ML20140E966
| ML20140E966 | |
| Person / Time | |
|---|---|
| Site: | Maine Yankee |
| Issue date: | 12/31/1996 |
| From: | Hebert J, Lydon P Maine Yankee |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM) |
| References | |
| JRH-97-99, MN-97-62, NUDOCS 9705020018 | |
| Download: ML20140E966 (65) | |
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MaineYankee REll ABLE ELECTRICITY SINCE 1972 l
329 BATH ROAD + BRUNSWICK. MAINE 04011 * (207) 798-4100 l
l April 25,1997 l
MN-97-62 JRH-97-99 UNITED STATES NUCLEAR REGULATORY COMMISSION Attention: Document Control Desk Washington, DC 20055
References:
(a)
License No. DPR-36 (Docket No. 50-309) l
Subject:
Annual Financial Report Gentlemen:
Pursuant to 10 CFR 50.71(b), please find enclosed a copy of the 1906 Annual Financial Report for Maine Yankee Atomic Power Company.
Very truly yours, 9em (
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/> C:L/
LM James R. Hebert, Manager Regulatory Affairs Department JRH/SJB/mwf Enclosure c:
Mr. Hubert Miller Mr. J. T. Yerokun Mr. Daniel H. Dorman Mr. Patrick J. Dostie
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I Mr. Uldis Vanags f ()O'/
f 9705020018 961231 PDR ADOCK 05000309 u u 1
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MAINE YANKEE ATOMIC POWER COMPANY ANNUAL FINANCIAL REPORT l
FOR 1996 329 Bath Road. Brunswick. Maine 04011 Company Address (207)798-4100 Telephone Number Since Maine Yankee retired its publicly-held First Mortgage Bonds in 1993, it is no longer required to file periodic reports on Form 10-K,10-Q and 8-K (the "1934 Act Reports") with the Securities and Exchange Commission under the Securities Exchange Act of 1934. However, in order to continue to keep its investors and other interested parties informed about the Company and to comply with the reporting obligations contained in its various debt and preferred stock agreements, Maine Yankee will prepare an annual report. Its quarterly financial reports will be substantially in the form of the 1934 Act Reports. These reports will be distributed to those who formerly received the 1934 Act Reports and are also available to others on request from the Treasurer of the Company at the above address.
THIS REPORT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OF MAINE YANKEE ATOMIC POWER COMPANY.
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Maine Yanken Atomic Power comoany 1996 Annual Report l
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TABLE OF CONTENTS 1
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The Company.
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The Plant 2
Regulation and Environmental Matters 4
Management's Discussion and Analysis of Financial Condition and Results of Operations 6
Financial Statements and Supplementary Data 26 Directors and Executive Officers 60 I
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THE COMPANY Maine Yankee Atomic Power Company (the " Company" or " Maine Yankee"),
incorporated under the laws of Maine on January 3, 1966, owns and operates a
pressurized-water nuclear-powered electric generating plant at Wiscasset, Maine, with a current not capacity of approximately 860 i
megawatts electric (the " Plant").
The Company sells its capacity and output to its ten sponsoring stockholder utilities.
The Company's principal office address is 329 Bath Road, Brunswick, ME 04011, and its telephone number is (207) 798-4100. At December 31, 1996, the Company had i
l 453 regular full-time employees.
The Company is sponsored by ten investor-owned New England utilities (the
" Sponsors" or the " Stockholders"), each of which is committed under a Power Contract with the Company to purchase a specified percentage of the capacity and output of the Plant and to pay therefor a like percentage of l
amounts sufficient to pay the Company's fuel costs, operating expenses j
(including a depreciation accrual at c., rate sufficient to fully amortise l
the investment in the Plant over the operating life of the Plant and amounts estimated to be sufficient to decommission the Plant), interest on its debt and a return on its equity.
The Company and its Sponsors have also executed Additional Power Contracts for the purpose of extending the l
term of the Power Contracts, as amended, from 2003 to the end of ' the useful life of the Plant and the completion of its decommissioning and financial obligations.
Each Sponsor has also agreed, under a Capital Funds Agreement with the Company, to provide a like percentage of the Company's capital requirements not obtained from other sources, subject l
to obtaining necessary authorizations of regulatory bodies in each instance. All such obligations are subject to the continuing jurisdiction of.various federal and state regulatory bodies.
l The obligations of the Sponsors to make payments under the Power Contracts are unconditional, subject only to each Sponsor's right to cancel its Power Contract if deliveries cannot be made to the Sponsor because either (i) the Plant is damsged to the extent of being completely or substantially completely destroyed, or (ii) the Plant is taken by exercise j
of the right of eminent deyain or a similar right or power, or (iii) (a) the Plant cannot be used because of contamination or because a necessary license or authorization cannot be obtained or is revoked or the utilization thereof is made subject to specified conditions which are not met, and (b) the situation cannot be rectified to an extent which will permit the Company to make deliveries to the Sponsor from the Plant.
Notwithstanding the right to cancel, the obligation to pay decommissioning costs continues until the Plant has been fully decommissioned.
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o; THE PLANT l
The Plant is located on tidewater on Bailey Point in Wiscasset, Maine, on-an 820-acre site that is owned in fee by the Company and is adequate for i
the Plant and for all associated facilities, including the associated switchyard facilities which are owned in part and operated by Central Maine Power Company.
The Plant is a nuclear-powered' electric generating plant, utilizing a pressurized-water reactor, fueled with slightly enriched uranium oxide.
The nuclear steam supply system and certain other equipment were designed and fabricated by Combustion Engineering, Inc.
The turbine generator was supplied by Westinghouse Electric Corporation.
Stone
& Webster Engineering Corporation, as engineer and constructor, designed and l
constructed the Plant.
Construction of the Plant, which began in 1967, was completed in 1972 except for certain discharge temperature control facilities designed to meet the requirements of. the Maine ' Board of Environmental Protection, which were completed in 1975.
l The Plant was declared commercial on December 28, 1972, with regular operation at approximately 570 megawatts electric (net) starting on January 1,
1973.
Hearings on the Company's application for a- - full operating license were completed in 1972 and the license for full operation to 2003 was granted by the Atomic Energy Commission, the predecessor of the Nuclear Regulatory Commission
("NRC"), on June 29, 1973.
l Since the Plant commenced operation, the Company has sought to improve its I
safety and reliability through periodic upgrading of equipment and facilities, along with regular training programs for Plant personnel.
Through 1994 the Plant was a leader in electrical production. Through December 31, 1996, the Company had solti 118.7 billion'KWH of electricity at an average lifetime total cost per KWH of 2.5 cents (including the cost of the 1995 extended shutdown discussed below).
In February of 1995, during a regular refueling-and-maintenance shutdown, Maine Yankee discovered an extensive number of degraded steam-generator tubes in the Plant.
After evaluating its options, the Company undertook a repair project that kept the Plant off-line until early December 1995, when anonymous allegations of wrongdoing forwarded by the Union of l
Concerned Scientists
("UCS")
in connection. with earlier license i
amendments raised safety concerns that caused the Plant to remain out of service until mid-January 1996.
At that time Maine Yankee was allowed to return the Plant to a level of 90 percent of its maximum operating capacity pending final resolution of thosa concerns.
Then, on December 6, 1996, the Plant was taken off-line again, and it has remained off-line i
l pending resolution of those concerns and additional issues.
For a detailed discussion of the extended outage in 1995 and subsequent 2
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THE PLANT (continued) events, including the Plant's being placed on the NRC's " Watch List", see
" Management's Discussion and Analysis of Financial Condition and Results of Operations"
" Plant Regulatory and Operational Issues," below.
The operation of existing nuclear units and the construction of nuclear units in the United States have been subjects of public controversy.
Various groups have filed lawsuits and participated in administrative proceedings claiming that nuclear technology presents risks to public health and safety and to the environment.
In addition, certain of these groups have proposed restrictive legislation relating to nuclear power.
Some of the claims made by such groups, if they should prevail, or the i
existence of the controversy itself, could cause substantial modifications to or extended shutdowns of plants presently in operation.
Events in 1979 at the Three Mile Island Nuclear Unit No. 2 in Pennsylvania
("TMI") caused increased concern about the safety of nuclear generating plants.
This prompted a rigorous reexamination of safety-related equipment and operating procedures in all nuclear facilities and caused the NRC to promulgate numerous requirements in response to TMI, including
.both near-term modifications to upgrade certain safety systems and instrumentation and longer-term design changes, ranging from equipment changes to operational support. The Company made the modifications required by the NRC.
The NRC is continuing its safety reviews under both long-standing and new regulations and may at any time issue orders that could materially affect the Company's affairs and financial condition and 1
the operation of the Plant.
Public and regulatory attention has also focused on the disposal of both low-and high-level nuclear wastes.
Certain aspects of the disposal of nuclear wastes and the decommissioning of nuclear generating facilities have been regulated under federal and Maine law, and further regulation is likely in this area.
Public concern about the operation of nuclear generating facilities and the disposal of nuclear wastes has sometimes resulted in public campaigns to close such facilities. Although affecting various nuclear generating facilities in varying degrees, such events, as j
well as other problems of the industry, have had, and will antinue to have, a direct effect on the affairs and financial condition of the Company.
For further discussion of nuclear waste disposal issues, see Note 14 of Notes to Financial Statements, " Commitments and Contingencies."
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THE PLANT (continued) l There have been three unsuccessful state referenda attempting to close the Plant since 1980. 'The last referendum occ'urred on November 3, 1987, when the Maine electorate defeated an initiated bill intended to close the
.uly 4, 1988, by a margin of 59 percent to 41 percent.
In late i
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1996, 1 - u-based group announced its intention to gather signatures for a ret.anha co close the Plant in 2008, when the Plant' s operating license is anneduled to expire.
In the event such a referendum takes place, no pa dictio" can be made as to the outcome.
If (contrary to the l
history of unsuccessful referenda on the Plant) such a referendum or a referendum to close the Plant early were to pass in Maine, the Company believes that such referendum would be vulnerable to a challenge on the basis of fundatwntal legal principles and that the Company would have substantial rights and remedies available to it.
REGULATION AND ENVIRONMENTAL MATTERS The Plant is subject to extensive regulation by the NRC, which is l
empowered to authorize the siting, construction and operation of nuclear i
reactors after consideration of public health, safety, environmental and j
antitrust matters.
The Company and several of its Sponsors are f
subsidiaries of registered holding companies and, as such, are subject to r
regulation by the Securities and Exchange Commission ("SEC") under the l
Public Utility Holding Company Act of 1935 with respect to various l
matters, including the issuance of certain securities.
The Company is also subject to regulation by the SEC under other federal securities laws.
l In addition, the Company is subject to regulation by the Federal Energy Regulatory Commission ("FERC")
as to its rates (including the Power Contracts and Additional Power Contracts) and various other matters, and is subject to regulation by the Maine Public Utilities Commission ("MPUC")
as to some aspects of its business, including the issuance of securities.
i The United States Environmental Protection Agency
(" EPA") administers programs established under the Federal Water Pollution Control Act and the Clean Air Act, as amended in 1990, which affect the Plant.
The former Act
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establishes a national objective of complete elimination of discharges of pollutants into the nation's water and creates a rigorous permit program designed to achieve this objective.
The latter Act empowers the EPA to establish clean air standards which are implemented and enforced by state agencies.
l In addition, pursuant to the Federal Resource Conservation and Recovery l
Act of 1976, the EPA regulates the generation, transportation, treatment, storage and disposal of hazardous wastes.
The EPA has broad authority in administering these
- programs, including the ability to require installation of pollution control and mitigation devices.
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REGULATION AND ENVIRONMENTAL MATTERS (continued)
The National Environmental Policy Act of 1969 ("NEPA") requires that detailed statements of the environmental effects of major federal actions be prepared by federal agencies.
Major federal actions can include licenses or permits issued to the Company by the NRC and other federal agencies for construction or operation of generation and transmission facilities.
NEPA requires that federal licensing agencies make an l
independent evaluation of the environmental impact of, and alternatives to, the proposed action.
Future construction modifications or other activities at the Plant could require federal licenses or approvals that involve NEPA requirements.
The Company is 1so subject to regulation as to environmental matters and land use by ve;ious state and local authorities in Maine.
Under their continuing jurisdiction, the NRC and one or more of the EPA and the state authorities having jurisdiction over the Company's facil-ities may modify permits or licenses that have already been issued, or l
impose new conditions on such permits or licenses, and may require ad-ditional capital expenditures or require that the level of operation of a unit be temporarily or permanently reduced.
The Sponsors of the Company have agreed, however, subject to certain exceptions including regulatory
- approval, (i) to provide the required capital not otherwise available, (ii) to take the total output of the Plant, and (iii) to pay all costs of the Plant, including capital and decommissioning costs.
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Maine Yankee Atomis Power Company
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MANAGEMENT!S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS J
i For a period commencing January 1,
1973, extending for thirty years thereafter in accordance with the Power Contracts, as
- amended, subsequently extended by the Additional Power Contracts from 2003 to the end of the useful life of the Plant and completion of all licensing and financial obligations, and subject to certain limitations, each Sponsor receives its entitlement percentage of Plant output and is obligated to pay its entitlement percentage of the Company's total costs, including a return on invested capital, regardless of the level of operation of the Plant.
The Plant's operating license is currently scheduled to expire in 200P.
The following is management's analysis of certain significant factors that have affected the Company's operating results and financial condition for j
1 the period 1994 through 1996.
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i Ooeratina Results Plant Ooerations The Plant is generally operated on a planned eighteen-month operating cycle and must be taken off-line at the end of a cycle for approximately six to ten weeks for scheduled refueling, maintenance and planned construction activities. Maine Yankee continues to evaluate and implement options to increase operating flexibility and minimize costs.
In 1994, a year with no refueling shutdown, it produced approximately 6.6 billion KWH at ran average cost of 2.6 cents per KWH, and was rated as having the second lowest production costs cf any United States nuclear generating plant that year.
During 1996, the Plant operated at an average 67 percent capacity factor (using MDC not rating of 860 Mwe) and generated and sold 5.1 billion KWH net.
Because of the long tube-sleeving outage, during 1995 the Plant operated at an average 3 percent capacity factor (using MDC net rating of 860 Mwe) and generated for sale 197,192 MWH net, all in January.
