ML20203L428
| ML20203L428 | |
| Person / Time | |
|---|---|
| Site: | Millstone, Vermont Yankee, Haddam Neck, Yankee Rowe, Maine Yankee |
| Issue date: | 03/04/1998 |
| From: | Gallen K MORGAN, LEWIS & BOCKIUS |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM) |
| References | |
| NUDOCS 9803060046 | |
| Download: ML20203L428 (249) | |
Text
._ _---_ _ _ _ _ _ _ _ - _ _ _ _ _ _ _ _ _ _ _ _ - - - _ _ _ _ _ _
1800 M Street NY/.
Waturgon. D C 20036 5869 Morgan, Lewis 202 4 7 - aBockitis ur Fax. 20447 7176 COUNSEL 0R$ AT LAW Kevin P. Gallen 202-467 7462 March 4,1998 <
10 C.F.R. Q 50.80 VIA HAND DELIVERY c
U.S. Nuclear kegulatory Commission Attention: Document Control Desk One White Flint North 11555 Rockville Pike Rockville,MD 20852 Re: NRC Docket Nos. 50-423 (Millstone Unit 3),50-309 (Maine Yankee) 50-29 (Yankee Rowe),50-213 (Haddam Neck), and 50-271 (VermontYankee); Proposed Reorganization of Central Maine Power Company
Dear Sir / Madam:
This letter is to (a) advis: the Nuclear Regulatory Commission (NRC or Commission) of the proposed reorganization of Central Maine Power Company (CMP) which will result in the creation of a new holding company structure for CMP, and (b) request NRC's consent to any indirect transfer of control of NRC Operating License NPF-49 for Millstone Unit 3, or any NRC license held by the various Yankee companies in which CMP owns an equity interest, to the extent that the Commission believes that such consent is required in connection with this reorganization pursuant to Section 184 of the Atomic Energy Act of 1954, as amended (AEA), and 10 C.F.R. Q 50.80.
gh CMP currently holds an undivided 2.5% ownership interest in Millstone Unit 3 ar.d is an NRC licensee with respect to this interest. CMP also owns (a) a 38% equity interest 980306o046 980304 PDR ADOCK 05000o29 l 7 l}l$ll$!!ll!flllllll,$lll!lll hiphe Wavungton New York los Angeles Merne Harnstarg Pnnteten London Brussets Frankfurt Tokyo
.. . . .. . _ _ _ . . _ J
5 Mo Lewis s s ur U.S. Nuclear Rc;;ulatory Commission March 4,1998 Page 2 in Maine Yankee Atomic Power Company, the licensed owner and operator of the Maine Yankee plant, (b) a 9.5% equity interest in Yankee Atomic Electric Company, the licensed owner and operator of the Yankee Rowe plant, (c) a 6% equity interest in Connecticut Yankee Atomic Power Company, the licensed owner and operator of the Haddam Neck plant, and (d) a 4% equity interest in the Vermont Yankee Nuclear Power Corporation, the licensed owner and operator of the Vennont Yankee plant. The Maine Yankee, Yankee Rowe, and Haddam Neck plants have all been permanently shut down and are undergoing or preparing for decommissioning.
'l ne CMP reorganization is being undertaken in response to (a) the widespread regulatory and market changes that have occurred throughout the electric utility industry in the United States as a result of the enactment of the Energy Policy Act of 1992 and recent decisions by the Federal Energy Regulatory Commission (FERC) promoting additional competition at the wholesale level, including Order Nos. 888 and 889 mandating open access to transmission services, and (b) the enactment of the Maine 4 Electric Industry Restructuring Act of 1997 which provides for the transition to a competitive market for electricity generation services at the retail level in the State of Maine by March 1,2000.
Under the proposed reorganization, CMP and its existing non-utility subsidiaries will become subsidiaries of a new holding compar.y (HoldCo) organized under the laws of the State of Maine. The ultimate ownemhip of CMP will remain unchanged since (a) the current holders of all of the issued and outstanding shares of common stock of CMP will become the holders of all of the issued and outstanding shares of common stock of HoldCo, and (b) the current holders of shares of the preferred stock and debt securities of CMP will retain these interests. CMP will continue to hold its existing ownership interests in Millstone Unit 3 and the Yankee companies after the reorganization. CMP believes that converting to this type of holding company structure will provide long-term advantages through increased management and financial flexibility that will better position CMP and its existing non-utility subsidiaries to compete effectively in a changing commercial and regulatory environment. This structure will also serve to insulate CMP's utility business from business risks associated with the activities of the non-utility subsidiaries and be consistent with the corporate structure used by many other utilities in the United States, h403/1953461 l u [
\
U.S. Nnclear Regulatory Commission I March 4,1998 l Page 3 I While CMP does not believe that NRC approval of the proposed reorganization is , required under the AEA or NRC regulations, CMP recognizes that the NRC has taken i the position that its consent is required under 10 C.F.R. Q 50.80 in connection with corporate reorganizations involving "the formation of a new holding company over an , existing licensee " Scc NRC Final Policy Statement on the Restructuring and I Economic Deregulation of the Electric Utility Industry,62 Fed. Reg 44071,44077 E (Aug.19,1997). In this regard, the NRC has recently consented to a number of corporate reorganizations by other licensees which are comparable to CMP's proposed l' reorganization. See e.g., Letter from NRC to Boston Edison Company (Feb. I1,1998)
- #RC Docket No. 50-293); Letter from NRC to Pacific Gas & Electric Company (Oct.
'I8,1996) (NRC Docket Nos. 50-275,50-323,50-133); Letter from NRC to San Diego Gas & Electric Company (April 21,1995) (Docket Nos. 50-206, 50-361, 50-362);
j Letter from NRC to Detroit Edison Company (Aug. 30,1995) (Docket Nos. 50-16, 50- ! 341); and Letter from NRC to Illinois Power Company, (Jan. 31,1994) (Docket No. 30-l 461). i Additional information pertaining to the proposed reorganization, including the information required under 10 C.F.R. { 50.80 and NRC Administrative Letter 96-02, is included in Attachment A. As this information demonstrates, CMP's reorganization will not (1) have any adverse impact on the ownership or operation of Millston Unit 3 l or any of the Yankee plants, (2) affect the managerial, technical, or financial F qualifications of the licensed owners and operators of these plants; (3) affect CMP's i existing financial qualifications and status as an " electric utility" under NRC regulations; (4) result in foreign ownership, control or domination over any of these i licenses or licensees; or (5) have any adverse impact on competition or require any j additional NRC antitrust review. ! In summary, the proposed reorganization will not be inimical to the common defense and security or result in any undue risk to public health and safety, and any indirect transfer of any NRC license associated with CMP's reorganization will be consistent ] with the requirements set forth in the AEA, NRC regulations, and any relevant NRC
~
orders and licenses. l The consummation of the corporate transactions associated with the reorganization is dependent upon the receipt of various regulatory and shareholder approvals and is amou
U.S. Nuclear Regelenry Commissior. March 4,1998 < Page 4 currently scheduled to occur shortly after the May 21,1998 Annual Meeting of CMP's Shareholders. Accordingly, CMP respectfully requests that the NRC expedite its review of the proposed reorganization and provide any required consents by that date, In the event that NRC has any questions about CMP's proposed reorganization or wishes to obtain any additional information about the reorganization, please contact me directly at 202-467-7462, l Sincerely, Kevin P. Gallen Counsel for Central Maine . Power Company Enclosure cc: Attached List } 4 1 mW3/10534.1
_ _ . . _ _ ... . . - _ __._._ _. . _ . . . _ . - _ _ _ _ _. _._m 4 U.S. Nuclear Regulatory Commission March 4,1998 Page 5 LIST OF ADDITIONAL ADDRERSERS Hubert J. Miller Wii!h m J. Raymond . Regional Administrator, Region I NRC Senior Resident Inspector, Haddam Neck U.S. Nuclear Regulatory Commission Haddam Neck Nuclear Power Station ) 475 Allendale Road 361 Injun Hollow Road King of Prussia, PA 19406-1415 East Hampton, CT 06424 p j Stephen Dembek Richard Rasmussen NRR Project Manager, Millstone 3 NRC Senior Resident Inspector, Maine Yankee NRR Project Manager, Haddam Neck Maine Yankee
- . United States Nuclear Regulatory Commission P.O. Box E i Mail Stop 14-D4 Wiscasset, Maine 04578
- Washington,DC 20555 Morton B. Fairtile 4
NRR Project Manager, Yankee-Rowe United States Nuclear Regulatory Commission Mail Stop 11 B20 Washington,DC 20555 , Daniel H. Dorman i NRR Project Manager, Vermont Yankee NRR Project Manager, Maine Yankee United States Nuclear Regulatory Commission Mail Stop 14-B20 Washington,DC 20555 Antone Cerne NRC Senior Resident Inspector, Millstone 3 United States Nuclear Regulatory Commission
- P.O. Box 513 1
Niantic,CT 06357 4 , Edward C. Knutson NRC Senior Resident Inspector, Vermont , Yankee j Vermont Yankee Nuclear Power Station l P.O. Box 176 4 Vernon, VT 05354 InA03/10534.1
__ - - . _ _ . _ . ~ _ . ~ 10 C.F.R. 50.80 ATTACHMENT A ADDITIONAL INFORMATION RELATED TO THE PROPOSED REORGANIZATION OF CENTRAL MAINE POWER COMPANY TO CREATE A NEW HOLDING COMPANY STRUCTURE TABLE OF CONTENTS E.839 I. GENERAL INFORMATION CONCERNING CMP . . . . . . . . . . . . . . . . . . . . . 1 II. GENERAL INFORMATION CONCERNING HOLDCO . . . . . . . . . . . . . . . . . 6 III. DESCRIPTION OF THE PROPOSED REORGANIZATION AND REASONS FOR THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 IV. CMP COMPLIANCE WITH THE MAINE ELECTRIC INDUSTRY RESTRUCTURING ACT OF 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
'v .
