any
event occur between the Company and the firm that would
require further reporting in this Form 10-K.
At no time during the Company's two most recent fiscal years
of Deloitte & Touche's engagement and any time thereafter
prior to the Company's engaging Coopers & Lybrand did the
Company consult Coopers & Lybrand regarding either the
application of accounting principles to a specified
transaction, either completed or proposed, or the type of
audit opinion that might be rendered on the Company's
financial statements.
-30-
Form 10-K
PART III
Item 10. Directors and Executive Officers of the Registrant
Information with regard to the Directors of the registrant is
set forth in the proxy statement of the registrant relating to
its 1998 Annual Meeting of Stockholders, which information is
incorporated herein by reference. Certain information
regarding executive officers is set forth under the caption
"Executive Officers" in Item 1 of Part I of this Form 10-K and
also in the proxy statement of the registrant relating to the
1998 Annual Meeting of Stockholders, under "Compliance with
Section 16(a) of the Securities and Exchange Act of 1934",
which information is incorporated by reference.
Item 11. Executive Compensation
Information for this item is set forth in the proxy statement
of the registrant relating to its 1998 Annual Meeting of
Stockholders, which information (with the exception of the
"Board Executive Compensation Committee Report") is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
Information for this item is set forth in the proxy statement
of the registrant relating to its 1998 Annual Meeting of
Stockholders, which information is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
Not applicable.
-31-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements
Incorporated by reference into Part II of this
report from pages 14 through 29 and page 34 of the
1997 Annual Report to Stockholders:
Statements of Consolidated Operations for years
ended December 31, 1997, 1996 and 1995.
Statements of Consolidated Cash Flows for the years
ended December 31, 1997, 1996 and 1995.
Consolidated Balance Sheets as of December 31, 1997
and 1996.
Statements of Consolidated Common Shareholders'
Equity for the years ended December 31, 1997, 1996
and 1995.
Consolidated Statements of Capitalization as of
December 31, 1997 and 1996.
Notes to Consolidated Financial Statements.
Independent Accountants' Report.
(2) Financial Statement Schedules
Included in Part IV of this report:
-32-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K - Continued
Page
Report of Independent Public Accountants 43
Schedule II - Valuation of Qualifying Accounts 44
and Reserves
Schedules other than those listed above are omitted for the
reason that they are not required or are not applicable, or
the required information is shown in the financial statements
or notes thereto.
(3) Exhibits
Certain of the following exhibits are filed
herewith. Certain other of the following exhibits
have heretofore been filed with the Commission and
are incorporated herein by reference. (* indicates
filed herewith).
3(a) Restated Articles of Incorporation with all
amendments through May 8, 1990. (Exhibit 3(a)
to 1990 form 10-K)
3(b) By-laws of the Company, as amended through May
12, 1987. (Exhibit 3(b) to 1987 Form 10-K)
4(a) Indenture of Mortgage and Deed of Trust
defining the rights of the holders of the
Company's First Mortgage Bonds. (Exhibit 4(a)
to 1980 Form 10-K)
4(b) First Supplemental Indenture. (Exhibit 4(b)
to 1980 Form 10-K)
4(c) Second Supplemental Indenture. (Exhibit 4(c)
to 1980 Form 10-K)
4(d) Third Supplemental Indenture. (Exhibit 4(d)
to 1980 Form 10-K)
4(e) Fourth Supplemental Indenture. (Exhibit 4(e)
to 1980 Form 10-K)
4(f) Fifth Supplemental Indenture. (Exhibit A to
Form 8-K dated May 10, 1968)
4(g) Sixth Supplemental Indenture. (Exhibit A to
Form 8-K dated April 10, 1973)
-33-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K - Continued
4(h) Seventh Supplemental Indenture. (Exhibit A to
Form 8-K dated November 7, 1975)
4(i) Eighth Supplemental Indenture. (Exhibit 4(i)
to 1980 Form 10-K)
4(j) Ninth Supplemental Indenture. (Exhibit B to