The Plant was taken off-line on January 14, 1995, and remained off-line into January 1996.
For a detailed discussion of the 1995 and 1996 operating history of the Plant, see " Plant Regulatory and Operational Issues," below.
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Maine Yankee Atomic Power Company l
MANAGEMENT'S DISCUSSION AND ANALYSIS OF I
FINANCIAL CONDITION AND RESULTS OF OPERATIONS i
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j Plant Reaulatory and Operational Issues i
f Prior to 1995, the Maine Yankee unit, like other pressurized-water
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reactors, had been experiencing degradation of its steam generator tubes,
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principally in the form of circumferential cracking, which, until early j
1995, was believed to be limited to a relatively small number of steam j
j generator tubes.
In the past, the detection of defects had resulted in
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the plugging of those tubes to prevent their subsequent use.
During the
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refueling-and-maintenance shutdown that commenced in early February of 1995, the Company detected through new inspection methods substantially i
increased degradation of the Plant's steam generator tubes to the extent j
that approximately 60 percent of the Plant's 17,000 steam generator tubes l
appeared to have defects to some degree, which eliminated mitigating the j
problem by plugging the tubes with indicated defects.
Following a detailed analysis of the safety, technical and financial considerations associated with repair of the degraded steam generator tubes, Maine Yankee elected to repair the tubes by inserting and welding i
short reinforcing sleeves of an improved material in substantially all of I
the Plant's steam generator tubes.
Similar repairs had been completed at l
other nuclear plants in the United States and abroad, but not on the scale of the Maine Yankee project.
With Westinghouse Electric Corporation as the general contractor, the sleeving project started in early June of 4
l 1995, after approval of the Westinghouse sleeving process by the NRC, and was essentially complete in early December.
The project caused 4 Maine Yankee to incur costs'of approximately $27 million during 1995.
For a discussion of the regulatory treatment of those costs, see " Operation and Maintenance Expenses," below.
On December 4,1995, when the sleeving project was substantially complete, j
Maine Yankee obtained a copy of a letter from the Union of Concerned Scientists, an organization with a history of opposing nuclear power, to a State of Maine nuclear safety official based on documentation from an j
anonymous employee or former employee of Yankee Atomic Electric Company
(" Yankee"), an affiliate of the company that has regularly performed nuclear engineering and related services for the Company and other nuclear plant operators.
The letter contained allegations that Yankee had knowingly performed inadequate analyses to support two license amendments to increase the rated thermal power at which the Maine Yankee Plant could operate.
It was further alleged in the letter that Maine Yankee deliberately misrepresented the analyses to the NRC in seeking the license amendments.
The allegedly inadequate analyses related to the operation l
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MAN _mPMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Plant Pmm.11atory and Operational Issues (continued) r of the Plant's emergency core cooling system ("ECCS") and the calculation i
of the Plant containment's peak postulated...:ident pressure, both under certain assumed accident conditions.
The aslyses were used in support of license amendments that authorized Plant power uprates from 2440 megawatts thermal, a level equal to approximately 90 percent of the maximum electrical capability of the. Plant, to its current 100 percent rated level of 2700 megawatts thermal.
i In response to technical issues raised by the allegations, the NRC initiated a special technical review cf the safety analyses performed by Yankee relating to Maine Yankee's it inse amendment applications for the
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At the same time, Jaine Yankee and Yankee initiated intensive internal investigations of the allegations and provided l
responsive information and documentation to the NRC. Subsequently, the NRC informed Maine Yankee that the allegations would be the subject of investigations by the NRC's Office of Investigations ("OI") and the Office of the Inspector General ("OIG").
on January 3,
1996, the NRC issued a " Confirmatory Order Suspending Authority For And Limiting Power Operation And Containment Pressure (Effective Immediately) And Demand For Information" (the " Order").
The Order limited the power output of the Maine Yankee Plant to approximately 90 percent of its rated maximum until the NRC had reviewed and approved a Plant-specific ECCS analysis and ordered that internal containment pressure be limited until the NRC had reviewed the design-basis analysis of containment pressure.
The Order further contained a request for information prior to restart, which the Company satisfied.
On January 10, 1996, Maine Yankee filed with the NRC information specified in the Order that it believed supported operation of the Plant at up to 90 percent of the Plant's capability, and the Plant began normal operation at the 90 percent level on January 24, 1996.
On April 25, 1996, Maine i
Yankee submitted the ECCS analysis requested in the Order.
l In December 1995 the OIG and OI initiated separate investigations of the j
anonymous allegations of wrongdoing by Maine Yankee and Yankee. On May 9, 1996, the OIG, which was ' responsible for investigating only the actions of the NRC Staff and not those of Maine Yankee or Yankee, issued its report on its investigation.
The report found deficiencies in the NRC Staff's review, documentation, and communications practices in connection with the license amendments, as well as "significant indications of possible licensee violations of NRC requirements and regulations."
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a Maine Yankee Atomic Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Plant Recrulatory and Operational Issues (continued) such violations by Maine Yankee or Yankee are within the purview of the OI investigation.
Maine Yankee was advised on September 19, 1996, that the NRC had asked the U.S.
Department of Justice, to review the OI investigation report.
Maine Yankee cannot predict the outcome of that review.
An internal assessment by Maine Yankee and Yankee noted several areas that could have been improved, including regulatory communications, l
definition of responsibilities between Maine Yankee and Yankee, and documentation and tracking of regulatory compliance.
A separate internal investigation of issues raised by the anonymous allegations commissioned by the boards of directors of Maine Yankee and Yankee and conducted by an independent law firm found no wrongdoing by Maine Yankee, Yankee or any l
of their employees.
On June 7, 1996, the NRC formally notified Maine Yankee that it would conduct an " Independent Safety Assessment"
("ISA") of the Plant as a
" follow-on" to the OIG report and to provide an independent evaluation of the safety performance of Maine Yankee by a team of NRC personnel and contractors who were " independent of any recent or significant involvement with the licensing, regulation or inspection of Maine Yankee," with State of Maine involvement.
The NRC conducted the ISA in the summer of 1996 and released its report on October 7, 1996.
The detailed ISA report identified both deficiencies and strengths in Maine Yankee's performance, and concluded that overall performance at Maine Yankee was " adequate" for operation of the Plant.
The ISA team stressed that the deficiencies noted in the report stemmed from two closely related root causes, specifically, (1) that economic pressure to l
be a low-cost energy provider had limited available resources to address corrective actions and some improvements, and (2) that a questioning culture was lacking at Maine Yankee, which had resulted in a failure to identify or promptly correct significant problems in areas perceived by Maine Yankee to be of low safety significance.
In a letter to Maine l
Yankee accompanying the ISA report, Chairman of the NRC Shix: ley Ann Jackson noted that although overall performance at Maine Yankee was i
considered adequate for operation, a number of significant weaknesses and deficiencies identified in the report would result in NRC violations.
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letter also directed Maine Yankee to provide to the NRC its plans for addressing the root causes of the deficiencies noted in the ISA and l
identified the NRC offices that would be responsible for overseeing corrective actions and taking appropriate enforcement actions against Maine Yankee.
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J MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS d
Plant Reaulatory and Operational Issues (co e inued)
On December 10, 1996, Maine Yankee filed its formal response to the ISA 3
report with the NRC.
In the response Maine Yankee indicated that it would spend substantial sums on improvements in several areas.in 1997 to address the roct causes and associated deficiencies noted in the report, and that l
the improvements would include physical and operating changes at the j _
engineering and maintenance areas, and other changes.
In a release Plant, along with a 10 percent increase. in staffing, primarily in ' the j
j accompanying the response, Maine Yankee stated that a " fundamental shift 1
in corporate culture" would accompany the changes and that Maine Yankee would not seek to return the Plant to the 100 percent power level from its i
authorized 90 percent level until it had also reviewed the margins on all the key safety systems at the Plant, which had been another matter of f
concern to the NRC.
h The December 1995 allegations caused the Plant's extended tube-sleeving
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to the 90 percent operating level on January 24.
The Plant operated 4
substantially at that level until July 20, 1996, when it was taken off-j line after a comprehensive review by Maine Yankee of the Plant's systems
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and equipment revealed a need to add pressure-relief capacity to a section 2
of the Plant's primary component cooling system.
On August 18, 1996, while the Plant was in the restart process, Maine Yankee conducted a review of its electrical circuitry testing procedures pursuant to a i
generic NRC letter to nuclear plant licensees that was intended to ensure that the electrical logic features of safety systems be routinely :ested.
During the expanded review, Maine Yankee found a deficiency in an electrical circuit of a safety system and therefore elected to conduct an i
intensified review of other safety-related circuits to resolve immediately any questions as to the adequacy of related testing procedures.
The Plant returned to the 90 percent operating level on September 3, 1996.
1 On December 6,1996, Maine Yankee took the Plant off-line again to resolve l
cable-separation and other operational and design issues.
On January 3, l
1997, Maine Yankee announced that it would use the opportunity presented j
by that outage to inspect the Plant' s 217 fuel assemblies, since daily j
monitoring had indicated evidence of minor leakage in a small number of the Plant's 38,000 fuel rods. As a result of the inspection, Maine Yankee j
determined that all of the assemblies manufactured by one supplier and j
currently in the reactor core (approximately one-third of the total) would j
have to be replaced before the Plant could be restarted.
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will therefore keep the Plant off-line for refueling, which had previously i
been scheduled for late 1997.
In addition, Maine Yankee will make use l
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Plant Raoulatory and Operational Issues (continued) of the outage to conduct a thorough inspection of the Plant' s steam generators, commencing approximately April 1,
1997, for deterioration beyond that which was repaired during the extended 1995 outage.
Degradation of steam generators of the age and design of those in use in the Plant has been identified at other plants. If major repairs to, or replacement of, the steam generators were found to be necessary for l
continued operation of the Plant, Maine Yankee would review the economics of continued operation before incurring the substantial capital expenditures that would be required. The Company cannot predict the results of the inspection.
On January 29, 1997, the NRC announced that it had placed the Plant on its
" watch list,"
in " Category 2,"
which includes plants that display I
" weaknesses that warrant increased NRC attention," but which are not severe enough to warrant a shut-down order.
Plants in Category 2 remain in that category "until the licensee demonstratec a period of improved performance."
The Plant is one of fourteen nuclear units on the watch list announced that day by the NRC, which regulates over 100 civilian nuclear power plants in the United States, c
l On February 13, 1997, Maine Yankee and Entergy Nuclear, Inc. ("Entergy"),
which is a subsidiary of Entergy Corporation, a Louisiana-based utility l
holding company and leading nuclear plant operator, entered into a l
contract under which Entergy is providing management services to Maine l
Yankee.
At the same time, officials from Entergy assumed management positions, including President, at Maine Yankee.
While the Plant is out of service Maine Yankee, in addition to successfully completing the refueling and the inspection of the steam l
generators, must resolve the cable-separation issues and other known regulatory issues, as well as any additional issues that are discovered during the outage.
The Company must obtain the approval of the NRC staff to restart the Plant, following a mandated NRC process that includes an NRC-approved restart plan and opportunities for public participation.
Maine Yankee submitted its Restart Readiness Plan ("RRP") to the NRC on March 7, 1997.
The NRC has scheduled the initial public meeting for review of the RRP on April 3, 1997.
Maine Yankee estimates that its operations and maintenance costs will increase by up to approximately $47 j
million in 1997, not of refueling costs.
The Company believes the Plant I
will be out of service at least until August 1997, but cannot predict when or whether all of the regulatory and operational issues will be satisfactorily resolved or what effect the ultimate total of the repairs and improvements to the Plant will have on the economics of operating the Plant.
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Maine Yankee Atomic Power Company MANANENT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Effect of Extended Outaae on Soonsors The additional costs associated with the Maine Yankee Plant outages, when combined with the Sponsors' own replacement power costs, are adversely affecting the financial condition of the Sponsors.
Central Maine Power Company, which is responsible for 38 percent of Maine Yankee's operating costs, has stated that sustained nuclear-unit outages "will be a major obstacle to achieving satisfactory results in 1997."
Bangor Hydro-Electric Company, a 7 percent Sponsor, has cited its " deteriorating" financial condition and on March 19, 1997, eliminated its first quarter common-stock dividend; and Maine Public Service Company, a 5 percent
- Sponsor, cited problems in satisfying financial covenants in loan documents and substantially reduced its common-stock dividend in early March 1997.
Other Sponsors are affected in varying degrees.
Northeast Utilities (a 20 percent Sponsor 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 an unfavorable utility deregulation plan in New Hampshire currently under appeal, announced on March 24, 1997, that its management was planning to recommend a suspension of its second-quarter common-stock dividend to its board of trustees.
A default by a Sponsor of the Company in making payments under its Power Contract or Capital Funds Agreement could have a material adverse effect on the Company, depending on the magnitude of the default, and would constitute a default under the Company's First Mortgage Indenture and its two other major credit agreements unless cured within applicable grace periods by the defaulting Sponsor or other Sponsors.
Generation j
The following table sets forth the Company's average cost of power and generation for the years 1996 and 1994.
Corresponding information for 1995 is not meaningful since the Plant did not generate after mid-January l
of 1995.
See the discussion above on " Plant Operations."
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12.95 1994 l
Avermae Cost of Power:
Cents per KWH M
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I Generation:
Net KWH sold (in billions)
M M
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Maine Yankee Atomic Power comoany MAN _m MENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Fuel Expenses Fuel amortization expense is based on the cost of (1) nuclear fuel in the reactor core that is allocated to the accounting period based on the level of energy production and (2) amortization over the remaining useful life of the Plant for the last core of unburned nuclear fuel.
The fluctuation in fuel amortization - an increase of $11.7 million in 1996 over 1995, and a decrease of $17.7 million in 1995 from 1994 - is primarily the result of the 1995 extended outage discussed above.
The average capacity factor (using MDC not rating of 860 Mwe) fluctuated from 88 percent in 1994 to 3 percent in 1995 to 67 percent in 1996.
Fuel disposal cost results from (1) a disposal fee of $1.00 per megawatt-hour of not generation which is assessed by the federal Department of Energy (" DOE") and is paid quarterly, and (2) a DOE annual assessment for i
decontaminating and decommissioning DOE's enrichment facilities.