SUMMARY
OF THE IMPACT OF THE REORGANIZATION ON CMP, MILLSTONE UNIT 3 AND THE YANKEE PLANTS . . . . . . . . . . . . . . . . . . 13 VI. OTHER REGULATORY AND SHAREHOLDER APPROVALS . . . . . . . . . . 14 VII. OTHER NUCLEAR REGULATORY CONSIDERATIONS . . . . . . . . . . . . . . 15 VIII. EFFECTIVE DATE OF THE REORGANIZATION . . . . . . . . . . . . . . . . . . . . 19 IX. REQUESTED NRC ACTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 e43/9M58.1
10 C.F.R. 50.80 ATTACHMENT A ADDITIONAL INFORMATION RELATED TO THE PROPOSED REORGANIZATION OF CENTRAL MAINE POWER COMPANY TO CREATE A M/ HOLDING COMPANY STRUCTURE I. GENERAL INFORMATION CONCERNING CMP (1) NAME Central Maine Power Company , (2) ADDRESS 83 Edison Drive Augusta, Maine 04336 (3) DESCRIPTION OF BUSINESS Central Maine Power Company (CMP) is a Maine corporation which is currently a {' vertically integrated public utility company engaged in the generation, transmission, sale, l and distribution of electricity in the state of Maine. CMP also has several non-utility subsidiaries engaged in other diversified business enterprises. CMP is a "public utility" subject to regulation by the Maine Public Utilities Commission (MPUC) under the laws of the State of Maine and the Federal Energy Regulatory Commission (FERC) under the Federal Power Act (FPA). CMP is currently exempt from regulation by the Securities w> usa i
. and Exchange Commission (SEC) under the Public Utility Holding Company Act of 1935, as amended (PUHCA), except Section 9(a)(2) of PUHCA, pursuant to Section l 3(a)(2) of PUECA. Upon the completion of the reorganization, CMP will be a transmission and distribution utility subject to regulation by the MPUC and FERC.
Additional information concerning the business and operations of CMP is set fonh in CMP's 1996 Annual Report on Form 10-K filed with the SEC in March 1997, CMP's most recent Quarterly Repon on Form 10-Q filed with the SEC on November 14,1997, and the Form 8-K filed with the SEC on January 12,1998, copies of which are contained in Exhibit I hereto. (4) NRC LICENSE HELD BY CMP Millstone Unit 3 (NRC Operating License NPF-49, Docket No. 50-423). CMP holds a 2.5% undivided ownership interest in Millstone Unit 3 as a tenant in common with 13 other electric utilities in New England which own the remaining 97.5% of this unit. Northeast Utilities is the licensed operator of Millstone Unit 3. (5) CMP INTERESTS IN YANKEE COMPANIES The Yankee companies each own a nuclear power plant in New England which is licensed by the NRC. The name of each Yankee company in which CMP owns an equity interest, the nuclear plant which is owned by that company, the relevant NRC licensing
=>msu 2
information with respect to each plant, and the extent of CMP's equity interest in each ' Yankee company is as follows: CMP's Yankee Plant NRC License NRC Docket Percentage Company No. No. Equity Interest in Company Maine Yankee Maine Yankee DPR-36 50-309 38% Atomic Power Company Yankee Yankee Rowe DPR-3 50-29 9.5% Atomic Electric Company Connecticut Haddam Neck DPR-61 50-213 6% Yankee Atomic Power Company Vermont Vennont DPR-28 50-271 4% Yankee Yankee Nucicar Power Corporation CMP is no; an NRC licensee with respect to any of these plants; however, CMP has entered into power purchase agreements with each of the Yankee companies which entitle CMP to a pro rata share of the electrical output of each of these plants and obligate CMP to pay a pro rata share of the costs of each of the plants, based on CMP's percentage equity interest in the individual Yankee company that owns and operates the plant. muss.: 3
. N
These power purchase agreements have been fit with FERC and the rates and charges in these agreements have been determined to bejust and reasonable in accordance with Section 205 of the FPA. The Maine Yankee, Yankee Rowe, and Haddam Neck plants have all been permanently shut down and are undergoing or preparing for decommissioning. The Vermont Yankee plant is the only plant owned by one of the Yankee companies which is currently authorized to operate under the terms ofits NRC license. (6) ORGANIZATION AND MANAGEMENT OF CMP CMP is a Maine corporation which is currently a publicly traded company listed on the New York Stock Exchange. (a) CMP Officers The names and titles of the current officers of CMP, all of whom are citizens of the United States, are as follows: Name Illh David M. Jagger Chairman of the Board of Directors Charles H. Abbott Vice Chairman of the Board of Directors David T. Flanagan President and Chief Executive Officer Arthur W. Adelberg Executive Vice President David E. Marsh Chief Financial Officer Sara J. Burns Chief Operating Officer, Distribution Services Gerald C. Poulin Chief Operating Officer, Energy Services Michael R. Cutter Vice President, Operations Support musea 4
F. Michael McClain Vice President, Corporate Development Curtis A. Mildner Vice President, Retail Marketing and Sales Curtis I. Call Treasurer Anne M. Pare Secretary and Clerk The names and titles of the principal officers of CMP upon the completion of the reorganization will be as follows: N_amt lills Sara J. Durns President Curtis I. Call Treasurer Anne M. Pare Secretary. The mailing addresses for all of the officers of CMP, except Messrs. Jagger and Abbott, before and after the reorganization is: Central Maine Power Company,83 Edison Drive, Augusta, Maine 04336. (b) CMP Directors ! The names and addresses of the current directors of CMP, all of whom are citizens of the United States, are set forth below: Name Address Charles H. Abbott Skelton, Taintor & Abbott,95 Main Street, P.O. Box 3200, Auburn, ME 04212 Charleen M. Chase Community Concepts, Inc., P.O. Box 278, Market Square, South Paris, ME 04281 Duane D. Fitzgeral'i 1002 Washington Street, Bath, ME 04530 avmu 5 o
David T. Flanagan Centrra Mse Power Company,83 Edison Drive, Augur.1, ME 04336 Robert H. Gardiner Maine Public Broadcasting Corporation,1450 Lisbon Street, Lewiston, ME 04240 David M. Jagger Jagger Brothers, P.O. Box 188, Water Street, Springvale,ME 04083 Peter J. Moynihan UNUM Corporation, Two Canal Plaza, Portland, ME 04101 William J. Ryan Peoples Heritage Financial Group, Inc., One Portland Square, P.O. Box 9540, Portland, ME 04112 Kathryn M. Weare The Cliff House, P.O. Box 2274, Bald Head Cliff, Shore Road, Ogunquit, ME 03907 Lyndel J. Wi.chcamper Wishcamper Properties, Inc.,177 High Street, Portland, ME 04101 Upon the completion of the reorganization, the CMP Board of Directors will consist of all of the current CMP directors, plus Sara J. Burns, the current Chief Operating Officer, Distribution Services, who will become the President of CMP after the reorganization. II. GENERAL INFORMATION CONCERNING HOLDCO HoldCo is a new corporation organized under the laws of the State of Maine with offices located at 83 Edison Drive, Augusta, Maine 04336. Upon the receipt of all m usu 6
I-necessary regulatory and shareholder approvals, HoldCo will be renamed and become a , publicly traded company listed on the New York Stock Exchange. CMP will promptly advise NRC of HoldCo's new name when the name change occurs. HoldCo will become the parent holding company of CMP and CMP's existing non-utility subsidiaries. Upon the completion of the reorganization, individuals who are currently principal officers of CMP will become officers of HoldCo. The names and titles of the HoldCo officers will be: Name Iille David T. Flanagan President end Chief Executive Officer ArthurW. Adelberg Executive Vice President David E. Marsh Chief Financial Off::er F. Michael McClain Vice President, Corporate Development Anne M. Pare Treasurer, Corporate Counsel and Secretary The mailing address of the HoldCo officers will be 83 Edison Drive, Augusta, Maine 04336. Upon the completion of the reorganization, the current directors of CMP will become directors of HoldCo. The names and addresses of these individuals are provided in Section 1(6)(b) above.. Additional information concerning the management, business and operations of HoldCo is set forth below and in the exhibits attached hereto. wwmn 7 l