Form 10-Q for the second quarter of 1978)
4(k) Tenth Supplemental Indenture. (Exhibit 4(k)
to 1980 Form 10-K)
4(l) Eleventh Supplemental Indenture. (Exhibit
4(l) to 1982 Form 10-K)
4(m) Indenture defining the rights of the holders
of the Company's 9 7/8% debentures. (Exhibit
A to Form 8-K, dated June 10, 1970)
4(n) Indenture defining the rights of the holders
of the Company's 14% debentures. (Exhibit
4(n) to 1982 Form 10-K)
4(o) Twelfth Supplemental Indenture. (Exhibit 4(o)
to Form 10-Q for the quarter ended September
30, 1984)
4(p) Thirteenth Supplemental Indenture. (Exhibit
4(p) to Form 10-Q for the quarter ended
September 30, 1984)
4(q) Fourteenth Supplemental Indenture, Dated July
1, 1985. (Exhibit 4(q) to 1985 Form 10-K)
4(r) Fifteenth Supplemental Indenture, Dated March
1, 1986. (Exhibit 4(r) to 1985 Form 10-K)
4(s) Sixteenth Supplemental Indenture, Dated
September 1, 1991. (Exhibit 4(s) to the
Company's 1991 Form 10-K).
9 Not applicable.
10(a)(1) Joint Ownership Agreement with Public Service
of New Hampshire in respect to construction of
two nuclear generating units designated as
Seabrook Units 1 and 2, together with related
-34-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K - Continued
amendments to date. (Exhibit 10 to 1980 Form 10-K)
10(a)(2) Twentieth Amendment to Joint Ownership
Agreement (Exhibit 10(a)(6) to the Company's
1986 Form 10-K)
10(a)(3) Twenty-Second Amendment to Joint Ownership
Agreement. (Exhibit 10(a)(3) to the 1988 Form
10-K)
10(b)(1) Capital Funds Agreement, dated as of May 20,
1968 between Maine Yankee Atomic Power Company
and the Company. (Exhibit 10(b)(1) to Form
10-Q for the quarter ended March 31, 1983)
10(b)(2) Power Contract, dated as of May 20, 1968
between Maine Yankee Atomic Power Company and
the Company. (Exhibit 10(b)(2) to Form 10-Q
for the quarter ended March 31, 1983)
10(c)(1) Participation Agreement, as of June 20, 1969,
with Maine Electric Power Company, Inc.
(Exhibit 10(c)(1) to Form 10-Q for the quarter
ended March 31, 1983)
10(c)(2) Agreement, as of June 20, 1969, among the
Company and the other Maine Participants.
(Exhibit 10(c)(2) to Form 10-Q for quarter
ended March 31, 1983)
10(c)(3) Power Purchase and Transmission Agreement
Supplement to Participation Agreement, dated
as of August 1, 1969, with Maine Electric
Power Company, Inc. (Exhibit 10(c)(3) to Form
10-Q for quarter ended March 31, 1983)
10(c)(4) Supplement Amending Participation Agreement,
as of June 24, 1970, with Maine Electric Power
Company, Inc., (Exhibit 10(c)(4) to Form 10-Q
for quarter ended March 31, 1983)
10(c)(5) Second Supplement to Participation Agreement,
dated as of December 1, 1971, including as
Exhibit A the Unit Participation Agreement
dated November 15, 1971, as amended, between
Maine Electric Power Company, Inc. and the New
Brunswick Electric Power Commission. (Exhibit
-35-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K - Continued
10(c)(5) to Form 10-Q for quarter ended March
31, 1983)
10(c)(6) Agreement and Assignment, as of August 1,
1977, by Connecticut Light & Power Company,
Hartford Electric Company, Holyoke Water Power
Company, Holyoke Power Company, Western
Massachusetts Electric Company and the
Company. (Exhibit 10(c)(6) to Form 10-Q for
the quarter ended March 31, 1983)
10(c)(7) Amendment dated November 30, 1980 to Agreement
and Assignment as of August 1, 1977, between
Connecticut Light & Power Company, Hartford
Electric Company, Holyoke Water Power Company,
Holyoke Power Company, Western Massachusetts
Electric Company and the Company. (Exhibit
10(c)(7) to Form 10-Q for the quarter ended
March 31, 1983)
10(c)(8) Assignment Agreement as of January 1, 1981,
between Central Maine Power Company and the
Company. (Exhibit 10(c)(8) to Form 10-Q for
the quarter ended March 31, 1983)
10(d) Wyman Unit #4 Agreement for Joint Ownership as
of November 1, 1974, with Amendments 1, 2, and
3, dated as of June 30, 1975, August 16, 1976,
December 31, 1978, respectively. (Exhibit
10(d) to Form 10-Q for the quarter ended March
31, 1983)
10(e) Agreement between Sherman Power Company and Maine
Public Service Company, dated June 4, 1984, with
amendments dated July 12, 1984 and February 14, 1985.