Fuel disposal expense for 1996 was higher than that for 1995 due to higher generation; the decrease for 1995 from 1994 resulted from lower generation.
Title XI of the Energy Policy Act of 1992 (the " Policy Act") provides for decontaminating and decommissioning DOE's enrichment facilities to be partially funded by a special assessment against domestic utilities.
Under the Policy Act, the total amount collected for a fiscal year will l
not exceed $150 million escalated by the Consumer Price Index
(" CPI")
annually, and the collection of the amounts will cease after the earlier of (1) 15 years after the date of the enactment or (2) the collection of l
$2.25 billion (to be escalated by the CPI annually).
Each utility's share l
of the assessment is to be based on its cumulative consumption of DOE j
enrichment services.
The Company's estimated obligation at December 31, 1996, was $25.1
)
million, based on information from the DOE.
Through that date the Company had paid $8.1 million, of which $6.8 million had been expensed and recovered through rates.
Operation and Maintenance Excenses Operation expense increased by $9.9 million for 1996 from 1995, primarily due to work in supporting, responding and implementing corrective actions associated with the ISA performed by the NRC discussed above, and the work i
associated with overall self-improvement of operations for Maine Yankee.
1 i
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l Maine Yankee Atomic Power Company MAN _W MENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operation and Maintenance h nses (continued)
Maintenance expenses decreased by $48.3 million for 1996 from 1995, primarily due to work associated with the 1995 extended steam generator tube-sleeving outage discussed above.
Maine Yankee recorded the sleeving costs as maintenance expense.
On October 10, 1995, eleven municipal and electrical cooperative secondary purchasers that purchase Maine Yankee power through the Company's Sponsors and are collectively entitled to less than 2 percent of the Plant' s output, filed a complaint with the Federal Energy Regulatory Commission
("FERC") challenging the Company's accounting treatment of the costs and alleging that such costs should be deferred and amortized over the remaining operating life of the Plant.
)
on May 30, 1996, the FERC issued an order directing Maine Yankee to amortize the sleeving repair costs over the remaining license life of the Plant (currently, to October 2008).
Because Maine Yankee had already billed the repair costs in 1995, it was also directed to refund, with interest, all amounts in excess of the properly amortized amounts.
On June 18, 1996, the Company filed a motion for a partial stay of the FERC order in support of an offer of settlement of the issues in the i
proceeding.
The stay was granted on June 27, 1996, but the FERC has not yet acted on the settlement.
The underlying settlement agreement preserves the benefits of the FERC's May 30 order for the complainant f
secondary purchasers as well as other secondary purchasers whose contracts to purchase Maine Yankee power expire in 2002.
The settlement agreement provides that Maine Yankee is not required to make refunds to its Sponsor customers, which represent in the aggregate approximately 94 percent of the total sleeving expense of approximately $27 million.
The Company cannot predict the timing or outcome of FERC deliberations and order on the offered settlement.
Operation and maintenance expenses increased by $0.9 million and $53.7 million, respectively, for 1995 from 1994, primarily due to the scheduled refueling, maintenance and construction outage and the extended shutdown associated with the steam generator tube defects discussed in " Plant Regulatory and Operational Issues."
i Dec - 4saionina The increase in decommissioning expense of $1.5 million for 1995 was due to the increase in the annual collection amount from $9.1 million to $14.9 million as approved by the FERC affective April 1, 1994.
See Note 4 of Notes to Financial Statements, "Most Recent Rate Case."
14
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l Maine Yankee Atomic Power Company 4
j MANAGEMENT'S DISCUSSION AND ANALYSIS OF 3
FINANCIAL CONDITION AND RESULTS OF OPERATIONS l
j Income Taxes l
i The increase in income tax expense for 1996 resulted principally from a
)
reduction in the flowback of investment. tax credits associated with credits claimed in 1995 under the " transitional" rule of the Tax Reform
]
Act of 1986.
I The decrease in income tax expense for 1995 resulted principally from j
additional flowback of investment tax credits which were claimed under the
" transitional" rule of the Tax Reform Act of 1986.
Other reductions were 4
derived from the tax benefits associated with the not earnings of the l
nonqualified decommissioning.and spent fuel trust funds.
I Fuel Discosal Interest 1
l The Company is accruing interest on its obligation to the DOE for fuel i
burned prior to April
- 1, 1983.
This interest expense is compounded
}
quarterly on the DOE obligation at the 13-week Treasury Bill rate.
The j
interest expense associated with this liability is reflected as Interest j
Charges - Fuel Disposal Liability.
The increase in expense for 1995 from 1994 reflects the effect of higher average interest rates, along with the compounding of interest.
Fuel Financina Note Interest i
The average level of borrowings on fuel financing notes was higher during 1995 than in 1994 primarily due to an increased level of Construction Work j
in Progress ("CWIP").
This, along with an increase in interest rates, l
contributed to the increase in interest expense.
t Other Interest Charaes j
Other interest expense was higher during 1995 than either 1994 or 1996 due
{
to the recording of interest on additional state income taxes associated with the 1988 and 1989 Internal Revenue Service audit settlement in 1995, along with higher levels of bank note borrowing at lower interest rates.
Allowance for Funds Used f
I Fluctuations in the amount of allowance for funds (equity and borrowed)
)
occur as the result of changes in the level of investments in CWIP and Nuclear Fuel in Process ("NFIP") and/or the rates used for capitalization y
of these funds.
4 2
15 1
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Maine Yankee Atomic Power Compaa MANAMMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS i
Allowance for Funds Used (continued) i l
During 1996, Allowance for Funds Used for Nuclear Fuel ("AFN") was higher l
than in 1995 due to increased levels of NFIP.
During 1995, Allowance for Funds Used During Construction ("AFC") was higher than in 1994 due to an increased level of investment in CWIP. AFN was lower due to decreased levels of NFIP.
Liauidity and Canital Resources Capital Resources cash flow needs during 1996 were provided from operating activities in the amount of $55.9 million and decommissioning trust earnings of $6.4 million i
restricted to decommissioning trust investments.
The primary uses of cash were for various corporate expenditures such as:
(1) nuclear fuel acquisitions of $7.1 million, (2) construction of operating property of $3.5 million, (3) trust fund investments of $30.1 million to meet future plant decommissioning and prior spent fuel permanent disposal costs, (4) dividend payments of $8.2 million and (5) the not redemption of overall debt of $9.1 million.
1 The Company's current 1997 budget for construction of electric property is $18.5 million, including AFC, and $39.7 million for procurement of nuclear fuel, including AFN.
See Note 14 of Notes to Financial i
I Statements, " Commitments and Contingencies," for additional information concerning the Company's 1997 construction program and the projected acquisition of nuclear fuel requirements for 1998 through 2001.
The Company currently has capital resources available from secured and unsecured lines of credit totaling $106 million, of which $20.0 million was utilized at December 31, 1996.
The lenders under the company's $35 million Eurodollar Revolving Credit Agreement have notified the Company 1
that their commitments to lend to the Company will terminate on February 13, 1998.
The Company is discussing a renegotiated credit arrangement with the banks.
Each of the Maine Yankee sponsors has agreed under a Capital Funds Agreement with the Company to provide a percentage equal to its respective ownership percentage of the company's capital requirements not obtained from other sources, subject to obtaining necessary authorizations of regulatory bodies in each instance.
All such obligations are subject to the continuing jurisdiction of various federal and state regulatory
(
bodies.
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Maine Iankee Atomic Power Company f
MANAGEMENT'S DISCUSSION AND ANALYSIS OF l
FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capital Resources (continued)
In June 1995 the Company's Board of Directors elected to strengthen the common-equity component of the company's capital structure through the retention of earnings.
Therefore, no common stock dividend was declared for the second and third quarters of 1995.
On March 13, 1997, the Board i
of Directors elected not to pay a common-stock dividend that would l
normally have been paid in mid-April 1997, t
l On February 5,1997, Standard & Poor's Corp. ("S&P") lowered its corporate l
credit rating for the Company to "BBB "
from "BBB" and the preferred stock rating to "BB+"
from "BBB."
S&P said the outlook remained negative.
l The downgrades reflect concerns over continued poor plant performance and the weakening credit profiles of most of the company's ten utility sponsors.
The negative outlook reflects continued uncertainty over the duration of the current unscheduled outage and the facility's potential restart. In l
addition, S&P remains concerned over the ability of Maine Yankee to achieve reasonable and consistent performance while sustaining competitively priced power.
On September 25, 1996, Duff & Phelps Credit Rating Co. ("DCR") placed the ratings of the debt and preferred stock of Central Maine Power Company
(" CMP"), which holds a 38 percent common-stock ownership in Maine Yankee, on " Rating Watch-Down".
DCR stated that its action was due to uncertainty surrounding the NRC's previously reported investigations into three nuclear generating facilities (Maine Yankee, Connecticut Yankee Atomic Power Company and Millstone Unit No.
- 3) in which CMP has ownership interests. DCR currently rates CMP's General and Refunding Mortgage Bonds "BBB ", its unsecured notes "BB+",
its preferred stock "BB",
and its commercial paper "D3".
On December 18, 1996, Moody's Investors Service placed CMP's credit ratings under review for possible downgrade, due largely to the effect of its Maine Yankee-related costs.
l l
l 17 n-p--+
Maine Yankee Atomic Power Company MANA m ENT'S DISCUSSION AND ANALYSIS Of FINANCIAL CONDITION AND RESULTS OF OPERATIONS i
C m titive Conditions The electric utility business is being subjected to rapidly increasing competitive pressures, stemming from a combination of trends, including surplus generating
- capacity, increasing electric. rates, improved technologies, inez assing rimmand for customer choice, and neu regulations and legislation intended to foster competition.
The enactment by Congress of the Energy Policy Act of 1992 accelerated the planning by all electric utilities, including the Company and the ten investor-owned New England utilities that are its stockholders (the
" Sponsors" or the " Stockholders"), for the anticipated transition to a more competitive industry.
Many of the major legislative and regulatory j
changes that will be implemented and the resulting structure of both the industry and the Company and its Sponsors are still unsettled, but regulatory and, in some states, legislative initiatives are already being implemented toward competition in the areas of generation and non-discriminatory transmission access.
A departure from traditional regulation could have substantial impacts on the value of utility assets and on the ability of electric utilities to recover their costs through rates.
In the absence of full recovery, utilities would find their above-market costs to be " stranded," or unrecoverable, in the new competitive setting.
On April 24, 1996, the FERC issued Order No.
888, its " Final Rule Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities. "
The rule requires all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to have on file open-access nondiscriminatory transmission tariffs that contain minimum terms and conditions of nondiscriminatory service. The rule also permits public utilities and transmitting utilities to seek recovery of legitimate, prudent and verifiable stranded costs associated with providing open j
and FERC-regulated transmission services.
The Company believes access that FERC Order No. 888, in conjunction with anticipated federal and state legislative and regulatory action, will have far-reaching effects on electric utility operations throughout the United States, but Maine Yankee cannot now predict what effect the rule will have on its operations.
18
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i Maine Yankee Atomic Power Company I
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS l
C^ m titive Conditions (continued) e On July 19, 1996, the Maine Public Utilities Commission ("MPUC") released j
for comment its Draft Plan for Electric Utility Industry Restructuring.
The draft plan had been prepared in response to a resolve of the Maine 4
i Legislature directing the MPUC to study restructuring Maine's electric l
utility industry and report its recommendations to the Maine Legislature by January 1, 1997.
t on December 31, 1996, the MPUC issued its Report and Recommended Plan on Electric Utility Industry Restructuring (the " Plan").
The Plan, which is substantially similar to the draf t plan, provides for all customers of Maine electric utilities to have the option to purchase power in an unregulated competitive market beginning in January 2000.
The Plan would also require them to transfer all of their generation-related assets, other than their interests ua Maine Yankee, to an entity distinct from their transmission and distribution businesses by. January 2000, and, except for Maine Public Service Company, to divest all generation assets other than Maine Yankee by January 2006.
The Plan would not require the utilities to divest their ownership interests in Maine Yankee unless the Maine Yankee Plant's operating life extends significantly past 2008, the year its operating license is scheduled to expire, but they would be required to sell their rights to the power associated with that ownership to the extent they retained ownership after 2005.
With respect to recovery of stranded costs, the Plan recommends that electric utilities have "a reasonable opportunity to recover legitimate, verifiable, and unmitigatable costs stranded as a result of retail access."
The Plan would require that utilities mitigate such costs
" aggressively" and obtain the " highest possible value" from their generation assets and contracts to minimize the amount of costs stranded.
The Plan provides that the MPUC would not reconcile stranded costs retrospectively, but would review them periodically and, if warranted, adjust the amounts prospectively.
Stranded costs would be collected from customers through the regulated rates of the transmission-and-distribution utilities.
The Plan also contains recommendations for continued regulation as public utilities of the transmission-and-distribution companies, which would have both exclusive service territories and an obligation to connect customers to the power grid.
The rates of those utilities would include, in addition to charges based on the services provided, amounts reflecting their shares of Maine Yankee decommissioning costs, the costs of energy-efficiency measures, and the costs of low-income assistance programs, if 19
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i Maine Yankee Atomic Power Company i
i MANAGEMENT'S DISCUSSION AND ANALYSIS OF j
FINANCIAL CONDITION AND RESULTS OF OPERATIONS comoetitive conditions (continued) l the Legislature rejects the MPUC's recommendation that such programs bo l
funded by taxes or other means.
" Standard offer service" at a l
competitively-bid but capped price would be provided to customers who do not choose a competitive power provider, as well as those who are unable i
to.obtain power in the market on reasonable terms.
l The Maine Legislature is considering other restructuring bills, including
]
enabling legislation for partial securitization of stranded-cost recovery.
The Company cannot predict what action the Maine Legislature will take on the Plan, but implementation of the Plan or any similar plan would require substantial changes in Maine statutory law.
Other states in which Maine Yankee Sponsors are based have utility restructuring plans in different stages of development or implementation.
Some, such as Massachusetts, call for an earlier initiation of retail competition and divestiture of generation assets than the Maine proposal, as well as providing for other arrangements for recovery of stranded costs.