III. DESCRIPTION OF THE PROPOSED REORGANIZATION AND REASONS FOR THE REORGANIZATION The proposed reorganization will involve the creation of a new holding compar. - . structure for CMP including a new holding company (HoldCo) organized under the laws of the State of Maine which will become the parent company of CMP and CMP's existing non-utility subsidiaries. HoldCo has already been formed. In order to accomplish this reorganization, CMP will form another new corporation, MergeCo, the sole purpose of which will be to serve as a vehicle to create the holding company structure. CMP, HoldCo, and MergeCo will then enter into an Agreement and Plan of Merger. Upon the consummation of the merger transactions comemplated in the Agreement and Plan of Merger, CMP's existing shares of common stock will be converted into an equal number of shares of common stock of HoldCo, CMP's existing shareholders will own 100% of the common stock of HoldCo, and CMP and CMP's existing non-utility subsidiaries will become subsidiaries of HoldCo. The current holders of preferred stock and debt securities in CMP will continue to hold these interests in CMP. Upon the completion o!the reorganization, CMP will continue to hold its existing 2.5% undivided ownership interest in Millstonc 3 and its existing equity interests in the Yankee companies and continue to be a party to the power purchase agreements with the
- Yankee companies. The new holding company structure is being adopted to provide CMP with long-term advantages through increased management and fimancial flexibility mwa.
- 8
that viill better position CMP and its non-utility subsidiaries to operate in a changing business and regulatory environment, while maintaining CMP's principal business focus on its core utility business. In addition, the clearer separa* ion of CMP's core utility business from non-utility enterprises by making HoldCo, rather than CMP, the parent of the non-utility subsidiaries will better segregate the operations, risks, and costs associated , with these non-utility businesses from those involved in providing utility service and provide greater flexibility in pursuing non-utility business opportunities. As shown below, the reorganization will also facilitate CMP's comphance with the requirements imposed under the Maine Electric Industry Restructuring Act of 1997. Additional information related to the proposed reorganization and the Agreement and Plan of Merger is set fortiiin the Application for Approval of the Reorganization which CMP filed with the MPUC, a copy of which is contained in Exhibit 2 hereto. IV. CMP COMPLIANCE WITH THE M AINE ELECTRIC INDUSTRY RESTRUCTURING ACT OF 1997 The proposed reorganization will be consistent with the requirements imposed under the Maine Electric Industry Restructuring Act of 1997,35-A MRSA 3201 et seq. (the Restructuring Act), which was signed into law on May 29,1997, and facilitate CMP's compliance with these requirements. Under the terms of the Restructuring Act, all investc,r-owned utilities in the state of Maine, including CMP, n ust (a) divest most of muse i 9
l their 1.on-nuclear generating assets and generation related activities by March 1,2000, the date on which all retail cu:temers in Maine will have the right to purchase generating services directly from competitive electricity providers licensed by the MPUC, (b) generally limit their electric utility operations to transmission and distribution services after that date, and (c) create separate corporate entities to market electricity to retail customers. The Restructuring Act expressly excludes ownership interests in nuclear power facilities from the divestiture requirement, but author.zes the MPUC to order divestiture of Maine Yankee interests on or after January 1,2009. This provision was enacted prior to the permanent shutdown of the Maine Yankee plant on August 6,1997, and was premised on the expiration of Maine Yankee's operating license in 2008. Such a divestiture would, of course, be subject to receipt of all required federal regulatory approvals. The Restructuring Act also contains provisions addressing the recovery of stranded costs associated with both nuciear and non-nuclear generation assets by investoi-owned utilities in future rates. 2 Although the Restructuring Act does not require divestiture of generating assets until March 1,2000, on April 28,1997, CMP announced a plan to seek proposals for the purchase ofits generation assets through an auction process. CMP believed that market conditions were such that it would be advantageous to seek proposals earlier than the time for divestiture mandated by the Restructuring Act. s emw i 10
Pursuant to requirements of Maine law, on August i1,1997, CMP filed its application with the MPUC for approval of the auction process for the sale. The MPUC approved the process for divestiture of CMP's generation assets selected by CMP by Order dated January 14,1998 in Docket No. 97-523. As part of the auction process, CMP received final bids on December 10,1997. On January 6,1998, CMP announced that it had reached agreement to sell all ofits hydro, fossil and biomass generatirn assets whh a combined generating capacity of 1,185 megawatts to an affiliate of Florida-based FPL Group, the winning bidder in the auction process. While CMP offered other generation assets for sale in the auction, including its interests in Millstone 3 and Vermont Y mkee, ; these assets attracted insufficient interest at the auction and are not included in the proposed sale to the FPL Group affiliate. Any future sale of these assets would be subject to receipt of all required federal regulatory approvals. The sale of CMP's hydro, fossil, and biomass generating assets to the FPL Group affiliate is subject to various closing conditions, including the approval of the MPUC and FERC. On February 20,1998, CMP filed its application with the MPUC for approval of the sale. CMP's remaining utility operations will still be subject to rate regulation by MPUC and FERC. Moreover, under Section 3209 of the Restructuring Act, CMP will be specifically authorized to recover in its rates the decommissioning expenses associated with its interests in any nuclear facilities "as required by federal law, order, or i regulation." m usu 11
While the Restructuring Act prohibits CMP from selling electricity to retail customers on or after March 1,2000, a separate corporate uffiliate of CMP, licensed by the MPUC, may sell electricity at retail as of that date. CMP has requested the approval of the MPUC to establish such a separate corporate affiliate (EnerMark) as part of the reorganization. The Restmeturing Act contains numerous specific standards of conduct governing the conduct of a transmission and distribution utility and its affiliated electricity provider and requires the MPUC to adopt mies to implement the standards. Because of the nurerous constraints imposed by the standards of conduct on dealings between a transmission and distribution utility and its marketing affiliate, CMP determined that a holding company form of crganization in which the holding company, rather than CMP, is the parent company of bot: the transmission and distribution utility and the separate marketing afliliate would facilitate compliance with the standards. Accordingly, upon the completion of the reorganization, HoldCo will become the parent holding company of CMP and EnerMark. Additional information concerning CMP's compliance with the requirements , imposed under the Restructuring Act is contained in Exhibits 1 and 2. A copy of the Maine Electric Industry Restructuring Act of 1997 is contained in Exhibit 3 hereto. wmsu 12 1 . . . .