(Exhibit 10(f) to 1984 Form 10-K)
10(f) Credit Agreement, dated as of October 8, 1987 among the
Registrant and The Bank of New York, Bank of New
England, N.A., The Merrill Trust Company and The Bank
of New York, as agent for the Participating Banks
(Exhibit 10(g) to Form 8-K dated October 13, 1987)
10(g) Amendment No. 1, dated as of October 8, 1989,
to the Revolving Credit Agreement, dated as of
October 8, 1987, among the Registrant and The
-36-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K - Continued
Bank of New York, Bank of New England, N.A.,
Fleet Bank (formerly the Merrill Trust
Company) and The Bank of New York as agent for
the participating banks (Exhibit 10(l) to Form
8-K dated September 22, 1989).
10(h) Amendment No. 2, dated as of June 5, 1992, to
the Revolving Credit Agreement, among the
Registrant and The Bank of New York, Bank of
New England, N.A., Shawmut Bank and the Bank
of New York, as agent for the participating
banks. (Exhibit 10(h) to the Company's 1992
Form 10-K)
10(i) Indenture of Second Mortgage and Deed of
Trust, dated as of October 1, 1985, made by
the Registrant to J. Henry Schroder Bank and
Trust Company, as Trustee. (Exhibit 10(i) to
Form 8-K dated November 1, 1985)
10(j) First Supplemental Indenture Dated March 1,
1991. (Exhibit 10(i) to the Company's 1991
Form 10-K).
10(k) Second Supplemental Indenture Dated September
1, 1991. Exhibit 10(j) to the Company's 1991
Form 10-K).
10(l) Agency Agreement dated as of October 1, 1985,
between J. Henry Schroder Bank and Trust
Company, as Trustee under the Indenture of
Second Mortgage and Deed of Trust dated as of
October 1, 1985, made by the Registrant to J.
Henry Schroder Bank and Trust Company, as
Trustee, and Continental Illinois National
Bank and Trust Company, as Trustee, under an
Indenture of Mortgage and Deed of Trust, dated
as of October 1, 1945, as amended and
supplemented, made by the Registrant to
Continental Illinois National Bank and Trust
Company, as Trustee (Exhibit 10(j) to Form 8-K
dated November 1, 1985)
Executive Compensation Plans and Arrangements
10(m) Employment Contract between Frederick C.
Bustard and Maine Public Service Company dated
-37-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K - Continued
August 22, 1989. (Exhibit 10(h) to 1989 Form
10-K)
10(n) Employment Contract between Paul R. Cariani
and Maine Public Service Company dated August
22, 1989. (Exhibit 10(l) to 1989 Form 10-K)
10(o) Employment Contract between Stephen A. Johnson
and Maine Public Service Company dated August
22, 1989. (Exhibit 10(m) to 1989 Form 10-K)
10(p) Employment Contract between Larry E. LaPlante
and Maine Public Service Company, dated May 9,
1995.