In New Hampshire, the Public Utilities Commission issued a restructuring order on February 28, 1997, which Public Service Company of New Hampshire
("PSNH"),
a 5 percent Sponsor of Maine Yankee and a subsidiary of Northeast Utilities, said would cause it to be required to write off approximately $415 million of regulatory assets, which it said could trigger acceleration of approximately one billion dollars of indebtedness and result in bankruptcy.
Implementation of that part of the order was stayed temporarily by a federal court on March 10, 1997, and PSNH is seeking to enjoin such implementation permanently.
Maine Yankee cannot at this point predict how the different restructuring plans and schedules in the states in which its Sponsors are based and do business will affect its operations.
i 1
Maine Yankee believes there are many uncertainties associated with any major restructuring of the electric utility industry. Among them are: the positions that will ultimately be taken by the various New England states and their regulatory agencies and their applicability to Maine Yankee, the role of the FERC in any restructuring involving Maine Yankee, and the ultimate positions it will take on relevant issues within its jurisdiction; to what extent the United States Congress will take legislative action and, if it does, with what results; whether the I
necessary political consensus can be reached on the significant and complex issues involved in changing the long-standing structure of the electric-utility industry; and to what extent electric utilities will be permitted to recover their strandable costs.
Maine Yankee cannot predict what form the restructuring of the electric utility industry in Maine or elsewhere will take, or what effect any resulting restructuring will have on Maine Yankee's business operations or financial results.
20
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l Maine Yankee Atomic Power Company i
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS j
l Competitive Conditions (continued)
Electric utility rates have historically been based on a utility's costs.
As a result, electric utilities are subject to certain accounting standards that are not applicable to other business enterprises in l
general.
Statement of Financial Accounting Standards
("SFAS")
71,
" Accounting for the Effects of Certain Types of Regulation," requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates.
The l
Company believes that its operations currently meet the criteria established in SFAS 71.
However, the effects of regulatory and/or legislative initiatives could, in the near future, cause all or a portion f
of the Company's operations to cease meeting the criteria of SFAS 71.
In that event, the application of SFAS 71 to the Company's operations would be discontinued and a noncash write-off of previously established i
regulatory assets and liabilities related to such operations would be required.
At December 31, 1996, the Company had pretax regulatory assets (net of regulatory liabilities) of approximately $49.0 million.
The Company's regulatory assets as of December 31, 199G, are currently being recovered through the FERC rate-making process.
1 The Company recovers 100 percent of its operating costs from its Sponsors, each of which is committed under a Power Contract with the Company to purchase a specified percentage of the capacity and output of the Plant and to pay therefor a like percentage of amounts sufficient to pay the Company's fuel costs, operating expenses (including a depreciation accrual at a rate sufficient to fully amortize the investment in the Plant over j
the operating life of the Plant and amounts estimated to be sufficient to decommission the Plant), interest on its debt and a return on its equity.
l The Company and its Sponsors have also executed Additional Power Contracts for the purpose of extending the term of the Power Contracts, as amended, from 2003 to the end of the useful life of the Plant e d the completion of its decommissioning and financial obligations.
Each Sponsor has also agreed, under a Capital Funds Agreement with the Company, to provide a like percentage of the Company's capital requirements not obtained from other sources, subject to obtaining necessary authorizations of regulatory bodies in each instance. All such obligations are subject to the continuing jurisdiction of various federal and state regulatory bodies.
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21 l
e Maine Yankee Atomic Power Company MAN _WNENT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIOME Ca=M titive Conditions (continued)
The obligations of the Sponsors to make payments under the Power Contracts are unconditional, subject only to each Sponsor's right to cancel its
' Power Contract if deliveries cannot be made to the Sponsor because either (i) the Plant is damaged to the extent of being completely or substantially completely destroyed, or (ii) the Plant is taken by exercise or (iii) (a) of the right of eminent domain or a similar right or power, the Plant cannot be used because of contamination or because a necessary license or authorization cannot be obtained or is revoked or the utilization thereof is made subject to specified conditions which are not met, and (b) the situation cannot be rectified to an extent which will permit the Company to make deliveries. to the Sponsor from the Plant.
Notwithstanding the right to cancel, the obligation to pay decommissioning costs continues until the Plant has been fully decommissioned, A default by a Sponsor of the Company in making payments under the Power Contract or Capital Funds Agreement could have a material adverse effect on the Company, depending on the magnitude of the default, and would constitute a default under the Company's First Mortgage Indenture and two other major credit agreements unless cured within applicable grace periods by the defaulting Sponsor or other Sponsors.
If competitive or regulatory change should cause a default of operating cost recovery from the Company's Sponsors or lead to the permanent shutdown of the Company's generating facility, and the Company is unable to recover these costs in rates, a substantial write-down of plant assets could be required pursuant to SFAS 121, " Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This standard, effective for fiscal year 1996, clarifies when and how to recognize an impairment of long-lived assets.
The Company believes that it is entitled to recover substantially all of its potentially strandable costs under existing regulatory principles, but cannot predict how much of such costs it will ultimately be allowed to recover.
Other New Enaland Nuclear Units On December 4, 1996, the board of directors of Connecticut Yankee Atomic Power Company
("CY"),
which owns and operates the Connecticut Yankee nuclear electric generating unit in Haddam, Connecticut, voted to permanently shut down the unit and to decommission the facility, based on an economic analysis of the costs of operating the unit compared to the 22
=,
4 Maine Yankee Atomic Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other New Enaland Nuclear Units (continued) costs of closing the unit and causing replacement power costs to be incurred for the same period.
Several of Maine Yankee's stockholder-power purchasers own stock in and purchased power from CY under power contracts substantially similar to Maine Yankee's, with Northeast Utilities system companies holding a 49 percent equity interest.
The three Millstone nuclear generating units in Connecticut, which are operated and largely owned by Northeast Utilities companies (Units 1 and 2 wholly owned, Unit 3 68 percent owned), have also been shut down (since November 1995, February 1996, and March 1996, respectively) until their operators can satisfy the NRC concerning a number of operating license requirements.
.The NRC has placed the three Millstone units on its " watch list" in " Category 3, "
which requires formal NRC action before a unit can be restarted.
Liquidity The Company bills its customers under a formula rate based on its cost of service.
Unlike traditional utility ratemaking,.where rates are based on a test-year rate base and total revenue requirements, the Company's rates consist of its actual costs of providing service each month, regardless of the production level of the Plant, plus the costs, as determined by the FERC in periodic rate cases, of the following items:
(1) return on common equity; (2) property depreciation; (3) decommissioning expense; (4) amortization of the materials and supplies inventory that will remain at the end of the Plant's operating life; (5) amortization of the fuel remaining in the core at the end of the Plant's operating life:
(6) 50 percent of the earnings on CWIP balances; and (7) expenses of postratirement benefits other than pensions.
The Company therefors j
recovers all of its actual or estimated costs monthly from its customers, j
See Note 4 of Notes to Financial Statements, "Most Recent Rate Case," for l
a more detailed discussion of the Company's rate formula.
I i
In addition to funding its short-term needs, the Company must also fund f
the payment of its long-term prior spent fuel disposal liability of $50.4 l
million and accrual of interest from April 7,
1983, to the time of payment, which through 1996 smounted to an additional $69.8 million.
Maine Yankee is funding an-external trust to provide for payment of this liability.
Payment from the trust to the DOE is scheduled for not earlier than January 1998.
The trust is funded by the Company through deposits, which began in December 1985, with current projected annual j
deposits of approximately $2.0 million through January 1998.
Deposits 23
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Maine Yankee Atomic Power Company MAN _m SENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPEPATIONS Liquidity (continued) are expected to total approximately $72.3 million.
The estimated liability, including interest due at the time of disposal, is projected to be approximately $125.5 million at January 31, 1998.
The Company estimates that trust fund deposits plus earnings will meet this total liability if funding continues without material changes.
The Company must also provide for the eventual decommissioning of the Plant at the end of its operating life.
On March 31, 1994, the FERC approved an increase in the annual amount of collection to fund the decommissioning costs for the Plant from $9.1 million to $14.9 million commencing April 1, 1994.
See Note 4 of Notes to Financial Statements, "Most Recent Rate Case."
The amounts collected in cost of service are being deposited into an external trust.
These amounts, together with the i
trust earnings, will be used to meet the Company's decommissioning obligation (estimated to be $316. 6 million in mid-1993 dollars).
The Company recognizes the relative uncertainties associated with decommissioning, including its changing technology and the possibility of new requirements of law, and therefore recognizes the need to monitor and adjust decommissioning collections through supplemental rate filings with the FERC.
See Note 1 of Notes to Financial Statements, " Summary. of Significant Accounting Policies"
" Decommissioning."
l The staff of the Securities and Exchange Commission has questioned certain current accounting practices of the electric utility industry regarding l
the recognition, measurement and classification of decommissioning costs l
for nuclear generating stations in financial statements of electric l
utilitics.
In response to those questions, the Financial Accounting Standards Board ("FASB") has initiated a review of the accounting for such costs.
The FASB has considered several approaches, including recording the entire estimated liability for decommissioning costs initially, rather than accruing the costs over the operating life of the generating unit.
The Company believes that such an accounting change, if adopted by the FASB, would not adversely affect the Company's results of operations due to its ability to recover decommissioning costs through rates.
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Maine Yankee Atomic Power Comnany MAN 7mHENT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity (continued)
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, cach respons:i' ale 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 the Company are in their early stages and a large number of potentially responsible parties is involved, the Company cannot now predict the amount of costs it will ultimately be required to assume, but believes the amount could be material.
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FINANCIAL STATD'ENTS AND SUPPT1PMENTARY DATA FINANCIAL AND STATISTICAL SECTION Index FAER 1
27 l
Report of Independent Public Accountants f
Financial Statements:
)
Statement of Income for each of the three years ended December 31, 1996 28 Balance Sheet at December 31, 1996 and 1995 29 Statement of Capitalization at December 31, 31 1996 and 1995 Statement of Changes in Common Stock Investment for each of the three years ended 32 i
December 31, 1996 Statement of Cash Flows for each of the three years 33 ended December 31, 1096 34 Notes to Financial Statements I
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a 26
l ARTHUR ANDERSEN LLP l
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of Maine Yankee Atomic Power Company:
We have audited the accompanying balance sheet and statement of capitalization of Maine Yankee Atomic Power Company (a Maine corporation) as of December 31,1996 and 1995, and the related statements of income, changes in common stock investment and cash flows for each of the three years in the period ended December 31,1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial position of Maine Yankee Atomic Power Company as of December 31,1996 and 1995, and the results ofits operations and its cash flows for each of the three years in the period ended December 31,1996, in conformity with generally accepted accounting principles.
h W
Boston, Massachusetts January 24,1997 l
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o Maine Yankee Atomic Power Company STATEMENT OF INCCHE (Dollars in Thoussnds Except Per Share Amounts)
Year Ended Dec-har 31.
1996 1995 1994 ELECTRIC OPERATING REVENUES
$185.661 $205.977
$173.857 OPERATING EXPENSES l
Fuel Amortization (Note 1) 13,952 2,280 19,936 Disposal Cost (Note 1) 6,618 2,221 7,698 l
Operation 81,661 71,715 70,838 Maintenance 21,953 70,261 16,579 Depreciation (Note 1) 18,052 17,822 17,379 Decommissioning (Note 1) 14,900 14,900 13,444 Taxes Federal and State Income (Note 3)
(439)
(2,981)
(135)
Local Property 11.814 11.232 11.895 Total Operating Expenses 168.511 187.450 157.634 OPERATING INCOME 17,150 18,527 16,223 OTHER INCOME (EXPENSE)
Allowance for Equity Funds Used During Construction (Note 1) 138 133 70 For Nuclear Fuel (Note 1)
Other, Not 5.271 5.729 5.304 f
INCOME BEFORE INTEREST CHARGES 22.559
_.24,389 21.597 INTEREST CHARGES Long-Term Debt (Note 6) 7,349 7,903 8,458 Fuel Disposal Liability (Note 1) 6,055 6,360 4,320 Fuel Financing Notes (Notes 7 and 8) 1,120 1,106 300 j
Other Interest Charges (Note 5) 199 626 116 Allowance for Borrowed Funds Used During Construction (Note 1)
(161)
(164)
(84)
For Nuclear Fuel (Note 1)
(109)
(13)
(86)
Total Interest Charges 14.453 15.818 13,024 NET INCOME 8,106 8,571 8,573 Dividends on Preferred Stock 1.469 1.514 1.559 1
EARNINGS APPLICABLE TO Cote 10N STOCK 6.637 $
7.057 7.014 I
SHARES OF COtedON STOCK CUTSTANDING M M M
EARNINGS PER SHARE OF Cote 10N STOCK 13.27 $
14.11 14.03 i
DIVIDENDS DECLARED PER SHARE OF Cote 10N STOCK 13.00 $
6.70 14.35 I
The accompanying notes are an integral part of these financial statements, t
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Maine Yankee Atomic Power Company l
l BALANCE SHEET l
(Dollars in Thousands)
ASSETS l
December 31.
1996 1995 ELECTRIC PROPERTY, at Original Cost (Note 6)
$409,865
$404,499 Less:
Accumulated Depreciation and Amortization INote 1) 225.735 208.536 t
184,130 195,963 Construct:.on Work in Progress 5.687 7.122 i
Net Electric Property 189.817 203.085 NUCLEAR FUEL, at Original Cost (Note 1)
Nuclear Fuel in Reactor 78,037 78,037 Nuclear Fuel - Spent 391,803 391,803 Nuclear Fuel - Stock 8.657 8.657 478,497 478,497 Less:
Accumulated Amortization (Note 1) 453,756 439.804 24,741 38,693 Nuclear Fuel in Process 7.802 621 I
Net Nuclear Fuel 32.543 39.314 Net Electric Property and Nuclear Fuel 222.36Q 242.399 CURRENT ASSETS Cash and Cash Equivalents 4,418 11 11 Restricted Cash Accounts Receivable 23,597 17,658 Materials and Supplies, at Average Cost (Note 1) 10,665 11,261 i
6.299 5.858 Prepayments Total Current Assets 44.979 34.799 DEFERRED CHARGES AND OTHER ASSETS Trust Funds (Note 1)
Puel Disposal 112,523 103,889 Plant Decommissioning 163,536 142,116 Regulatory Assets (Note 1)
Accumulated Deferred Income Tax Assets (Note 3) 33,103 31,386 DOE Decontamination and Decommissioning Fee (Note 1) 18,270 19,604 Other 7,072 6,545 Other Deferred Charges and Other Assets 213 220 Total Deferred Charges and Other Assets 334.722 303.760
$f.Q.2 d.ft1
$M l
The accompanying notes are an integral part of these financial statements.