I V.
SUMMARY
OF THE IMPACT OF THE REORGANIZATION ON CMP, MILLSTONE UNIT 3 AND THE YANKEE PLANTS The proposed reorganization will have no adverse impact on the ownership or operation of Millstone 3 or any of the Yankee plants or the managerial, technical, or f'mancial qualifications of the licensed owners and operators of these plants. Upon the completion of the reorganization: (1) HoldCo will be a publicly traded company listed on the New York Stock Exchange and the common stock 01 HoldCo will be widely held; (2) CMP's existing shareholders will hold 100% of the issued and outstanding shares of common stock of HoldCo; (3) HoldCo will hold 100% of the issued and outstanding shares of common stock of CMP; (4) CMP's directors will continue to hold their current positions and also become directors of HoldCo; (5) CMP's principal officers will assume similar positions at HoldCo and the CMP officer currently responsible for Distribution Services will become the President of CMP and a director of CMP; (6) All of the directors and offices of HoldCo and CMP will be U.S. citizens; (7) CMP will continue to hold its existing 2.5% undivided ownership interest in Millstone Unit 3 and its existing equity interests in the Yankee companies, and CMP's e usu 13
existing power purchase agreements with the Yankee companies will remain unchanged by the reorganization; (8) CMP will continue to be an " electric utility" within the meaning of 10 C.F.R. Q 50.2 subject to regulation by MPUC and FERC, and there will be no change in CMP's ability to obtain funds to support its financial obligations with respect to Millstone Unit 3 and the Yankee companies as a result of the reorganization; (9) The CMP reorganization will have no adverse impact on the management, ownership, operation or technical and financial quali'dcations of the other Millstone Unit 3 licensees or the Yankee companies; and (10) The Millstone Unit 3 licensees and the Yankee companies will continue to own and operate Millstone Unit 3 and the Yankee plants, respectively, in accordance with the terms and conditions set forth in their respective NRC licenses. VI. OTHER REGULATORY AND SHAREHOLDER APPROVALS The other major regulatory approvals required in connection with the proposed reorganization include the approval of the MPUC under various provisions in the Maine utility laws, the approval of the SEC under Section 9(a)(2) of PUHCA, the approval of the FERC under Section 203 of the FPA, and, possibly, the npproval or waiver of the Connecticut Department of Public Utility Control. The reorganization is also subject to the approval of CMP's shareholders. CMP intends to seek the approval ofits eussa 14
shareholders at its 1998 Annual Meeting of Shareholders scheduled for May 21.1998 and plans to consummate the merger transactions ne:essary to complete the reorganization as soon as possible after all regulatory and shareholder approvals have been obtained. Additional information concerning these other regulatory and shareholder approvals is contained in Exhibit 2. VII. OTHER NUCLEAR REGULATORY CONSIDERATIONS (1) FOREIGN OWNERSHIP. CONTROL. OR DOMINATION CMP is not currently subject to foreign ownership, control, or domination within the meaning of Section 103 of the AEA. The shares of common stock of CMP are widely held and all of the directors and officers of CMP are U.S. citizens. Upon the completion of the reorganization, CMP's existing shareholders will own 100% of the common stock of HoldCo. HoldCo, in turn, will own 100% of the common stock of CMP, and ell of the directors and officers of HoldCo and CMP will be U.S. citizens Neither HoldCo nor CMP will be owned, controlled, or dominated by any alien, foreign corporation, or foreign government. (2) CMP's FINANCIAL OUALIFICATIONS CMP is licensed pursuant to Section 103 of the AEA and 10 C.F.R. Part 50 to hold an undivided 2.5% ownership interest in Millstone Unit 3. " Electric utilities" licensed m403/9%58.1
pursuant to Section 103 of the AEA are exempt from the requirement to demonstrate financial quslifications. CMP is and will remain an " electric utility" within the meaning of 10 C.F.R. 50.2 following completion of the reorganization, since its rates will continue to be subject to regulation by MPUC and FERC and it will remain an " entity that generates or distributes electricity and which recovers the cost of this electricity, either directly or indirectly, through rates established by the entity itself or by a separate regulatory authority." The reorganization, therefore, will not adversely affect CMP's ability to obtain the funds necessary to cover its pro rata share of costs for the operation, maintenance, repair, decontamination, and decommissioning of Millstone Unit 3 and the Yankee plants. CMP's liability for such costs and for its obligations under 10 C.F.R. Part 140 and 10 C.F.R. 50.54(w) will not be affected by the reorganization. (3) DECOMMISSIONING FUNDING As explained above, the financial qualifications of CMP will not be adversely affected by the proposed reorganization. The reorganization will not affect the ability of CMP to provide the funds necessary to cover its pro rata share of costs for the decontamination and decommissioning of Millstone Unit 3 and the Yankee plants. At noted previously, Section 3209 of the Restructuring Act specifically requires the MPUC to include " decommissioning expenses associated with a nuclear unit" in CMP's rates "as e ssu 16
required by federal law, mle, or order." There will be no change in CMP's existing decommissioning funding arrangements for its pro rata share of the projected ;
-_ decommissioning costs for Millstone Unit 3, or the decommissioning funding arrangements under the FERC-approved power purchase agreements for CMP's pro rata shares of the projected decommissioning costs of the Yankee plants, as a result of the proposed reorganization. However, to provide additional assurance of the availability of funds for decommissioning, CMP agrees to provide the Director of Nuclear Reactor Regulation with a copy of any additional application to any other regulatory authority, at the time it is filed, to transfer (excluding grants of a security interest or liens) from CMP to HoldCo, or any other affiliated company, facilities for the production, transmission or distribution of electric energy having a depreciated book value exceeding ten percent (10%) of CMP's consolidated net utility plant, as recorded on CMP's books of account.
(4) TECHNICAL OUALIFICATIONS The proposed reorganization will not result in any change in the design or operation of Millstone Unit 3 or any of the Yankee plants, nor any change in the terms and conditions of the existing licenses or technical specifications related to these plants. The personnel at the plants having control over licensed activities will not change as a
- result of the reorganization. There will also be no other changes in the management er operation of any of these plants as a result of the reorganization.
wami 17 u
l l (5) ANTITRUST CONSIDERATIONS CMP is currently entitled to 2.5% of the electrical output of Millstone Unit 3 based upon its 2.5% ownership interest in that unit. CMP is also entitled to 4% of the electrical output of the Vermont Yankee plant under its power purchase agreement with Vermont Yankee Nuclear Power Corporation based upon its 4% ownership interest in that company. The other Yankee plants have been permanently shut down and no longer produce power. CMP's percentage entitlement to the output of Millstone Unit 3 and Vermont Yankee are de minimis generation interests (i.e., less than 200 megawatts) which will not be affected by the reorganization. The submission of antitrust information is not required in connection with licensing actions which do not affect the ownership of a
, nuclear generating facility or entitlement to the power output from such a facility, particularly if they involve de minimis interests. See e.u., SECY-91-246 (Aug. 7,1991) " Antitrust Considerations for License Amendments Authorizing New Operating Entities."