10(q) Maine Public Service Company, Prior Service
Executive Retirement Plan, dated May 12, 1992.
(Exhibit 10(s) to 1992 Form 10-K).
10(r) Maine Public Service Company Pension Plan.
(Exhibit 10(t) to 1992 Form 10-K).
10(s) Maine Public Service Company Retirement
Savings Plan. (Exhibit 10(u) to 1992 Form 10-
K).
10(t) Third Supplemental Indenture Dated as of June
1, 1996.
10(u) Amendment No. 3, dated as of October 8, 1995,
to the Revolving Credit Agreement, dated as of
October 7, 1987, among the Registrant and The
Bank of New York, Shawmut Bank of Boston,
Fleet Bank of Maine, and The Bank of New York,
an agent for the participating Banks.
11 Not applicable.
12 Not applicable.
*13 1997 Annual Report to Shareholders.
16 March 8, 1996 Letter regarding change in
certifying accountant from Deloitte & Touche LLP
18 Not applicable.
19 Not applicable.
-38-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K - Continued
21 Maine and New Brunswick Electrical Power
Company, Limited, a Canadian corporation.
22 Not applicable.
23 Not applicable.
99(a) Agreement of Purchase and Sale between Maine
Public Service and Eastern Utilities
Associates, dated April 7, 1986 (Exhibit 28(a)
to Form 10-Q for the quarter ended June 30,
1986).
99(b) Addendum to Agreement of Purchase and Sale,
dated June 26, 1986 (Exhibit 28(b) to Form 10-
Q for the Quarter ended June 30, 1986).
99(c) Stipulation between Maine Public Service
Company, the Staff of the Commission and the
Maine Public Utilities Commission and the
Maine Public Advocate, dated July 14, 1986
(Exhibit 28(c) to Form 10-Q for the quarter
ended June 30, 1986).
99(d) Amendment to July 14, 1986 Stipulation, dated
July 18, 1986 (Exhibit 28(d) to Form 10-Q for
the quarter ended June 30, 1986).
99(e) Order of the Maine Public Utilities Commission
dated July 21, 1986, Docket Nos 84-80, 84-113
and 86-3.
99(f) Order of the Maine Public Utilities
Commission, dated May 9, 1986, Docket Nos. 84-
113 and 86-3 (with attached Stipulations).
(Exhibit 28(r) to 1986 Form 10-K).
99(g) Order of the Maine Public Utilities
Commission, dated July 31, 1987, Docket Nos.
84-80, 84-113, 87-96 and 87-167 (with attached
Stipulation) (Exhibit 28(i) to 1988 Form 10-K).
99(h) Agreement between Maine Public Service Company
and various current Seabrook Nuclear Project
Joint Owners, dated January 13, 1989 (Exhibit
28(o) to 1988 Form 10-K).
-39-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K - Continued
99(i) Order of the Maine Public Utilities Commission
dated November 30, 1995 (with attached
Stipulation) in Docket No. 95-052. (Exhibit
28(p) to 1995 Form 10-K).
99(j) Order of the Federal Energy Regulatory
Commission dated May 31, 1995 in Docket No. ER
95-836-000. (Exhibit 28(r) to 1995 Form 10-
K).
99(k) Order of Maine Public Utilities Commission
dated June 26, 1996 in Docket 95-052 (Rate
Design)
*99(l) Independent Auditors Report of Deloitte &
Touche L.L.P. dated February 14, 1996
regarding year ended December 31, 1995.
*99(m) Amendment No. 1, dated as of March 28, 1997,
to the Letter of Credit and Reimbursement
Agreement, dated as of June 1, 1996, among the
Registrant, The Bank of New York, Fleet Bank
of Maine, and The Bank of New York, as Agent
and Issuing Bank.