29 l
j f'
Maine Yankee Atomic Power Company BALANCE SHMET (Dollars in Thousands)
STOCKHOLDERS' INVESTMENT AND LIABILITIES Dec-har 31, 1996 1995 CAPITALIZATION (See Separate Statements)
Common Stock Investment
$ 71,337
$ 71,201 Redeemable Preferred Stock 18,000 18,600 l
Long-Term Debt 83.332 89.999 Total Capitalization 172.669 179.800 j
LONG-TERM FUEL DISPOSAL LIABILITY (Note 1) 120.240 114.186 NUCLEAR FUEL FINANCING NOTES (Notes 7 and 8) 20.000 20.000 CURRENT LIABILITIES 1,850 Notes Payable to Banks (Note 5)
Current Sinking Fund Requirements j
(Notes 6 and 9) 7,267 7,267 l
Accounts Payable 19,061 14,917 Fuel Disposal Cost Payable (Note 1) 1,103 Dividends Payable 1,867 2,054 Accrued Interest and Taxes 2,550 2,615 j
Other Current Liabilities 2.417 2.201 Total Current Liabilities 34.265 30.904 Cot @(ITMENTS AND CONTINGENCIES (Note 14)
RESERVES AND DEFERRED CREDITS Plant Decommissioning Reserve (Note 1) 164,807 143,485 Deferred Credits Accumulated Deferred Ir.come Tax Liabilities (Note 3) 56,704 55,893 DOE Decontamination and Decommissioning Fee (Note 1) 15,295 16,520 Regulatory Liability - Income Taxes (Note 3) 9,487 10,673 Unamortis:ed Investasnt Tax Credits (Note 3) 6,374 6,861 Unamortized Gains on Reacquired Debt (Note 1) 2.220 2.636 Total Reserves and Deferred Credits 254.887 236.068
$M
$M The accompanying notes are an integral part of these financial statements.
I 30
. _. _ _ _... ~ _ _..
._.__-__..~-.._._.___.__._.m a
a Maine Ic A a Atomic Egger Company STATEML:
OF CAPITALIZATION (Dol 3 ers in Thousands)
Dec--% r 31.
l 1996 1995 I
CatedON STOCK INVESTMENT f
Common Stock, $100 Par Value, 500,000 Shares Authorized and Outstanding
$ 50,000
$ 50,000 Other Paid-in Capital 16,572 16,607 Capital Stock Expense (361)
(397)
Gain on Redemption of Preferred Stock 1,125 1,118 Premiums on Preferred Stock 53 62 Retained Earnings (Note 10) 3.948 3.811 71.337 71.201 1
REDEEMABLE PREFERRED STOCK 7.48% Series, $100 Par Value Authorized 60,000 Shares outstanding 36,000 in 1996 and 42,000 in 1995 (Note 9) 3,600 4,200 l.
8 00% Series, $100 Par Value Authorized 200,000 Shares outstanding 150,000 (Note 9) 15.000 15.000 3
18,600 19,200 Less:
Current Sinking Fund Requirements 600 600 h
18.000 18.600
)
LONG-TERM DEBT (Note ~ 6)
First Mortgage Bonds Series D - 8.79 % due May 1, 2002 30,000 35,000 Series E - 8.13 % due May 1, 2008 40,000 40,000 Series F - 6.89 % due May 1, 2008 19.999 21.666 89,999 96,666 Less.
Current Sinking Fund Requirements 6.667 6.667 83.332 89.999 Total Capitalization
$172.669
$179.800 i
The accompanying notes are an integral part of these financial statements.
1 i
31 l
l
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Maine Yankee Atomic Power Company STATEMENT OF CHANGES IN Cotef0N STOCK INVESTMENT for the Three Years Ended December 31, 1996 f
(Dollars in Thousands) l l
Amount at Retained Shares Par Value Other. Net Earninas Total Balance - December 31, 1993 500,000
$50,000
$17,389 $
265 $67,654 Add (Deduct) :
8,573 8,573 Net Income Cash Dividends l
Declared on -
(7,175)
(7,175)
I Common Stock (1,559)
(1,559)
I Preferred Stock Redemption of 6
6 Preferred Stock (5)
Other (5) i Balance - December 31, 1994 500,000 50,000 17,390 104 67,494 f
Add (Deduct) :
8,571 8,571 l
I Net Income Cash Dividends Declared on -
(3,350)
(3,350)
Common Stock (1,514)
(1,514)
Preferred Stock l
Redemption of 6
6 l
Preferrad Stock (6)
(6) l Other l
i Balance - December 31, 1995 500,000 50,000 17,390 3,811 71,201 Add (Deduct) :
8,106 8,106 Net Income Cash Dividends Declared on -
(6,500)
(6,500)
Common Stock (1,469)
(1,469)
Preferred Stock Redemption of 7
7 Preferred Stock (8)
(8)
Other
{
Balance - December 31, 1996 500.000
$50.000
$17 E $ M $M The accompanying notes are an integral part of these financial statements.
32 l
l i
Maine Yankee Atomic Prygg Comoany STATEMENT OF CASH FLOWS (Dollero in Thou Enda)
Year Ended December 31, j
1221 19.1E 1994 Doeratina Activities Not Income
$ 8,106
$ 8,571 $ 8,573 Items Not Requiring (Providing) Cash Fuel Amortization 13,952 2,280 19,936 Depreciation and Decommissioning 32,952 32,722 30,823 Deferred Income Taxes and Investment Tax Credits, Net (2,579)
(5,681)
(6,231)
Allowance for Equity Funds Used for Nuclear Fuel and During Construction (138)
(133)
(70)
Long-Term Fuel Disposal Interest, N6t of AFN 5,961 6,349 4,237 Other, Net (833)
(3,557)
I'S Changes in Certain Assets and Liabilities Accounts Receivable (5,939) 260 (1,974)
Other Current Assets 166 3,865 (2,855)
Accounts Payable 4,361 1,804 (212)
Accrued Interest and Taxes (65) 1,345 (990)
Net Cash Provided by Operating Activities 55.944 47,825 51,683 Investina Activities Acquisition of Nuclear Fuel (7,181)
(570) (22,083)
Construction of Electric Property (4,365)
(6,790)
(8,035)
Changes in Accounts Payable - Investing Activities Nuclear Fuel 93 (548) 436 Construction of Electric Property 822 (1,047) 379 Investment Income in Decommissioning Trust 6,421 18,623 1,854 Trust Fund Investments Fuel Disposal (8,634)
(9,979)
(7,226)
Plant Decommissioning (21,420)
(33,438) (14,831)
Net Cash Used by Inves. ting Activities (34,264)
(33,749) (49,506)
Financina Activities Issuances (Redemptions)
Bank Notes, Not (1,850) 140 1,710 Fuel Financing Notes, Net (2,000) 10,000 Leng-Term Debt (6,667)
(6,667)
(6,667)
Preferred Stock (600)
(600)
(600)
Dividend Payments Common Stock (6,675)
(3,450)
(6,950)
Preferred Stock (1,481)
(1,525)
(1,570)
Net Cash Used by Financing Activities (17,273)
(14,102)
(4,077)
Net Increase (Decrease) in Cash and Cash Equivalents 4,407 (26)
(1,900)
Cash and Cash Equivalents at Beginning of Year 11 37 1,937 Cash and Cash Equivalents at End of Year
$ld
$ J $ _,_J2 Supplemental disclosure of cash flow information:
Cash paid during the year for:
l Interest (net of amounts capitalized)
$ 8,736
$ 9,882 $ 9,074 Income taxes
$ 4,866
$ 1,381 $ 7,039 l
Disclosure of accounting policy:
For purposes of the statement of cash flows, the Company considers all highly liquid instruments purchased having a maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these financial statements.
33
Maine Yankee Atomic Power Company I
+-
NOi'ES TO FINANCIAL STATEMENTS December 31, 1996 1.
StBeOLRY OF SIGNIFICANT ACCOUNTING POLICIES Ownershin:
The following New England electric utilities own all of the common stock of Maine Yankee Atcmic Power Company (the " Company" or " Maine Yankee"):
l Ownership Sponsor / Participant Interest Central Maine Power Company
(" CMP")
38%
New England Power Company 20 The Connecticut Light and Power Company 12 Bangor Hydro-Electric Company 7
Maine Public Service Company 5
Public Service Company of New Hampshire 5
Cambridge Electric Light Company 4
l Montaup Electric Company 4
l Western Massachusetts Electric Company 3
Central Vermont Public Service Corporation
_2 MS%
Regulation: The Company is subject to the regulatory authority of the Federal Energy Regulatory Commission ("FERC"), the Nuclear Regulatory Commission ("NRC"), the Maine Public Utilities Commission ("MPUC") and other federal and state agencies as to rates, accounting, operations and other matters.
l l
Prenaration of Financial Statements: The preparation of financial l
statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assats and liabilities at the date of the financial statements and the reported amounts of revenues ar.d expenses during the reporting period that, in the opinion of managen.ent, as audited, are necessary to a fair statement of results.
Actual results could differ from those estimates.
Depreciation:
Depreciation is provided using a composite remaining l
life method designed to fully depreciate the original cost of electric l
plant over the Plant operating life.
Under the composite method, at the time depreciable property is retired, the original cost, plus cost of removal, less salvage, of such property is charged to accumulated depreciation.
Reaulatory Asseta:
The Company is subject to the provisions of i
l l
Statement of Financial Accounting Standards ("SFAS") 71, " Accounting for the Effects of Certain Types of Regulation."
SFAS 71 allows j
certain costs that would normally be reflected in the Company's i
operating costs to be deferred on the balance sheet as regulatory l
assets.
These costs are then recovered through the FERC rate-making process.
The following regulatory assets were reflected in the Company's Balancs Sheet as of December 31, 1996 and 1995:
34 m
--w~
-4 m-
~9 p
-Mr-w--
-e-e
Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1996 1.
Sine 4ARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 1996 1995 1
l (Dollars in Thousands)
Income Taxes
$33,103
$31,386
)
l DOE D&D Fee
- 18,270 19,604 l
Pension Costs 3,990 2,587 Plant Costs 1,568 1,701 Fuel Termination Fee 487 1,072 Debt Financing Costs 719 813 Postratirement Benefit Costs 308 372
$M
$57.535 I
- Federal Department of Energy (" DOE") Decontamination and Decommissioning Fee ("D&D Fee")
For additional information regarding the DOE D&D Fee, income taxes, pension costs and postratirement benefit costs, see Notes 1, 3 and 13 of Notes to Financial Statements, respectively.
Decommissionina:
A study conducted for the Company in 1987 by an external engineering consultant estimated decommissioning costs, which include the costs of removal of the Plant and reclamatien of the Plant site, to be $142.5 million, plus a contingency of $35.6 million, for a total of $178.1 million (in mid-1987 dollars). Until April 1,.1994, the Company was allowed to collect $9.1 million annually in rates, based on the FERC-approved rate case settlement amount of $167 million (in mid-1987 dollars).
The ccmpany's most recent study, conducted by the same consultant in 1993, estimated decommissioning costs, based on the DECON method, to be $273.1 million, plus a contingency of $43.5 million, for a total of $316.6 million (in mid-1993 dollars).
On March 31, 1994, the FERC
. approved a Settlement Agreement calling for an increase in the annual amount of collection to fund the decommissioning costs for the Plant from $9.1 million to $14.9 million commencing April 1, 1994.
See Note 4 of Notes to Financial Statements, "Most Recent Rate Case."
After applying the 1994 FERC Settlement Agreement's assumed inflation rate of 4.5 percent to the mid-1993 cost estimate, the estimated cost in year-end 1996 dollars would be $369.4 million.
The estimated cost of
(
decommissioning expressed in future dollars is $704.1 million.
The future dollars estimate was determined by inflating individual costs t
35
i j
I 1
Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1996 1.
STAS 4hRY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
I l
from mid-1993 to the anticipated date of expenditure, expressed at six-month periods, at an annual 4.5 percent inflation rate.
The 1994 i
FERC Settlement Agreement ' assumes an after-tax rate of return on amounts collected for decommissioning of 5.5 percent, with :::ollections beginning in November 1981 and continuing through October 2008.
i j
Through
- 1996, the Company had collected
$111.9 million for decommissioning, which funds are held by an independent trustee.
The j
total decommissioning fund balance as of December 31, 1996, was $155.7 I
million (including actual interest earned) with an adjusted market value as of December 31, 1996, of $163.5 million for financial reporting purposes under SFAS 115.
When reflecting the tax effect on unrealized investment returns, the fund balance would be $160.9 million as of December 31, 1996.
See Note 2 of Notes to Financial Statements,
" Changes in Accounting Principles."
The amounts collected, together with the trust earnings, will be used to meet the Company's decommissioning obligation.
The staff of the Securities and Exchange Commission has questioned certain current accounting practices of the electric utility industry regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to those questions, the Financial Accounting Standards Board ("FASB") has initiated a review of the accounting for such costs.
The FASB has considered several approaches, including recording the entire estimated liability for decommissioning costs initially, rather than accruing the costs over the operating life of the generating unit.
The Company believes that such an accounting change, if adopted by the FASB, would not adversely f
affect the Company's results of operations due to its ability to recover decommissioning costs through rates.
The Company recognizes the relative uncertainties associated with decommissioning, including its changing technology and the possibility of new requirements of law, and therefore recognizes the need to monitor and adjust decommissioning collections through supplemental rate filings with the FERC.
The Company is planning a new decommissioning cost study in 1997.
36
~
-... -.- - -.__.-.~..-
p Maine Yankee Atomic Power Company l
NOTES TO FINANCIAL STATEMENTS l
December 31, 1996 l
1.
SIM4ARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) b ortization of Nuclear Fuel: The cost of nuclear fuel in the reactor is amortized to fuel expense based on the ratio of energy produced l
during the period to the estimated total core capability.