Moreover, if"the transaction is deemed to be an indirect transfer, with no new licensee added to the hense, a Section 105 antitrust review (including a sit tificant changes review) is not authorized by the [AEA]." NRC Standard Review Plan for Antitrust Reviews at 3-2 (Nov.1997). The poposed reorganization of CMP will -- at most -- constitute an indirect transfer which will not result in any new licensee being added to any NRC license and will therefore not require an antitrust review by the NRC. ems.i 18
-(6) ACCESS TO RESTRICTED DATA This request does not contain any Restricted Data or other Classified Defense Information or any change in access to such Restricted Data or Classified Defense
. Infontation. Any existing restrictions on access to Restricted Data and Classified Defense Information related to the licenses for Millstone Unit 3 and the Yankee plants will be unaffected by the proposed reorganization.
(7) ENVIRONMENTAL IMPACT The proposed reorganization does not involve any change to nuclear plant operations or equipment and does not change any environmental impact previously evaluated in prior environmental reviews for Millstone Unit 3 and the Yankee plants. Accordingly, there is no significant environmental impact associated with the reorganization. VIII. EFFECTIVE DATE OF THE REORGANIZATION The reorganization requires the approval of the other regulatory agencies identified in Section V above. CMP intends to consummate the merger transactions necessay to complete the reorganization as soon as possible after all regulatory and shareholder approvals have been obtained. CMP's 1998 Annual Meeting of Shareholders is scheduled for May 21,1998. CMP requests that the NRC expedite its review of this w3.mi 19
i request on a schedule that will permit the issuance of any required NRC consents as promptly as possible and, in any event, by May 21,1998. IX. REQUESTED NRC ACTION For the reasons stated above, CMP respectfully submits that the proposed reorganization is consistent with the applicable provisions of the AEA, NRC regulations - and NRC orders issued pursuant thereto. CMP therefore respectfully requests that, to the
-R extent required by Section 184 of the AEA and 10 C.F.R. Q 50.80, the NRC consent to any indirect transfer of control of any NRC licenses that may occur in connection with this reorganization.
wassaa 20 4
1 LIS f OF EXHIBITS - l NQ' TITLE
-l I 1 (a) CMP Annual Report on Form 10-K -
- for the Fiscal Year Ended December 31, ;
1996 (w/o exhibits); (b) CMP Quarterly i Report on Form 10-Q for the Quarter ending September 30,1997; and (c) L CMP Report on Form 8-K, dated January 6,1998. I 2 CMP Application for Approval u r Reorganization Filed With MPUC, dated
- December 8,1997 (w/o exhibits).
3 Maine Electric Industry Restmeturing
- Act of 1997.
J f D i. l i i f e ( 1 i uomsa.: e
- , , - . - - - . - . . _ - - - , - - . , . , - ,n,. . - _ . .
I LXHIBIT 1(a) t UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washingtor, D.C. 20549 2 FORM 10-K (Mark One) X AhWUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31.1996 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF ' THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED) For the transition period from to Commission file number 1-5139 CENTRAL M AINE POWER COMPANY 7 (Exact name of registrant as specified in its charter) Maine 01-0042740 (State: or otherjurisdiction of (1.R.S. Employer incorporation or organization) Identification No.) 83 Edison Drive. Augusta. Maine 04336 (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: (2071 623-3521 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered Iltle of each class Preferred Stock. 7 7/8% Series New York Stock Exchange Common Stock. SS Par Value New York Stock Exchange
. Securities registered pursuant to Soction 12(g) of the Act:
6% Preferred Stock. 5100 Par Value (Voting. NoncallabkJ (Title of class) Dividend Series Preferred Stock. 5100 Par Value (Callablei (Title of class) k
indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), e d (2) has been subject to such filing requirements for the past 90 days. Yes .x. No _ indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or Information statements incorporated by reference in Part 111 cf this Form 10 K or any amendment to this Form 10 K _x_. State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value of the voting stock held by r.on affiliates of the Company was
$360,772,712 on hiarch 3,1997 (based, in the case of the common stock of the Company, on the last reported sale price thereof on the New York Stock Exchange on hiarch 3,1997).
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. The number of shares of the Company's Common Stock,
$5 par value (being the only class of common stock of the Company), outstanding on hiarch 3, 1997, was 32,442,752 shares.
DOCUhiENTS INCORPORATED BY REFERENCE List hereunder the following documents ifincorporated by reference and the Part of the Form 10 K (e.g., Part 1, Pari 11, etc.) into which the document is incorporated:(1) Any annual report to security holders;(2) Any proxy or infonnation statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) ader the Secunties Act of 1933. Portions of the defmitive proxy statement for the Company's 1997 Annual hieeting of Shareholders are incorporated by reference in Part til hereof.
- - - _ _ _ _ _ _ _ . - . _ J
CENTRAL MAINE POWER COMPANY INFORMATION IEQUIRED IN ?ORM 10.K Item Number k htLI Item 1. Business 1 Item 2. Properties 12 Item 3. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 20 item 4.1. Executive Officers of the Registrant 21 Part 11 Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 27 Item 6. Selected Financial Data 2.:. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23 Item 8. Financial Statements and Supplementary pata 42 ltem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 81 Part 111 Item 10. Directors and Executive Officers of the Registrant 82 Item 11. Executive Compensation 82 Item 12. Security Ownershic of Certain Beneficial Owners and Management 82 Item 13. Certain Relationships and Related Transactions 82 hilly ltem 14. Exhibits, Financial Statement Schedules, and Reports on Fo m 8 K 83 Signatures 85
FORWARD LOOKING INFORMATION in addition to the historical information contained herein, this report contains a number of "fonvard looking statements", within the meaning of the Securities and Exchange Act of 1934. Such =i statements address future events and conditions concerning capital expenditures, earnings on assets, resolution and impact oflitigation, reguiatory matters, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those projected in such statements, by reason of factors including, without limitation, electric utility restructuring, including the ongoing state and federal activities; future economic conditions; carnings retention and dividend payout policies; developmer.ts in the legislative, regulatory and competitive markets in which the Company operates; and other circumstancet
- hat could affect anticipated revenues and costs, such as unscheduled maintenance or
- repair requirements of nuclear and other facilities and compliance with laws and regulations. Nuclear investments and obligations, which are subject to increased regulatory scrutiny, and the amount of the expenditures and the timing of the return of the Maine Yankee generating plant to service could have a material effect on the Company's financial posinon. These and other factors are discussed in the Company's filings with the Securities and Exchange Commission, including this report. PARTI l Item 1. BUSINESS. i Introduction General. Central Maine Power Company (the Company")is an investor-owned Maine public utility incorporated in 1905. The Company is primarily engaged in the business of generating, purchasing, transmitting, distributing and selling electric energy for the benefit of retail customers in southern and central Maine and wholesale customers, principally other utilities. The Company is also diversifying into new lines of business, largely through its subsidiaries. See " Competition - Expansion of Lines of ' Business", below. Its principal executive offices are located at 83 Edison Drive, Augusta, Maine 04336, where its general telephone number is (207) 623 3521. , The Company is the largest electric utility in Maine, serving approximately 521,000 customers in its 11,000 square mile service area in southern and central Maine and having $967 million in consolidated electric operating revenues in 1996 (reflecting consolidation of financial statements with a majerity-owned subsidiary, Maine Electric Power Company, Inc. ("MEPCO")). The Company's service area contains the bu'k of Maine's industrial and commercial centers, including Portland (the state's largest city), South Portland, Westbrook, Lewiston, Auburn, Rumford, Bath, Biddeford, Saco, Sanford, Kittery, Augusta (the state's capital), Waterville, Fairfield, Skowhegan and Rockland, and approximately 943,000 people, representing abcat 77 percent of the total population of the state. The Company's industrial and commercial customers include major producers of pulp and paper products, producers of chemicals, plastics, electronic components, processed food, and footwear, and shipbuilders. Large pulp-and-paper industry customers account for approximately 62 percent of the Company's industrial sales and ' approximately 25 percent of total service-area sales. G:\ WORD \BLP\l99610K. DOC 1
Nuclear Plant Outages. In 1996 the Company incurred substantially higher costs associated with its investments in nuclear generating units, particularly the 879 megawatt unit owned and operated by hiaine Yankee Atomic Power Company ("hiaine Yar.kee") in Wiscasset, hiaine,(the "hiaine Yankee Plant" or the " Plant") and expects even higher costs in 1997 to have a signincant effect on the Company's financial results for 1997. For a complete discussion of the regulatory and operational problems causing such higher hiaine Yankee costs, see "hiaine Yankee Atomic Power Company " below, and item 7.