*99(n) Amendment No. 4, dated as of March 28, 1997,
to the Revolving Credit Agreement, dated as of
October 8, 1987, by and among the Registrant,
the signatory Banks thereto and The Bank of
New York, as Agent.
*99(o) Order of Maine Public Utilities Commission
dated January 30, 1998 in Docket No. 97-830
(Annual Increase under Rate Stabilization
Plan).
*99(p) Interim Report of the MPUC and Maine Attorney
General regarding market power issues raised
by the prospect of the retail competition in
the electric industry in Docket No. 97-877.
*99(q) Order by the Maine Public Utilities Commission
dated January 15, 1998 in Docket No. 97-727.
-40-
Form 10-K
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K - Continued
(b) A Form 8-K was filed on: January 31, 1997, under item 5,
Other Events; February 14, 1997, under item 5, Other
Events; March 7, 1997, under item 5, Other Events; March
31, 1997, under item 5, Other Events and item 7,
Exhibits; June 4, 1997, under item 5, Other Events;
September 4, 1997, under item 5, Other Events; October
15, 1997, under item 5, Other Events; November 19, 1997,
under item 5, Other Events; December 23, 1997, under item
5, Other Events; and January 28, 1998, under item 5,
Other Events.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 26th of March, 1998.
MAINE PUBLIC SERVICE COMPANY
By: /s/ Larry E. LaPlante
Larry E. LaPlante
Vice President, Finance,
Administration and Treasurer
-41-
Form 10-K
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons in the
capacities and on the date indicated.
Signature Title Date
Chairman of the Board,
/s/ G. M. Hovey and Director 3/6/98
(G. Melvin Hovey)
/s/ Paul R. Cariani President and Director 3/6/98
(Paul R. Cariani)
/s/ Robert E. Anderson Director 3/6/98
(Robert E. Anderson)
/s/ Donald F. Collins Director 3/6/98
(Donald F. Collins)
/s/ D. James Daigle Director 3/6/98
(D. James Daigle)
/s/ Richard G. Daigle Director 3/6/98
(Richard G. Daigle)
Director
(J. Gregory Freeman)
/s/ Deborah L. Gallant Director 3/6/98
(Deborah L. Gallant)
/s/ Nathan L. Grass Director 3/6/98
(Nathan L. Grass)
/s/ J. Paul Levesque Director 3/6/98
(J. Paul Levesque)
-42-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Directors and Shareholders of
Maine Public Service Company
We have audited the consolidated financial statements of Maine Public
Service Company and its subsidiary, Maine and New Brunswick Electrical
Power Company, Limited, as of December 31, 1997 and 1996, and for the
years then ended, which financial statements are included on pages 14
through 29 of the 1997 Annual Report to Shareholders of Maine Public
Service Company and incorporated by reference herein. We have also
audited the financial statement schedules as of December 31, 1997 and
1996, listed in the index on page 33 of this Form 10-K. These financial
statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Maine Public Service Company and its subsidiary as of December 31, 1997
and 1996, and the consolidated results of their operations and their
cash flows for the years then ended in conformity with generally
accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in
relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information required to be
included therein.
/s/ Coopers & Lybrand, LLP
Portland, Maine
February 13, 1998
-43-
Maine Public Service Company & Subsidiary
Valuation of Qualifying Accounts & Reserves
For the Years Ended December 31, 1997, 1996, & 1995
Column A Column B Column C Column D Column E
Additions: Deductions:
Balance Recoveries Accounts Balance
at Costs of Accounts Written Off at
Beginning & Previously As End of
Description of Period Expenses Written Off Uncollectible Period
Reserve Deducted From Asset
To Which It Applies:
Allowance for
Uncollectible Accounts
Year Ended December 31:
1997 207,029 182,706 124,397 299,132 215,000
1996 214,130 182,000 102,627 291,728 207,029
1995 214,215 150,800 109,390 260,275 214,130
-44-
Exhibit 13
Maine Public Service Company
1997 Annual Report
We put a lot of energy into Northern Maine
(Page 1)
Maine Public Service Company
(System Map)
The primary goal of Maine Public Service Company is to supply reliable,
economical electrical power to Northern Maine. The Company is an investor-
owned electric utility with a wholly-owned subsidiary, Maine and New
Brunswick Electrical Power Company, Ltd., located at Tinker, New Brunswick.