4 i
The Company amortizes to expense the estimated costs of the unburned nuclear fuel which is expected to be in the reactor core at the expiration of the Plant's NRC operating license life in 2008.
These costs are being amortized over the period ending October 2008.
Accumulated amortization for last core fuel for 1996 and 1995 was
$11.2 million and $10.1 million, respectively.
DOE D&D Fee:
Title XI of the Energy Policy Act of 1992 (the " Policy i
Act")
provides for decontaminating and decommissioning DOE's I
enrichment facilities to be partially funded by a special assessment against domestic utilities.
Under the Policy Act, the total amount collected for a fiscal year will not exceed $150 million escalated by the Consumer Price Index
(" CPI") annually, and the collection of the amounts will cease after the earlier of (1) 15 years after the date of the enactment or (2) the collection of $2.25 billion (to be escalated by the CPI annually).
Each utility's share of the assessment is to be based on its cumulative consumption of DOE enrichment services.
A liability, along with a corresponding regulatory asset, has been recognized in the accompanying financial statements.
The total liability at December 31, 1996, was $25.1 million, of which the Company had paid $8.1 million. Through December 1996, the Company had expensed and recovered $6.8 million.
The unrecovered balance of the
)
regulatory asset at December 31, 1996 and 1995, was $18.3 million and
$19.6 million, respectleely.
The Company believes that the full assessment will be recovered in rates as described in the Policy Act.
Fuel Disoosal Cost:
In 1983, the Company entered into a contract with the DOE for disposal of its spent nuclear fuel, as required by the Nuclear Waste Policy Act of 1982, pursuant to which a fee of $1.00 per megawatt-hour is assessed against current generation and is paid to the DOE quarterly.
The Company also has an obligation of $50.4 million with respect to generation prior to April 7, 1983 (the date current DOE assessments began), all of which the Company has already collected from its customers, but for which a reserve was not funded.
The Company has elected, under the terms of this contract, to make a single payment of this obligation prior to the first delivery of spent 37
\\
=,
l Maine Yankes Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1996
)
1.
St.494hRY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2
)
fuel to DOE, scheduled to begin no earlier than 1998.
See Note 14 of j
Notes to Financial Statements,
" Commitments and Contingencies."
Interest on the obligation accrues at the 13-week Treasury Bill rate i
compounded on a quarterly basis from April 7, 1983, through the date of the actual payment and is billed under the terms of the Power Contract.
Interest accrued and billed through December 31, 1996, d
amounted to $69.8 million.
The Company has formed a trust to provide for payment of this long-term fuel obligation.
The total spent fuel fund balance, held by an independent trustee, as of December 31, 1996,
{
was $112.5 million (including interest earned) and is included in l
Deferred Charges and Other Assets on the accompanying balance sheet.
i The trust is funded by the Company through deposits, which began in f
December 1985, with current projected annual deposits of approximately j
$2.0 million through January 1998. Deposits are expected to total j
approximately $72.3 million.
The trust fund deposits plur A.-*.imated earnings are projected to meet the total estimated futur.
lility of $125.5 million at January 31, 1998.
1 l
1 Amortization of Materials and Sucolies:
The Company is reserving for j
materials and supplies inventory that is expected to be unctilized at i
the end of the Plant'as life.
This amortization expense is based on i
the current inventory balance less the accumulated amortization. This cost is being amortized over the period ending October 2008 on a I
monthly basis using the prior month's ending balances.
Accumulated i
amortization for 1996 and 1995 was $6.1 million and $5.2 million, l
respectively.
4
)
Allowance for Funds Used Durincr Construction ("AFC") and Allowance for 4
Funds Used for Nuclear Fuel ("AFN"):
In accordance with prior rate-4 making treatment, the Company earns a current return on up to 50 percent of Construction Work in Progress ("CWIP") and 50 percent of Nuclear Fuel in Process ("NFIP"), subject to certain limitations. The
]
Company capitalizes the not cost of borrowed funds and the allowed rate of return on equity funds used to finance its remaining 5
construction and nuclear fuel acquisition costs as AFC and AFN.
The l
amount of try allowance recorded is determined by multiplying the applicable e.s.orage monthly balance of CWIP and NFIP by the weighted average cosst of capital used to finance the respective additions.
38
6 Maine Yankee Atomic Power Comeany NOTES TO FINANCIAL STATEMENTS l
December 31, 1996 I
1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table contains the rates used for the most recent three annual periods:
AFC AFN on CWIP on NFIP t
1996 10.37%
10.63%
1995 9.94 10.94 1994 9.48 8.99 Unamortized Gain or Loss on Reacouired Debt:
Gains and losses on bonds reacquired to satisfy sinking fund requirements of First Mort-gage Bonds are deferred and amortized to income over the remaining original terms of the applicable series as prescribed by the Uniform System of Accounts of the FERC.
l 2.
CHANGES IN ACCOUNTING PRINCIPLES i
In May 1993, FASB issued SFAS 115, " Accounting for Certain Investments in Debt and Equity Securities. " SFAS 115 addresses the accounting and and reporting for certain investments in debt and equity securities, expands the use of fair value accounting for these securities.
SFAS 115 is applicable to the Company with respect to its investments in the nuclear decommissioning trust fund and the spent fuel disposal trust fund.
SFAS 115 requires investments in the decommissioning trust to be presented at fair value and was adopted by Maine Yankee on a prospective basis in the third quarter of 1994.
The spent fuel disposal trust classification under SFAS 115 requires no change in the current presentation of its investments at amortized cost.
As a result of the adoption of SFAS 115, the Company increased its book value of investments in the nuclear decommissioning trust funds by approximately $7.9 million as of December 31, 1996, with a corresponding offset to the plant decommissioning reserve.
There was no change in the funding of the trust, nor any impact on the Company's earnings as a result of the adoption of SFAS 115.
For further discussion of nuclear decommissioning costs, refer to Note 1, " Summary of Significant Accounting Policies"
" Decommissioning."
l l
I 39
. =
l I
Maine Yankee Atomic Power comoany NOTES TO FINANCIAL STATEMENTS December 31, 1996 3.
INCOME TAX EXPENSE The components of federal and state income taxes reflected in the 7
Statement of Income are as follows:
Year Ended December 31, 1996 1995 1994 (Dollars in Thousands)
Federal Current
$ 1,922
$ 2,057
$ 5,100 Deferred (2,813)
(5,638)
(5,504)
Investment tax credits, net (487)
. 122 (487)
(1.378)
(3.459)
.... ( 8 91 )
State Current 218 643 1,359 Deferred 721 (165)
(603) 939 478 756 Total federal and state income taxes
$ _L4L.,
$ (Lj.91)
$ M)
Deferred income taxes are provided to recognize the income tax effect of reporting certain transactions in different years for income tax and financial reporting purposes in accordance with the rate-making policies of the FERC.
Provisions for deferred income taxes reflect the tax effect of all timing differences.
In February 1992, the FASB issued SEAS 109, " Accounting for Income Taxes."
The standard requires the use of the liability method under which existing deferred taxes will be adjusted currently to reflect the effect of tax rates applicable to the years in which these taxes would become payable. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the year in which the differences are I
expected to reverse.
The new standard had no impact on total income tax expense for financial reporting purposes.
The not regulatory I
liability related to income taxes is $9.5 million as of December 31, 1996. This liability is being amortized consistent with the Company's ratemaking.
l l
l 40 l
~.
.. -.. ~. _ - -
Maine Yankee Atomic EgggI Company NOTES TO FINANCIAL STATEMENTS December 31, 1996 3.
INCOME TAX EXPENSE (continued)
Accumulated deferred income taxes consisted of the following as of December 31, 1996 and 1995:
1996 1995 (Dollars in Thousands)
Liabilities Property
$57,663
$56,561 Other (959)
(668) 56,704 55,893 1
Assets Decommissioning 14,921 12,839 Regulatory Tax Liability 3,841 4,331 i
1.
Investment Tax Credit 4,231 4,554 Last Core Fuel and Material l
and Supplies Inventory 6,302 5,501 i
Other 3.808 4,161 33,103 31,386 Accumulated Deferred Income Taxes, Net $2.3_dQ1
$M i
A valuation allowance was not recorded at December 31, 1996 and 1995, as the Company expects that all deferred income tax assets will be realized in the future.
Investment tax credits u'cilized to reduce federal income taxes currently payable are deferred and amortized over the lives of the related assets.
The following table reconciles the statutory federal income tax rate to the effective tax rate for financial reporting purposes.
l l
l l
l 41 i
[
l Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1996 3.
INCOME TAX EXPENSE (continued) 1996 1995 1994 (Dollars in Thousands)
Amount Amount Amount Statutory federal income tax rate
$ 2,288 34.0 $ 1,738 34.0 $ 2,622 34.0 Increase (reduction) in taxes resulting from:
Investment tax credits (487)
(7. 2) (2,105) (41.2)
(487) (6.3)
Flowback of excess deferred incor.e taxes (738) (11.0)
(735) (14.4)
(701) (9.1)
Nontaxable interest income:
Spent Fuel Trust (2,157) (32.1) (2,062) (40.3)
(1,905) (24.8) l Nonqualified Decom-missioning Trust (640) (9.5)
(704) (13.8)
(771) (10.0)
Other
__357
_.5 1 409 8.0 351 4.6 l
Calculated rate
$ (W) (M) $ (m) (67. 7) $ _,321) (M) 4.
MOST RECENT RATE CASE l
On April 7, 1993, the FERC initiated an investigation pursuant to f
Section 206 of the Federal Power Act into the justness and I
reasonableness of Maine Yankee's rate of return on common equity
(" ROE") established in the Company's 1988 FERC rate case.
The FERC indicated that its concurrent investigations of the rates of return on common equity of Maine Yankee and other nuclear generating companies were based on an indspendent analysis that suggested such rates might be excessive under the then-current market conditions.
After extensive negotiations, on September 20, 1993, the FERC staff, intervenors and Maine Yankee submitted for filing an offer of partial settlement, which was approved by the FERC on December 30, 1993.
The settlement agreement provided, among other things, for the following:
reduction in Maine Yankee's ROE effective June 15, 1993, to (1) a 10.65 percent from 12.9 percent; (2) an agreement by the parties to enter into good-faith negotiations regarding Maine Yankee's estimated cost of decommissioning and the corresponding collection rate; (3) an agreement that if the parties reached a settlement on Maine Yankee's decommissioning and collection rate, Maine Yankee would i
l submit a rate filing requesting approval of the agreed-upon decommissioning and collection rate and a continuation of the 10.65 percent ROE, with the support of the FERC staff and
[
intervenors; 42 l
t,
_ _ ~ _ _ _
_m l
4 Maine Xankaa Atomic Power Company i
NOTES TO FINANCIAL STATEMENTS December 31, 1996 l
4.
MOST RECENT RATE CASE (continued)
(4) an agreement that if the parties were unable to reach agreement on the decommissioning issues, the company would submit a rate filing that would encompass all appropriate rate issues.
l On January 18, 1994, Maine Yankee, af ter reaching agreement on the major issues, filed its rate case with the FERC.
In the filing, the i
Company sought approval to continue the ROE of 10.65 percent as l
earlier approved by the FERC.
Maine Yankee also sought to increase the annual amount collected to fund decommissioning costs for the Plant from $9.1 million to the agreed-upon amount of $14.9 million, l
commencing April 1,
1994.
This amount reflected the first step l
i increase in the estimated cost to fully decommission the Plant from the $167 million (in mid-1987 dollars) allowed by the FERC in the l
Company's 1988 rate case to $316.6 million (in mid-1993 dollars) based on the Company's 1993 decommissioning cost study.
The Company plans to continue to evaluate the cost of decommissioning periodically and is planning a new decommissioning cost study in 1997, and it will seek l
additional step increases as necessary.
With that filing, Maine l
Yankee also requested the FERC's approval for current and past i
expenses to fund Postratirement Benefits Other Than Pensions ("PBOP"),
pursuant to a new accounting standard.
See Note 13 of Notes to Financial Statements, " Employee and Postratirement Benefits."
l l
Along with the rate filing, the Company filed offers of settlement that were the result of extensive negotiations between Maine Yankee and the intervenors.
The parties, except for one municipal utility, agreed to a settlement reflecting, among other things, the following:
(1) an agreement to extend the ROE of 10.65 percent to April 1, 1997, or later, except for certain reopener provisions; l
(2) an agreement to establish the decommissioning collection rate described above based on the new decommissioning cost estimate of $316.6 million; (3) an agreement to establish a moratorium on Maine Yankee's ROE and decommission 1;q c Alection rate until April 1, 1997, except in I
certain limited circumstances, i
The settlement offer did not address the treatment of PBOP expense.
43 l
l l
i
j r
Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1996 4.
MOST RECENT RATE CASE (continued)
On March 31, 1994, the FERC issued an order accepting the proposed rates and profiling agreement effective April 1, 1994.
The FERC also f
directed the Company to make additional limited rate filings to recover CNIP costs and any changes in PBOP accruals.
In its order, the FERC gave the Company the option to propose a method to limit its filing obligation to once a year by adopting a procedure that bills CWIP subject to refund pending a later filing with the FERC to meet CNIP requirements.
On April 29, 1994, the Company filed a motion for l
clarification or alternative request for rehearing in order to further clarify the CWIP filing and to include PBOP accruals with the proposed yearly filing.
This clarification was granted as to annual filings for:
(1) CWIP, subject to adjustment, if necessary, after FERC
{
i review; and (2) changes in PBOP accruals prior to implementation.
5.
NOTES PAYABLE TO BANKS The company had bank lines - of credit totaling $21 million as of l
December 31, 1996 and 1995, all of which require an annual fee of 1/4 percent. There were no outstanding bank notes under the lines of credit as of December 31, 1996; $1.9 million was outstanding at December 31, 1995.
~
6.
FIRST MORTGAGE BONDS The annual sinking fund requirements of outstanding Series D, E and F First Mortgage Bonds for each of the five years ending December 31, 2000, are as follows:
Sinking I
Fund 1996
$6,667,000 1997 6,667,000 1998 6,667,000 1999 6,667,000 2000 6,667,000 Under the terms of the Indenture securing the First Mortgage Bonds, f
I substantially all electric plant of the Company is subject to a first i
mortgage lien.
l 4
44 i
~. - -. - -.