"hianagement's Discussion and Analysis of Financial Condition and Results of Operations."
1996 Results. The Company generated net earnings oiS60.2 million in 1996, compared to net earnings of $38.0 million in 1995. The earnings applicable to common stock was $50.8 million, or $1.57 per share in 1996, compared to earnings applicable to common stock of $27.8 million, or $0.86 per share, in 1995. Electric operating revenues increased by $51.0 million, or 5.6 percent, to $967 million in 1996. Total service area sales increased by 2.9 percent in 1996, with residential sales increasing by 1.0 percent, commercial sales increasing by 0.5 percent, industrial sales increasing by 4.0 percent, and the small wholesale and lighting category increasing by 58.9 percent. The primary factors in the service-area kilowatt hour sales increase were residentiai customers' taking advantage of the Company's water heating program, increased sales in the pulp and paper industry, and the addition of a wholesale customer. The decreases in 1995 and 1994 were attributed to low economic growth, the loss of a major industrial customer in September 1994, energy manag~nent, and loss of sales due to conversions from electricity to alternative fuels for such purposes as space and water heating. In order to compete effectively in an increasingly competitive electric utility industry, the Company is pursuing a strategy based on stabilizing its price of electricity, in real terms, through the rest of the decade. To accomplish that goal, the Company in 1996 continued its efforts to control costs, which became a much greater challenge because of the nuclear plant outages, reduce its costs of non utility purchased power, and expand its lines of business. Significant progress was made in stabilizing rates with the adoption effective January 1,1995, of the Alternative Rate Plan (the "ARP"), which contains inflation-based price caps, additional pricing flexibility, and efficiency incentives. In addition, as a result of the ARP the Company was able to enter into five-year reduced price contracts over the last two years with a number ofits largest customers designed to ensure that those customers would remain on the Company's system over the five year period. The Company has used the pricing flexibility provision in the ARP to provide new rates to approximately 19.000 customers, representing approximately 40 percent of annual kilowatt hour sales and 27 percent of service area revenues. The Company is actively supporting electric industry restructuring efforts now under consideration & by the hlaine Legislature. This is part of a national trend to change the electric industry over time into a more competit;ve industry. A primary goal of this effort is to provide customers with greater choices in the terms, conditions and suppliers of their electric power needs. While many aspects of the transition are uncertain, the transition to direct retail competition could have substantial impacts on the value of utility asset; and on the ability of electric utilities to recover their costs through rates. Without effective action by legislaors and regulators, utilities could find their above-market costs to be " stranded " or unrecoverable, in the nev competitive setting. The Company has substantial exposure to cost stranding relative to its size. See "Coreetition" and "Restruc'uring and Strandable Costs," below, for more information on this subject. G:\WORDiBLPil996-10K. DOC 2
m _ m . . _ _ _ _ . . . . _ , ,_ __,__m , _ . ,--.---gu. -
,g..m :
hiaine Yankee, the ARP, restructuring, strandable costs, and other signincant developments are discussed in succeeding sections of this report, in some cases more complete iaformation is included in hianagement's Discussion and Analysis of Financial Condition and Results of Operations, which appears in item 7 of this report, or in the Notes to Consolidated Financial Statements for the year ended December 31,1996, which appear in item 8 of this report. in those cases item 7 and 8 should be read in conjunction with the secticas below for a full discussion of the subjects covered in that manner. The following topics are discussed under the genera' heading oflhiness. Where applicable, the discussions make reference to the various other items of this report. In addition, for further discussion of information required to be furnished in response to this item, see items 7 and 8. Icpic Page Regulation and Rates 3 Competition 4 Restructuring and Strandable Costs 5 Non utility Generation 5 hiaine Yankee Atomic Power Company 6 Financing and Related Considerations 7 Environmental hiatters Water Quality Control 9 Air Quality Control 9 Ilaza.rdous Waste Regulations 9 Electromagnetic Fields 10 Capital Expenditures 10 Employee information 10 Reculation and Rates General. The Company is subject to the regulatory authority of the hiaine Public Utilities Commission (the "hiPUC" or the."PUC") as to retail rates, accounting, service standards, territory served, the issuance of securities maturing more than one year after the date ofissuance, certiGeation of generation and transmission projects and various other matters. The Company is also subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC") under Parts 1.11 and III of the Federal Power Act for some phases ofits business, including licensing ofits hydroelectric stations, accounting, rates relating to wholesale sales and to interstate transmission and sales of energy and certain other tratters, Other activities of the Company from time to time are subject to the jurisdiction of various other state and federal regulatory agencies. The hiaine Yankee Plant and the other nuclear facilities in which the Company has an interest are subject to extensive regulation by the federal Nuclear Regulatory Commission ("NRC"). The NRC is empowered to authorize the siting, construction 3nd operation of nuclear reactors after consideration of public health, safety, environmental and antitrust matters. Under its continuing jurisdiction, the NRC may, after appropriate proceedings, require modincation of units for which construction permits or operating G:\ WORD \BLPil996-10K. DOC 3
licenses have already been issued, or impose new conditions on such permits or licenses, and may require that the operation of a unit cease or that the level of operation of a unit be temporarily or pe; nanently reduced. The United States Environmental Protection Agency (" EPA") administers programs which affect the Company's thermal and hydroelectric generating facilities as well as the nuclear facilities in which it has an interest. The EPA has broad authority in administering these programs, including the ability to require installation of pollution-control and mitigation devices. The Company is also subject to regulation by various state, local and other federal authorities with regard to environmental matters and land use. For further discussion of environmental considerations as they affect the Company, see " Environmental Matters", below. Under the Federal Power Act, the Company's hydroelectric projects (including storage reservoirs) on navigable waters of the United States are required to be licensed by the FERC. The Company is a licensee, either by itself or in some cases with other parties, for 26 FERC licensed projects, some of which include more than one generating unit. Thirteen licenses expired in 1993, one expires in 1997, and fourteen after 2000, The Company has filed all applications for relicensing the projects whose licenses were scheduled to expire in 1993 and has been authorized to continue to operate those projects pending action on relicensing by the FERC. Of the thirteen projects with licenses which expired in 1993, ten are operating under annual licenses, one project is operating under a new license issued in 1993, one license was allowed to expire, and one project was sold. New licenses may contain conditions that reduce operating Dexibility and require substantial additional investment by the Company. > The United States has the right upon or after expiration of a license to take over and thereafter maintain and operate a project upon payment to the licensee of the lesser ofits " net investment" or the fair value of the property taken, and any severance damages, less certain amounts carned by the licensee in excess of specined rates of return. If the United States does not exercise its statutory right, the FERC is authorized to issue a new license to the original licensee, or to a new licensee upon payment to the l original licensee of the amount the United States would have been obligated to pay had it taken over the l project. The United States has not asserted such a right with respect to any of the Company's licensed i projects. Rate Regulation. Effective January 1,1995, rate regulation for the Company underwent a fundamental change with the implementation of the ARP, which replaced traditional regulation. Instead of rate changes based on the level of costs incurred and capital investments, the ARP provides for one annual adjustment of an in0ation-based cap on each of the Company's rates, with no separate reconciliation and recovery of fuel and purchased-power costs. Under the ARP, the MPUC is continuing to regulate the Company's operations and prices, provide for continued recovery of deferred costs, and specify a range for its rate of return. The MPUC con 0rmed in its order approving the ARP that the ARP is intended to comply with the provisions of Statement of Financial Accounting Standards No. 71," Accounting for the Effects of Certain Types of Regulation." See Note 3 of Consolidated Financial Statements for more information on the ARP. G:\WORDiBLP\1996-10K. DOC 4