Together both companies provide energy to more than 35,000 retail customers in
a 3,600 square mile area.
Maine Public Service Company has a favorable mixture of generation
sources made up of power produced by hydro-electric and oil-fueled facilities,
as well as two independent wood-burning cogenerators. The system is
strengthened by electrical interconnections with New Brunswick, Canada,
allowing electrical support from the New Brunswick system and indirectly from
the Hydro-Quebec system.
Major business activities in the area center around the production of
agricultural and forest products. Service was provided at a high reliability
rate over the last year, and it is our aim to meet customer needs fully and
efficiently, at the lowest possible cost.
Table of Contents
Profile and Table of Contents 1
President's Letter 2-3
Analysis of Financial Condition
and Review of Operations - 1997 4-11
Shareholder Information 12
Five-Year Summary of Selected Financial Data 13
Financial Statements and Notes 14-29
Consolidated Financial Statistics 30-31
Consolidated Operating Statistics 32-33
Independent Accountants' Report 34
Directors 35
Executive Officers and Stock
Transfer Information 36
(Photo)
Walter M. Reed, Jr., age 74, died unexpectedly while golfing at Aroostook Valley
Country Club, August 21, 1997. A champion golfer and well-known retired
businessman, Walter served as President of Maine Potato Growers for 22 years.
He had been a Director of Maine Public Service Company since February 28, 1979,
serving on the Pension Investment Committee and Budget and Finance Committee.
With sadness we remember and appreciate the efforts of our valued friend.
Maine Public Service Company
209 State Street
P. O. Box 1209
Presque Isle, Maine 04769-1209
Tel. No. (207) 768-5811 * FAX No. (207) 764-6586
Home Page: http://www.mainerec.com/mpsco.html * E-Mail: mainepub@ mfx.net
(Pages 2 and 3)
(Photo)
Bell-Ringing Ceremony in New York -- With a solid rap on the American Stock
Exchange bell, MPS President Paul R. Cariani, left, opened stock trading at
precisely 9:30 a.m. on December 5, 1997. The event marked the Company's 50th
anniversary of trading on the Exchange. Looking on from Cariani's left are Amex
Senior Vice President Delia Emmons; MPS Vice President of Finance,
Administration, and Treasurer Larry LaPlante; and Amex Executive Vice
President James Duffy. MPS stock is listed on the Amex under the ticker symbol
"MAP".
President's Letter
to our Shareholders and
Employees
The pace of change quickened in 1997 and the year turned out to be one of
the most challenging of your Company's 80-year history. Although we suffered
a loss of $1.35 per share, we have made significant progress in restoring the
financial health of the Company and are moving forward with positive
developments in order to compete under future deregulation. We have increased
our efforts in marketing and economic development.
As you know, the 1994 closure of Loring Air Force Base and the 1996 loss
of our largest customer, Houlton Water Company, have placed continued financial
challenges before us. Greatly compounding our difficulties, the closure of
Maine Yankee in 1997 cost this Company $2.94 per share in 1997 and is the
primary reason for this year's unfavorable financial performance.
Despite these adverse circumstances, the Company has taken several steps
to improve its financial condition; steps that I believe will substantially
improve our results in 1998 and beyond. These developments are:
* Settlement of the third year of our rate plan;
* Restructuring of the Wheelabrator-Sherman power contract;
* Potential sale of our Generation Assets;
* Development of a Marketing Subsidiary; and
* Improved economic development activity within our service territory.