. ~. -. -..
)
e Maine Yankee Atomic Power Company I
i NOTES TO FINANCIAL STATEMENTS December 31, 1996 7.
SECURED CREDIT AGREEMENT j
~
In 1989, the Company entered into a secured credit agreement with a group of banks including the Bank of New York ("BNY"), which is also acting as the agent bank, under which the Company may borrow amounts up to $50 million to finance corporate expenditures.
Borrowings are l
secured by the Company's nuclear fuel inventory, as defined, and certain rights under the Power Contracts and Capital Funds Agreements.
Under the credit agreement, as amended in 1992, the company has four rate options for financing its interim requirements:
(1) a rate based l
on the higher of BNY's prime rate or a rate based on overnight federal funds transactions plus 1/4 percent; (2) the LIBOR rate plus 1/2 percent; (3) an adjusted certificate of deposit rate plus 5/8 percent; j
and (4) a rate established by bid. A quarterly commitment fee of.35 percent per annum is required on the unused portion of the facility.
The credit agreement has a three-year term, which may be extended for j
an additional year on each anniversary by agreement of the company and the banks.
The agreement was extended for an additional year in 1996 f
with a current maturity date of August 1999.
Certain other information relating to this loan arrangement is as follows:
Year Ended December 31, 1996 1995 1994 (Dollars in Thousands)
Promissory notes outstanding at and of period
$20,000 $20,000
$22,000 Average daily outstanding borrowings
$18,519 $16,997
$ 5,949 Highest level of borrowing
$33,000 $38,000
$27,000 Annual interest rate at end of period 6.07%
6.37%
6.36%
Effective average annual interest rate 6.05%
6.51%
5.05%
8.
EURODOLLAR REVOLVING CREDIT AGREEMENT In January 1990, the Company entered into a Eurodollar Revolving Credit Agreement with a group of major international banks including Union Bank of Switzerland, which is also acting as agent bank, under which the Company may borrow up to $35 million.
Under the facility, each loan is due 364 days after the date of the loan, unless an earlier termination date applies under the agreement, and bears interest at a LIBOR-based rate plus 5/8 percent.
A commitment fee of
.35 percent on the unused line is payable quarterly.
The loans are 45 l
~. -_. _.. _.___ _ _..._. _ _ _...__ _.. _ __ _ _ _.. _. _ _..
Maine Yankee Atomic Power Connany NOTES TO FINANCIAL STATEMENTS December 31, 1996 8.
EURODOLLAR REVOLVING CREDIT AGREEMENT (continued) secured by a second lien on the Company's nuclear fuel inventory (excluding fuel in the reactor) and on certain rights under its Power Contracts and Capital Funds Agreements requiring payments or financing of fuel-related costs.
i The banks have given notice to the Company that their commitments to lend to the Company will terminate on February 13, 1998.
The Company is discussing a renegotiated credit arrangement with the banks.
1 I
l The Company had no borrowings under the Eurodollar Revolving Credit l
l Agreement during the years 1994 through 1996.
I 9.
REDEEMABLE PREFERRED STOCK I
7.48% Series.
The Company must redeem and cancel 6,000 shares annually of the 7.48% Series Preferred Stock at par value plus accrued dividends.
At the election of the Company, up to an additional 6,000 i
shares may be redeemed and canceled at par plus accrued dividends on each redemption date.
The optional provision is not cumulative.
The annual sinking fund requirement through December 31, 1999, is
$600,000. The Company may also redeem, in whole or in part, any additional shares of the 7.48% Series Preferred Stock upon not less l
than thirty nor more than fifty days' notice at $101.50 per share on or before December 31, 1997, and at $100.00 per share thereafter, in each case plus accrued dividends.
l There was no Preferred Stock repurchased for the sinking fund in advance and not canceled at December 31, 1996, 1995 and 1994.
8.00% Serita.
At the option of the Company, any time on and after October 1,
1997, shares of the cumulative Preferred Stock, 8.00%
Series, are redeemable at redemption prices decreasing from $105.33 l
per share on or after October 1, 1997, to $100.00 per share as of October 1,
2007.
No shares of Cumulative Preferred Stock, 8.00%
Series, may be redeemed, directly or indirectly, prior to October 1, 1997.
Mandatory sinking fund redemptions of the 8.00% Series shares l
begin October 1,
- 2002, and each October 1 thereafter with a
' noncumulative optional provision to redeem additional shares at a price of $100.00 per share plus dividends accrued.
l l
46 l
I
- ~ _ -
Maine Yankee Atomic Power Company 1
l NOTES TO FINANCIAL STATEMENTS i
December 31, 1996 1
1
- 10. RETAINED EARNINGS Under the terms of the most restrictive test in the Company's First Mortgage Indenture and the Company's Articles of Incorporation, no dividend may be paid on any class of its stock unless the Company is in compliance with specific equity ratio requirements.
Through December 31,
- 1996, the company was in compliance with these requirements.
l
- 11. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS The methods and assumptions used to estimate the fair value of each I
class of financial instruments for which it is practicable are discussed below.
The carrying amounts of cash and temporary investments approximate fair value because of the short maturity of these investments.
The fair value of redeemable preferred stock,
)
other notes and long-term obligations is based on quoted market prices l
for the same or similar issues.
i The estimated fair value of the Company's financial instruments as of December 31, 1996, is as follows:
Carrying Fair l
Amount Value (Dollars in Thousands)
Cash and Cash Equivalents 4,418 4,418
)
Fuel Disposal Trust 112,523 113,845 l
Plant Decommissioning Trust 163,536 163,536 l
Redeemable Preferred Stock 18,600 13,640 First Mortgage Bonds C9,999 80,837 Nuclear Fuel Financing Notes 20,000 20,000 i
Anticipated regulatory treatment of any differences between fair value and carrying value of the Company's financial instruments is expected to be considered in the future rates charged by the Company.
l l
47
m I
t Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1996
- 12. SFAS 119 DISCLOSURE In 1994, FASB issued SFAS 119, " Disclosure about Derivative Financial l
Instruments and Fair Value of Financial Instruments."
SFAS 119 l
requires information about all derivative finaricial' instruments, including separate disclosure for instruments held or issued for trading and nontrading purposes.
In addition, certain amendments have been made to SFAS 105, " Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with l
Concentrations of Credit Risk"; and SFAS 107, " Disclosures about Fair l
Value of Financial Instruments."
l l
SFAS 119 was required to be effective for fiscal years after December 15, 1994. As of December 31, 1996 and 1995, the Company held no derivative financial instruments that require disclosure under SFAS l
119.
- 13. EMPLOYEE AND POSTRETIREMENT BENEFITS The Company has two separate noncontributory defined-benefit pension plans that cover substantially all of its union and nonunion 3
employees.
The Company's funding policy is to contribute amounts to the separate plans which are sufficient to meet the funding requirements set forth in the Employee Retirement Income Security Act, plus such additional amounts - as the company may determine to be appropriate.
Total pension expense related to these plans amounted to $1.9 million in 1996, $1.8 million in 1995 and $2.3 million in 1994.
Plan benefits under the union retirement plan are based on average career earnings and length of employee service.
Plan benefits under the nonunion retirement plan are based on average final earnings, as defined within the plan, and length of employee service.
A summary of the components of not periodic pension cost for the union and nonunion defined benefit plans in 1996, 1995 and 1994 and the total contributions charged to pension expense is as follows:
I 48
l I
Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1996
- 13. EMPLOYEE AND POSTRFKIREMENT BENEFITS (continued)
Union Nonunion 1996 1995 1994 1996 1995 1994 l
(Dollars in Thousands)
Service Cost -
Benefits Earned During the Period
$ 411 $
334 $ 375 $ 1,416 $ 1,180 $1,347 Interest Cost on i
Projected Benefit l
Obligation 346 287 261 1,469 1,260 1,192 Return on Plan Assets (929)
(1,098) 31 (2,967) (3,021) 102 l
Net Amortization and Deferral 142 699 (2 16) 1,667 2,117 (7Q2) l Net Periodic l
Pension Cost
$ M1 $ _.222 $ M1 $ 1u5.El $ L5.25 $bl2E Effective January 1, 1994, the nonunion defined benefit pension plan j
was amended for its active employees terminating on or after that date.
The major changes included an increase in the percentage value of compensation utilized in the final average pay plan, along with a reduction in the social security offset within the formula; the j
addition of a career average minimum benefit for participation service f
after December 31, 1985; the redefinition of pensionable wages to include incentive compensation; and a change to the definition of benefit service within the final average pay formula.
Pension Benefits:
The following table sets forth the actuarial present value of pension benefit obligations, the funded status of the plans and the liabilities recognized on the Company's balance sheet at December 31, 1996 and 1995:
i l
l i
l 1
49 l
C e
M&iDa Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1996
- 13. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued)
Union Nonunion l
l 1996 1995 1996 1995 l
(Dollars in Thousands)
Actuarial Present Value of Benefit Obligations Vested Benefit obligation
$ @ $ LJi,52. $ M $ 9.127 l
Accumulated Benefit Obligation $ L.,6jii $ LJJ), $ 13.722 $11.825 Projected Benefit Obligation
$ 4,822 $ 4,316 $ 20,597 $18,929 Plan Assets at Market Value (Primarily, Stocks and Bonds) 7,334 5.793 23.236 17.570 Funded Status - Projected l
Benefit obligation in Excess of (Less Than) Plan Assets (2,512) (1,477)
(2,639) 1,359 j
Unrecognized Prior Service Cost 12 13 (2,568) (2,776)
Unrecognized Net Gain 954 321 2,910 476 l
l Unrecognized Net Asset 265 287 347 379 Net Pension Asset Recognized in the Balance Sheet
$ (M)$ Ej) $ (1,950)$
(562) i Assumptions used in accounting for the union and nonunion plans at December 31 were as follows:
1996 1995 1994 Weighted Average Discount Rate 7.50% 7.25%
8.25%
Rate of Increase in Future Compensation Levels 5.25 5.25 5.50 Expected Long-Term Return on Assets 8.50 8.50 8.50 i
50
l A
Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1996
- 13. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued)
Other Post==nlovment Benefits:
In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for its qualifying retirees.
These benefits are provided through purchased insurance policies, and premiums are based on the benefits paid during the year. The Company recognizes the future cost of providing these benefits through charging expense in the current period.
The cost of health care and life insurance benefits, substantially all of which relates to active employees, agg: egated approximately $2.5 million in 1996, $2.3 million in 1995 and $2.4 million in 1994.
In December 1990, the FASB issued a standard on Employers' Accounting for PBOP, such as health care and life insurance.
The standard requires the accrual of the expected cost of such benefits during the employees' years of service and provides transition rules allowing the impact of the adoption to be included in annual expense over a period not greater than 20 years.
(See Note 4 of Notes to Financial Statements, "Most Recent Rate Cass," for the FERC ruling on rate treatment of PBOP by the Company.)
The following table sets forth the pisn's funded status:
1996 19JiL'i (Dollars in Thousands)
Fair Value of Plan Assets
$ 9.037
$ 7,646 Accumulated Postratirement Benefit Obligation:
Current Retirees and Beneficiaries 870 713 Active Employees Fully Eligible for Benefits 225 249 Other Active Employees 9.156 8.631 Total Accumulated Benefit obligations 10.251 9,593 Accumulated Benefit Obligation in Excess of Plan Assets (1,214)
(1,947)
FERC-Approved Expense Adjustment 224 (194)
~
Unrecognized Amounts:
Transition Obligation 1,905 2,064 Prior Service Cost Net Loss (Gain)
(413) 449 Prepaid Postratirement Benefit Cost 502
$ __322 51
4 I
Maine Yankee Atomic Equer Company NOTES TO FINANCIAL STATEMENTS December 31, 1996 13.
EMPLOYEE AND POSTRETIREMENT BENEFITS (continued) l i
The not periodic postratirement benefit cost expensed for 1996 and 1995 included the following components:
1996 1995 (Dollars in Thousands)
Service Cost
$ 626 531 718 650 Interest cost l
Actual Return on Assets (879)
(964)
Deferral of Asset Losc During the igpr 337 580 Net Amortization 159 159 FERC-Approved Expense Adjustment (221)
. 194 Net Periodic Postratirement Denefit Cost
$M
$M l
I The current covered health care benefits assume for 1996 an 8.50 f
percent annual rate of increase in cost trend rates.
The health l
came cost trend rate is assumed to decrease annually through the year 1999 to an ultimate rate of 5.50 percent.
Increasing the assumed health care cost trend rates by 1 percent would increase the l
accumulated postratirement benefit obligation as of December 31,
)
l 1996, by $2.07 million.
Additional assumptions used in accounting for postratirement plans at December 31 were as follows:
1996 1995 Weighted Average Discount Rate 7.50%
7.25%
Rate of Return on Plan Assets 7.50
- 7.50 *
- Rate of return on plan assets for nonunion medical l
voluntary Employee Beneficiary Association is 5.0 percent.
1
- 14. Cote (ITMENTS AND CONTINGENCIES Construction:
The Company anticipates construction expenditures to l
amount to $18.5 million (including AFC) in 1997.
Nuclear Fuel:
The Company anticipates nuclear fuel expenditures of
$39.7 million (including AFN) for 1997 and $59.7 million (including AFN) for the period 1998 through 2001.
l 52 l
l
\\
_.m.,
t d
Maine Yankee Atomic Power Company i
I NOTES TO FINANCIAL STATEMENTS December 31, 1996
- 14. Cot *HITMENTS AND CONTINGENCIES (continued)
Nuclear Fuel Stormaa: Federal legislation enacted in 1987 directed the F
DOE to proceed with the studies necessary to develop and operate a
~
permanent high-level waste (spent fuel) disposal site at Yucca Mountain, Nevada.
The legislation also provided for the possible development of a Monitcred 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.
In late 1989, the DOE announced that the permanent disposal site was not expected to open before 2010, although originally scheduled to open in 1998.
r The Nuclear Waste Policy Act of 1996 (S. 1936), approved by the United States Senate on July 31, 1996, would provide for an interim federal high-level waste storage facility to commence operation by November 30, 1999, if Yucca Mountain is found to be a stable repository cite, and authorizes the DOE to develop an integrated f
spent-fuel management program. A generally aimilar bill is pending in the House of Representatives. Tho Company cannot predict whether or in Fbat form the legislation will be adopted.