Cumnetition General. In 1992 the United States Congress enacted the Energy Policy Act of 1992 (the " Policy Act"). The Policy Act was designed to encourage competition among electric utility companies, improve energy resource planning by utility companics, and encourage the development of alternative feels and sources of energy. The Policy Act provides for, among other things, enhanced ac:ess to electric transmission to promote competition for wholesale purchasers and sellers. The Policy Act has combined with regulatory development to create new areas of competition for the Company, resulting in more options for its wholesale and retail customers. Even though the Company's customers are at present generally unable to seek direct service from another utility, some can curtail usage, switch fuels, install their own generation, cancel plans to expand their operations, or even leave the Company's service territory. In response to those threats,i Company has initiated several programs, including the implementation of special rates to maintain or increase employment at specific large customers' plants and incremental energy rates to avoid losing specific groups of customers to other energy sources, in addition, the Company has redesigned some rates to encourage off peak usage and discourage switching to alternative fuels. See item 7,"hianagement's Discussion and Analysis of Financial Condition and Results of Operations," and Notes 3 and 4 to Consolidated Financial Statements for more infonnation. Expansion of Lines of Ilusiness The Company is also preparing for competition by expanding its business opportunities through subsidiaries that capitalize on core competencies. One such subsidiary, hiaineCom Services ("hiaineCom") is developing opportunities in expmding markets by arranging fiber-optic data service foi bulk carriers, offering support for cable-TV or " super cellular" personal-communication vendors, and providing other telecommunications services. The Company invested $10.7 million in hiaineCom during 1996 to develop an interchange network from Portland, hiaine, to various points in New llampshire, Massachusetts and Connecticut. In addition, the Company has subsidiaries or divisions that provide energy-efficiency services, utility consulting (domestic and international) and 4 research, engineering and environmental services, management of rivers and recreational facilities, locating of underground utility facilities and infrared photography, real estate brokerage and management, modular housing, and credit and collection services. All subsidiaries utilize skills of former Company employees and compete for business with other companies. In July 1996, the Company and hiaine Electric Power Company,Inc. (h1EPCO), a 78 percent owned subsidiary of the Company, entered into option agreements with hiaritimes and Northeast Pipeline, L.L.C. (hi&N) in which the Company and hiEPCO agreed to provide exclusive options to hi&N to acquire property interests in certain transmission line rights of way to sections of hi&N's proposed natural gas pipeline from the United States-Canada border at Woodland, hiaine, to Dracut, hiassachusetts. In November 1996, while the parties were still engaged in negotiating the terms of the proposed long-teim arrangement, the options expired by their terms. Subsequent to the expiration the parties have met to discuss a long-term arrangement for use of the Company's and hiEPCO's rights of way for the proposed pipeline, but the Company cannot predict whether final agreement on such an arrangement will be reached. CdWORDsBLPil996-10K. DOC 5
Restructurine and Strandahle Costs The enactment by Congress of the Policy Act accelerated planning by electri: utilities, including the Company, for a transition to a more competitive industry. The functional areas in which competition will take place, the regulatory changes that will be implemented, and the resulting structure of both the industry and the Company are still uncertain, but regulatory, and in some states, legislative steps have already been taken toward competition in 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. l The Company is pursuing efforts to mitigate its exposure to stranded costs through securitization of I regulatory assets. For further discussion of this issue, see item 7. "Managemcnt's Discussion and Analysis of Financial Condition and Results of Operations." Non utility Generation After enactment of the federal Public Utility Regulatory Policies Act of 1978 ("PURPA") and companion legislation in Maine, the Company became an industry leader in developing supplies of energy from non-utility generators ("NUGs"), including cogeneration plants and small power producers. These sources supplied 3.8 billion kilowatt-hours of electricity to the Company in 1996, representing 32 percent of total generation, a decrease from 37 percent in 1995 when Maine Yankee was out of service for most of j the year. The Company's contracts with non utility generators, however, which were entered into pursuant to the mandates of PURPA and vigorous state implementation ofits policies, have contributed the largest part of the Company's increased costs and the resulting rate increases in recent years prior to { implementation of the ARP in 1995, and constitute the largest part of the Company's strandable costs. PURPA provided substantial economic incentives to NUGs by allowing cogenerators and small power producers to sell their entire electrical output to an electric utility at the utility's avoided cost rate, which has often been substantially higher than market rates, while purchasing their own electric energy requirements at the utility's established rate for that customer class. Thus the Company in a number of cases has been required to pay a higher price for energy purchased from a NUG than the NUG, which in some cases is a large customer of the Company, has paid the Company for the NUG's energy requirements, in addition, with the recent surplus of relatively low-cost power in the New England market, prices paid by the Company under NUG contracts have often been well above current wholesale market prices. The Company's NUG contracts generally have had terms of five to 30 years, and expiration dates ranging from 1997 to 2021. They require the Company to purchase the energy at specified prices per kilowatt hour. As of December 31,1996, facilities having 573 megawatts of capacity covered by these contracts were in service, The costs of purchases under all of these contracts amounted to $313.4 million in 1996, $314.4 million in 1995, and $373.5 million in 1994. Because of the upward price pressure resulting in large part from costs associated with its NUG contracts, the Company has taken steps to reduce those costs. In recent years the Company has reached agreement with a number of NUGs to buy out their contracts or to give the Company options to G:\WORDillLPil996-10K. DOC 6
- -. _ ._ ,. - g
restructure their contracts through lump-sum or periodic payments. The Company restructured 40 contracts representing 316 megawatts of capacity that the Company believes should result in approximately $301 million in fuel savings over the next five years. Pursuant to one NUG contract buy-out, Aroostook Valley Electric Company ("AVEC"), a wholly-owned subsidiary of the Company, acquired a 33 megawatt wood fired generating plant in Fort Fairfield, in northern hiaine. AVEC reduced the operating costs of the plant and, after competitive bidding, was awarded a 12.5 megawatt contract to supply the Town ofiloulton municipal electric utiliti, which is outside the Company's retail service territory, at wholesale for ten years starting January 1,1996. In accordance with prior hiPUC policy and the ARP, $113 million of buyout or restructuring costs since January 1992 has been included in Deferred Charges and Other Assets on the Company's balance sheet and will be amortized over their respective fuel savings periods. The Company will continue to seek opportunities to reduce its NUG costs, but cannot predict what level of additional savings it will be able to achieve in October 1997 a contract with a major NUG supplier will expire, which should result in annual savings of approximately $25 million for the Company. Mainc Yankee Atomic Power Company The Company owns a 38 percent stock interest in hiaine Yankee, which owns and operates the hiaine Yankee Plant and is entitled under a cost-based power contract to an approximately equal percentage of the Plant's output. The Plant has been in commercial operation since 1972 and, through 1994, generally produced power at a cost among the lowest in the country for nuclear plants. The hiaine Yankee Plant was shut down for eleven months in 1995 for repairs to its steam generator tubes. The Plant retumed to service in January 1996 at 90 percent ofits operating capacity, On December 6,1996, the plant was shut down for inspection and repairs, and is expected to remain out of service at least until August 1997. During this time, hiaira Yankee must replace 92 fuel assemblies, conduct an iniensive inspection ofits steam generators, resolve cable separation issues and other regulatory issues, as well as any additional issues that are discovered during the outage, and obtain the approval of the NRC to restart the plant. In addition, hiaine Yankee wif t make use of the outage to inspect 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 continued operation of the Plant, hiaine Yankee would review the economics of continued operation before incurring the substantial capital expenditures that would be required. 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 " 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 demonstrates a period ofimproved 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. GSWORD\BLPil996-10K. DOC 7