Settlement of Rate Plan
Through negotiations with the MPUC Staff and Public Advocate, we settled
the third year of our rate stabilization plan with a 3.9% rate increase
effective February 1, 1998. As part of the agreement, we wrote off nearly $1.5
million of Maine Yankee expenses in 1997. This rate settlement will improve our
financial position in 1998 and is in the best interest of all concerned. Even
with this rate increase, MPS will continue to be competitive with other
investor-owned utilities throughout New England.
Restructuring Supply Contract
We have recently received approval from the Maine Public Utilities
Commission to buy down and restructure our power supply contract with
Wheelabrator-Sherman. This restructuring will substantially reduce our expenses
beginning 1998. We expect to finance the buy-down through the Finance Authority
of Maine (FAME).
Sale of Generation Assets
The Maine retail access law, passed in 1997, requires an open competitive
market for generation, beginning March 1, 2000. In order to facilitate that
free market, the law requires all electric utilities to divest of generating
assets by March 1, 2000.
In order to take advantage of a currently favorable market in the
Northeast, the Company opened bidding on its generation assets in August, 1997.
Based on preliminary results of the bid process, we are confident we will
receive fair value and look forward to finalizing the sale in 1998. The retail
access law permits electric utilities a reasonable opportunity to recover
legitimate, verifiable and unmitigable costs (otherwise known as stranded costs)
that are unrecoverable as a result of retail competition. We believe the
sale of our generating assets, along with the restructured W-S contract, will
substantially reduce our stranded costs and, thereby, facilitate its recovery.
MPUC proceedings in 1998 will address stranded costs as well as rates and other
restructuring issues. Both the sale of our generating assets and stranded costs
are subject to MPUC approval.
A New Marketing Subsidiary
Changes in electric regulation will present a number of opportunities.
Anticipating retail access, MPS is developing a marketing subsidiary, although
the subsidiary's formation must be approved by the MPUC. We are working with
Cinergy, an electric utility headquartered in Cincinnati, Ohio, to market power.
The marketing group is actively trading wholesale power as well as researching
products and services that may be marketable in an unregulated, competitive
environment.
Economic Development
This year, we will witness the opening of two call centers within our
service territory, one at Loring Commerce Center (former Air Base) and one in
Presque Isle. These new businesses are solid evidence of northern Maine's
emerging economic recovery, along with the restart of a wood-fired generating
plant in our service territory.
We have an agreement in principle with our Banks that satisfies our
interest coverage tests and will restructure our credit agreement. This
agreement resolves issues pertaining to violations of our interest coverage
tests and potential defaults on our debt instruments caused by the closure of
Maine Yankee. Although the loss of Maine Yankee posed a financial hardship for
us, the decision to close the plant was based on an economic analysis of the
costs, risks, and uncertainties of operating the plant compared to closing and
decommissioning the site. As explained elsewhere in this report, the MPUC may
challenge the prudency of this decision.
Overall, I am pleased with the progress of the Company and believe that we
are putting our finances in order and are preparing for retail access. To
summarize, the aforementioned events should allow the Company to maintain
competitive rates, satisfy the financial covenants of our lenders, and maintain
our current dividend, barring any unanticipated developments.
I want to thank you for your trust, confidence, and the opportunity to lead
your Company into the next century. And, as always, our employees continue to
dedicate themselves and exhibit the highest degree of professionalism and work
ethic, and I thank them for that.