L 22 June 199(., 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 requires 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." In October 1996 the DOE announced that it would not appeal the decision. Maine Yankee cannot predict when or how l
the DOE will satisfy its responsibility, r
Under the terms of a license amendment approved by the NRC in 1984, the pre <sent storage capacity of the spent fuel pool at the Plant will be reached in 1999, and after 1997 the available capacity of the pool will not accommodate a full-core removal.
After consideration of available technologies, the Company elected to provide additional the capacity by replacing the fuel racks in the spent fuel pool at Plant and, in January 1993, fi;cd with the NRC seeking authorization to implement the plan. On March 15, 1994, the NRC granted the j
authorization, and the installation of the new racks is scheduled to be completed in 1997.
Maine Yankee believes that the replacement of
[
the fuel racks will provide adequate storage capacity through the Plant's licensed operating life, but cannot predict with certainty the effect on the future cost of spent fuel dispo al.
53
I Maine Yankee Atomic Power Compa'2y NOTES TO FINANCIAL STATEMENTS l
December 31, 1996 i
- 14. Cote (ITMENTS AND CONTINGENCIES (continued) i i
Nuclear Insurange: In accordan'ce with the Price-Anderson Act, the limit of liability for a nucle 3J-related accident is approximately I
$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 liconasd reactors.
The secondary layet is based on a
retrospective premium assessment of $79.275 million per nuclear accident per licensed reactor, payable at a rate not exceeding $10 i
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.
Numerous liability claims were filed as a result of the 1979 accident at Three Mile Island Unit No. 2 in Pennsylvania. On June 7, 1996, all of the lawsuits claiming personal injuries as a result of that accident were dismissed prior t.) trial by the United States Distrac;.
Court in which the suits were 15 be heard.
The suits are subject to appeal.
If the first layer of coverage carried by the owners of the
]
unit should be exhausted to omy such claims, the Company and other licensees in the United
- as would be assessed as part of the secondary layer.
Maine Yankwe cannot predict the outcome of any appeals or whether or when secondary-layer assessments will be required, but, in any event, its assessment would be limited to $5 million.
In addition U 'ha insuranco required by the Price-Anderson Act, the Company carris.
11-risk nuclear property damage insurance in the amount of $500 au lion plus additional excess nuclear property insurance in the am unt of $2.25 billion.
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 $2.25 billion is provided by a nuclear electric utility industry insurance company through a ccabination of current premiums, retrospective premium assessments and reinsurance.
If the insurance company experiences losses in excess of its capacity to pay them, each participating utility may be assessed a retrospective premium of up to E times its premium with respect to industry losses in any policy year, which could range up to approximately $15.1 million for the company.
This excess coverage amount is the maximum offered by the industry mutual company.
54
~ ~... - -. - - - - -.- -.- -
i o
Maine Yankee Atomic Power Company I
NOTES TO FINANCIAL STATEMENTS l
December 31, 1996
- 14. cot 44ITMENTS AND CONTINGENCIES (continued)
Low-Level Waste Disnosal:
The federal Low-Level Radioactive Waste Policy Amendments Act (the " Waste Act"), enacted in 1986, required l
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 af ter the and 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 i
implementation of a compact for the disposal of low-level waste at a i
site in Texas.
The ratification bill for the compact is before Congress for consideration at its 1997 session.
The compset 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 the Company 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.
T'w Maine Low-Level Radioactive Waste Authority suspended its search i
for p suitable disposal site in Maine and, as of June 30, 1994, ceased j
operations.
)
In the event the required ratification by Congress is not obtained,.
subject to continued NRC approval, the ' Company will ship low-level waste offsite for disposal in South Carolina or other available sites as long as the sites are available, reserving it s capacity to store approximately ten to twelve years' production of low-level waste at its facility at the Plant site.
Subject to obtaining necessary regulatory approval, the company could m3so build a second facility on the Plant site.
The Company believes it is probable that it will have adequate storage capacity for such low-level waste available on-site, if needed, through the current licensed operating life of the Plant, to October 21, 2008.
i l
55
Maine Yankee Atomic Power Company 1
NOTES TO FINANCIAL STATEMENTS l'
December 31, 1996
- 14. Cole (ITMENTS AND CONTINGENCIES (continued)
The Company cannot predict whether the final required ratification of the Texas compact or other regulatory approvals required for on-site I
storage will be obtained, but the Company intends to utilize its on-site storage facility as well as dispose of low-level waste at the t
South Carolina site or other available sites in the interim and I
continue to cooperate with the State of Maine in pursuing all appropriate options.
Accoun. tina for Sleevina costs:
Maine Yankee recorded the costs of sleeving the Plant's steam-generator tubes incurred during the 1995 l
extended shutdown as maintenance expense. On October 10, 1995, eleven municipal and electrical cooperative secondary purchasers that purchase Maine Yankee power through the Company's Sponsors and are collectively entitled to less than two percent of the Plant's output, filed a complaint with the FERC challenging the Company's accounting treatment of the costs and alleging that such costs should be deferred and amortized over the remaining operating life of the Plant.
l On May 30, 1996, the FERC issued an order directing Maine Yankee to amortize the sleeving repair costs over the remaining license life of the Plant (currently, to October 2008).
Because Maine Yankee had already billed the repair costs in 1995, it was also directed to l
refand, with interest, all amounts in excess of the properly amortized amounts.
On June 18, 1996, the Company filed a motion for a partial stay of the FERC order in support of an offer of settlement of the issues in the proceeding.
The stay was granted on June 27, 1996, but the FERC has not yet acted a the settlement.
The underlying settlement agreement preserves the w eefits of the FERC's May 30 order for the complainant j
secondary purchasers as well as other secondary purchasers whose contracts to purchase Maine Yankee power expire in 2002.
The settlement agreement provides that Maine Yankee is not required to make refunds to its Sponsor customers, which represent in the aggregate approximately 94 percent of the total sleeving expense of approximately $27 million.
The Company cannot predict the outcome of FERC deliberations and order on the offered settlement.
I l
4
}
4 i
56 l
4 4,,-,
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l 1
l Maine Yankee Atomic Power Company o
l NOTES TO FINANCIAL STATEMENTS l
December 31, 1996 i
- 14. Cote (ITMENTS AND CONTINGENCIES (continued) l l
C m titive conditions: Electric utility rates have historically been j
based on a utility's costs.
As a result, electric utilicies are l
subject to certain accounting standards that are not applicable to
]
other business enterprises in general.
SFAS 71, " Accounting for the l
Effects of Certain Types of Regulation," requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates.
The Company believes that its operations currently meet the criteria established i
in SFAS 71.
However, the effects of regulatory and/or legislative initiatives could, in the near future, cauce all or a portion of the Company's operations to cease meeting the criteria of SFAS 71.
In that event, the application of SFAS 71 to the Company's operations would be discontinued and a noncash write-off of previously established regulatory assets and liabilities related to such operations would be required.
At December 31, 1996, the Company had pretax regulatory assets (not of regulatory liabilities) of approximately $49.0 million.
The Company's regulatory assets as of December 31, 1996, are currently being recovered through the FERC l
rate-making process.
If competitive or regulatory change should cause a default of operating cost recovery from the Company's Sponsors or lead to the permanent shutdown of the Company's generating facility, and the Company is unable to recover these costs in rates, a substantial q
write-down of plant assets could be required pursuant to SFAS 121,
" Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This standard, effective for fiscal year 1996, clarifies when and how to recognize an impairment of long-lived assets.
The Company believes that it is entitled to recover substantially all of its potentially strandable costs under existing regulatory principles, but cannot predict how much of such costs it will ultimately be allowed to recover.
Effect of Extended Outaae on Soonsors: The Company believes the Plant will be out of service at least until August 1997, but cannot predict when or whether all of the regulatory and operational issues will be satisfactorily resolved or what effect the ultimate total of the repairs and improvements to the Plant will have on the economics of i
i operating the Plant.
1 1
57 1
6 4
i Maine Yankee Atomic Power Company i
I j
NOTES TO FINANCIAL STATEMENTS
}
December 31, 1996 3
4.
CateGTMENTS AND CONTINGENCIES (continued)
The additional costs associated with the Maine Yankee Plant outages, when combined with the Sponsors' own replacement power costs, are l
adversely affecting the financial condition of the Sponsors.
Central Maine Power Company, which is responsible for 38 percent of Maine Yankee's operating costs, has stated that sustained nuclear-unit outages "will be a major obstacle to achieving satisfactory results in 1997. "
Bangor Hydro-Electric Company, a 7 percent Sponsor, has cited its " deteriorating" financial condition and on March 19, 1997, eliminated its first-quarter common-stock dividend; and Maine Public Service company, a 5 percent Sponsor, cited problems in satisfying i
financial covenants in loan documents and substantially reduced its common-stock dividend in early March 1997.
Other Sponsors are affected in varying degrees.
Northeast Utilities (a 20 percent Sponsor 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 an unfavorable utility deregulation plan in New Hampshire currently under appeal, announced on March 24, 1997, j
that its management was planning to recommend a suspension of its 1
second-quarter common-stock dividend to its board of trustees.
A default by a Sponsor of the Company in making payments under its Power Contract or Capital Funds Agreement could have a material adverse effect on the Company, depending on the magnitude of the default, and l
would constitute a default under the Company's First Mortgage Indenture and its two other major credit agreements unless cured within applicable grace periods by @ defaulting Sponsor or other Sponsors.
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 the Company are in their early stages and a large number of potentially responsible parties is involved, the Company cannot now predict the amount of costs it will ultimately be required to assume, but believes the amount could be material.
58
.. _ _ _. _. ~ _
. ~ ~.... _ _ ~ _. _. _ _.. _ _
'e l
Maine Yankee Atomic Power ComDany NOTES TO FINANCIAL STATEMENTS December 31, 1996
- 15. UNAUDITED QUARTERLY FINANCIAL DATA l
Unaudited quarterly financial data are shown below.
Results of i
operations vary between quarters, primar12.y because of scheduled and
]
unscheduled plant outages.
i I
I ouarter Ended March 31 June 30 September 30 December 31 (Dollars in Thousands, Except Per Share Amounts) 1996 Electric Operating Revenues
$41,812
$43,068
$47,532
$53,249 Operating Income 4,484 4,213 4,305 4,148 Net Income 2,154 2,127 1,807 2,018 Earnings Per Share of Common Stock 3.57 3.52 2.88 3.30 1995 Electric Operating Revenues 62,662 49,225 44,835 49,255 Operat.'.ng Income 4,703 4,556 4,708 4,560 Not Income 2,093 2,096 2,201 2,181 Earnings Per Share of Common Stock 3.43 3.43 3.65 3.60
- 16. TRANSACTIONS WITH ASSOCIATED COMPANIES During 1996, 1995 and 1994, the company paid $14.0 million, $12.3 million and $14.5 million, respectively, to Yankee Atomic Electcric Company
(" Yankee"), an associate of several of the Sponsors, l'or services at cost for its engineering and nuclear services department.
CMP has furnished the Company certain engineering, administrative and legal services, and furnished certain facilities at cost, and electric service et its filed rates.
During 1996, 1995 and 1994, CMP was reimbursed in the amount of $4.9 million, $4.4 million and $2.6 million, respectively, for such services.
It is expected that Yankee and CMP will continue to perform similar services for the company in the future, for which they will be reimbursed by the Company.
59 l
l l
o DIRECTORS AND EXECUTIVE OFFICERS Directors The directors of the Company and their principal occupations and all positions and offices with the Company are as follows:
Name Principal Occupation David T.
Flanagan President and Chief Executive Chairman of the Board of
- Officer, Central Maine Power Directors Company Arthur W. Adelberg Vice President, Law and Power Director Supply, Central Maine Power Company Rcbert S.
Briggo Chairman of the Board, Director President and Chief Executive Officer, Bangor Hyd: o-Electric Company Kent R.
Brown Vice President, Engineering and Director Operations, Central Vermont Public Service Corporation Paul R.
Cariani President and Chief Executive Director Officer, Maine Public Service Company Lillian M.
Cuoco Senior Nuclear Counsel, Director Northeast Utilities Service Company Ted C.
reigenbaum Executive Vice President and Director Chief Nuclear Officer, North Atlantic Energy Services Corporation Frederic E.
Greenman Consultant; former Vice j
Director President and General Counsel, New England Power Company 4
60
,e DIRECTORS AND EXECUTIVE OFFICERS (continued)
Directora (continued)
Name Princioal Occunation John B.
Keane Vice President and Treasurer, Director Northeast Utilities Carroll R.
Lee Vice President, Operations, Director Bangor Hydro-Electric Company David E. Marsh Vice President, Corporate Director Services, Treasurer, and Chief j
Financial Officer, Central Maine Power Company Thomas E. Murley Nuclear Safety and Management Director Consultant; former Director of Nuclear Reactor Regulation,
)
United States Nuclear Regulatory Commission j
l Donald G.
Pardus Chairman and Chief Executive Director Officer, Eastern Utilities Associates Gerald C.
Poulin Vice President, Generation and Director Technical Eupport, Central Maine Power Company James S. Robinson Director, Nuclear Invaatments, Director New England Power Company John W.
Rowe President and Chief Executive Director Officer, New England Electric System F. Allen Wiley Managing Director of l.
Director Generation, Central Maina Power Company Russell D. Wright President and Chief Operating Director Officer, Cambridge Electric Light Company
}
4 61
8 0
4, g
l e
DIRECTORS AND EXECUTIVE OFFICERS (continuedj_
l Executive Officers l
The following are the executive officers of the Company with all positions and offices held:
Name Office David T.
Flanagan Chairman of the Board of Directors Macht.el B.
Sellman President l
Graham M. Leitch Vice President, Operations l
i Patrick S.
Lydon Vice President, Finance and Administration Mary Ann Lynch Vice President, General Counsel, Secretary and Clerk Michael J. Meisner Vice President, Nuclear Safety and l
Regulatory Affairs Michael E. Thomas Treasurer l
Murch 28, 1997 hdon Date Patrick S.
t.
f Vice Presiddnt, Finance l
and Administration i
4 i
62 I
t