Sincerely,
Paul R. Cariani
President and CEO
(Page 4)
Analysis of Financial Condition and Review of Operations - 1997
RESULTS OF OPERATIONS
Operating Revenues and Energy Sales
Consolidated operating revenues and MWH sales for the years 1997, 1996, and
1995 are as follows:
Consolidated Operating Revenues and Megawatt Hours Sold
1997 1996 1995
(Dollars in Thousands) Dollars MWH Dollars MWH Dollars MWH
Residential $20,391 167,368 $19,961 169,298 $19,081 168,640
Commercial & Industrial - Large
9,452 134,741 10,112 134,588 9,437 128,478
Commercial & Industrial - Small
17,419 168,976 16,420 163,804 15,723 165,914
Other Retail 1,468 13,323 1,523 13,166 1,701 14,859
Total Retail 48,730 484,408 48,016 480,856 45,942 477,891
Sales for Resale 2,168 57,578 2,096 55,958 6,955 123,793
Total Primary 50,898 541,986 50,112 536,814 52,897 601,684
Secondary Sales 2,140 52,648 4,797 229,141 619 22,115
Total Sales of
Electricity 53,038 594,634 54,909 765,955 53,516 623,799
Other 2,034 2,355 1,763
Total Operating Revenues
$55,072 $57,264 $55,279
Primary sales for 1997 were 541,986 MWH, which were approximately 1.0%
higher than primary sales of 536,814 MWH in 1996 and 9.9% lower than sales of
601,684 MWH in 1995. As reflected in the table above, the loss of Houlton Water
Company (HWC), a sales for resale customer, due to a competitive bid effective
January 1, 1996, is the principle reason for the primary sales decrease from
1995 to 1996. In 1995, HWC, the Company's largest customer, represented 11.1%
of consolidated MWH sales and 8.4% of consolidated operating revenues.
MWH sales for resale were 2.9% higher in 1997 than 1996 because of increased
sales to Eastern Maine Electrical Co-op and Perth-Andover Electric Light
Commission. Retail sales were 484,408 MWH in 1997, an increase of 3,552 MWH or
.7% over 1996 sales of 480,856 MWH, primarily due to the re-utilization of the
former Loring AFB by small commercial customers. Compared to 1995, retail sales
increased 1.4% reflecting increased sales to two large industrial customers: J.
Paul Levesque & Sons (a wood products customer) and McCain Foods (a foods
product customer).
During 1996 and 1997, the Company entered into long-term contracts with
five of its largest customers. In exchange for discounts from the Company's
standard rates, these customers agreed to purchase all of their electrical
requirements from the Company through the year 2000. All five of these
customers produced evidence of hardship to continue operations in the area or
were investigating self generation, criteria that the Maine Public Utilities
Commission (MPUC) reviewed before approving these load-retention contracts.
Secondary sales for 1997 of $2,140,000 were $2,657,000 lower than those
sales in 1996 and $1,521,000 higher than sales in 1995. The Company's Maine
Yankee entitlement was sold in 1996 during periods of surplus capacity while in
1997 and 1995 the plant was out of service, as further discussed in the "Maine
Yankee" section of this Annual Report. During the three-year period, the
Company entered into arrangements with other utilities to sell its Wyman Unit
No. 4 and Maine Yankee entitlements, when available, for varying lengths of
time at existing market rates. This energy was replaced, when necessary, with
system purchases, avoiding off-system wheeling costs.
The MPUC has jurisdiction over retail rates. As more fully explained in
the "Regulatory Proceedings - Four-Year Rate Stabilization Plan" section of this
Annual Report, the MPUC approved the four-year rate plan effective January 1,
1996 with increases of 4.4% and 2.9% effective on January 1, 1996 and February
1, 1997, respectively. The four-year rate plan allows for annual increases in
retail rates and eliminated the fuel clause. Prior to the four-year rate plan,
the Company had not sought a base rate increase since November 1, 1992.
(Page 5)
A fuel clause increase of $1.4 million was approved by the MPUC effective April
1, 1995. The Company's customer rates are competitive among investor-owned
utilities in Maine and New England.
The Federal Energy Regulatory Commission (FERC) has jurisdiction over U.S.
wholesale rates, included as sales for resale in the previous table and
discussion.
Energy Supply
The Company's most economical source of supply is hydro energy, which was
80.7% of normal production levels i