On February 13,1997, hiaine Yankee and Entergy Nuclear, Inc. (Entergy), which is a subsidiary of Entergy Corporation, a Louisiana based utility holding company and leading nuclear plant operator, entered into a contract under which Entergy is providing management services to hiaine Yankee. At the same time, officials from Entergy assumed management positions, including President, at hiaine Yankee. The Company will incur significantly higher costs in 1997 for its share ofinspection, repairs and refueling costs at hiaine Yankee and will also need to purchase replacement power while the Plant is out of service. While the amount of higher costs is uncertain, hiaine Yankee has indicated that it expects it operations and maintenance costs to increase by up to approximately $45 million in 1997, before refueling costs. The Company's share of such costs based on its power entitlement of approximately 38 percent would be up to approximately $17 million. In addition, the Company estimates its share of the refueling costs will amount to approximately $15 million, of which $10.4 million has been accrued as of December 31,1996. The Company has been incurring incremental replacement power costs of approximately $1 million per week while the plant has been out of service and expects such costs to continue at approximately the same rate until the plant returns to service. The impact of these higher nuclear related costs on the Company will be a major obstacle to achieving satisfactory results in 1997, despite prudent control of other operating costs, and is likely to trigger the low earnings bandwidth provision of the ARP. Under the ARP, actual eamings for 1997 outside a bandwidth of 350 basis points, above or below a 10.68 percent rate of return allowance, triggers the profit sharing mechanism. A return below the low end of the range provides for additional revenue through rates equal to one-half of the difference between the actual camed rate of return and the 7.18 percent (10.68 - 3.50) low end of the bandwidth. While the Company believes that the profit sharing mechanism is likely to be triggered in 1997, it cannot predict the amount, if any, of additional revenues that may ultimately result. liigher nuclear related costs are affecting other stockholders of hiaine Yankee in varying degrees. Bangor Ilydro Electric Company, a hiaine-based 7-percent stockholder, has cited its " deteriorating" financial condition and on hiarch 19,1997, climinated its common stock dividend for the quarter. hiaine Public Service Company, a 5-percent stockholder, cited problems in satisfying financial covenants in loan documents and reduced its common stock dividend substantially in early hiarch 1997. Northeast Utilitics (20 percent stock ownership through three subsidiaries), which is also adversely affected by the substantial additional costs associated with the three shut dmvn hiillstone nuclear units and the permanently shut-down Connecticut Yankee unit, as well as an unfavorable utility deregulation plan in New ilampshire currently under appeal, announced on h1 arch 24,1997, that its management was planning to recommend a suspension ofits second-quarter common stock dividend to its board of trustees. A < default by a hiaine Yankee stockholder in making payments under its power contract or capital funds agreement could have a material adverse effect on hiaine Yankee, depending on the magnitude of the default, and would constitute a default under hiaine Yankee's bond indenture and its two major credit agreements unless cured within applicable grace periods by the defaulting stockholder or other stockholders. The Company cannot predict, however, what effect, if any, the financial difficulties being experienced by some hiaine Yankee stockholders will have on hiaine Yankee or the Company. G:\WORDiBLPil99610K. DOC 8
For a detailed discussion of the current Maine Yankee regulatory and operational issues, see item 7 - " Management's Discussion and Analysis of Financial Condition and Results of Operations" " Maine Yankee Regulatory issues." Financing and Related Consideration 1 199u Financing Activity. During 1996 the Company issued $10 million of notes under its $150-million Medium-Term Note program at variable interest rates and an average life of five years. Notes in the amount of $34 million matured during the year, reducing the total of outstanding Medium Term Notes at the end of 1996 to $68 million from $92 million at the end of 1995. The Company's Articles ofIncorporation limit the amount of unsecured indebtedness the Company rnay incur without the consent of the holders of the Company's preferred stock to 20 percent of the Company's total capitalization. At the end of 1996,20 percent of such capitalization amounted to S219 million, in 1989 holders of the Company's preferred stock consented to the issuance of unsecured Medium-Term Notes in an aggregate principal amount of up to $150 million outstanding at any one time, so such notes up to that amount are not included in the 20 percent limitation. The Company is proceeding with plans to seek the consent of the holders ofits preferred stock to an additional $350 million of Medium-Term Notes, to $500 million outstanding at any one time, at its annual meeting of stockholders on May 15,1997, in order to increase its financing flexibility in anticipation ofindustry restructuring and increased competition. The Company cannot predict whether such consent will be obtained. On October 23,1996, the Company entered into a $125 million revolving credit facility with several banks, with The First National Bank of Boston and The Bank of New York as agents for the lenders, and temiinated its 1986 and 1994 bank facilities. The new facility consists of two tranches, one a 364 day revolving-credit arrangement that matures on October 22,1997, and the other a three-year revolving-credit arrangement that matures on October 23,1999. At December 31,1996, the Company had $7.5 million in outstanding loans under the new facility. Securities Ratings. On September 25,1996, Duff & Phelps Credit Rating Co. ("D&P") placed the ratings of the Company's debt and preferred stock on " Rating Watch.-Down." D&P stated that its action = was due to uncertainty surrounding the Nuclear Regulatory Commission's investigations into the Maine Yankee, Connecticut Yankee and Millstone Unit No. 3 nuclear facilities, in which the Company has ownership interests." The rating agency recognized " positive strides" taken by the Company over the past few years in dealing with several challenges, but found that the Company's " troubled nuclear facilities situation casts a shadow on the Company's prospects for financial strengthening." On December 18, 1996, Moody's investors Service (" Moody's") placed the Company's credit ratings under review for possible downgrade, due largely to the effect ofits Maine Yankee related costs. The current ratings assigned the Company's securities by the three major securities-rating agencies, Standard & Poor's Corp. ("S&P"), Moody's investors Service and Duff & Phelps Credit Rating Co., are shown below: G:\WORDiBLP\l996-10K. DOC 9
hiortgage Unsecured Commercial Preferred Bonds . Notes Paner stock S&P BB+ BB B B+ hioody's Baa2 Baa3 P2 Baa3 D&P BBB- BB+ D3 BB Environmental Matters in connection with the operation and construction ofits facilities, various fuderal, state and local authorities regulate the Company regarding air and water quality, hazardous wastes. land use, and other environmental considerations. Such regulation sometimes requires review, certification or issuance of permits by various regulatory authorities. In addition, implementation of measures to achieve environmental standards may hinder the ability of the Company to conduct day to-day operations, or prevent or substantially increase the cost of construction of generating plants, and may require substantial investment in new equipment at existing generating plants. Although no substantial investment is presently necessary, the Company is unable to predict whether such investment may be required in the future. Water Quality Control. The federal Clean Water Act provides that every " point source" discharger of pollutants into navigable waters must obtain a National Pollutant Discharge Elimination System (" NPDES") permit specifying the allowable quantity and characteristics ofits effluent. Maine law contains similar permit requirements and authorizes the state to impose more stringent requirements. The , Company holds all permits required for its plants by the Clean Water Act, but such pemiits may be reopened at any time to reflect more stringent requirements promulgated by the EPA or the hiaine Department of Environmental Protection ("DEP"). Compliance with NPDES and state requirements has necessitated substantial expenditures and may require further substantial expenditures in the future. Air Quality Control. Under the federal Clean Air Act, as amended, t!.e EPA has promulgated national ambient air quality standards for certain air pollutants, including sulfur oxides, particulate matter and nitrogen oxides. The EPA has approved a Maine implementation plan prepared by the DEP for the achievement and maintenance of these standards. The Company believes that it is in substantial compliance with the requirements of the Maine plan. The Clean Air Act also imposes stringent emission standards on new and modified sources of air pollutants. Maintaining compliance with more stringent standards, if they should be adopted, could require substantial expenditures by the Company. Although 1990 amendments to the Clean Air Act require, among other things, an aggregate reduction of sulfur dioxide emissions by United States electric utilities by the year 2000, the Company believes that the amendments will not have a material adverse effect on the Company's operations. In addition, state regulations restrict the sulfur content and other characteristics of the fuel oil burned at the Company's William F. Wyman Station in Yannouth, Maine. The Company believes that it will continue to be able to obtain a sufficient supply of oil with the required specifications, subject to G:\WORDiBLP\l996-10K. DOC 10
i 1 a unforeseen events and the factors innuencing the availability of oil discussed under item 2, Pronerties,
" Fuel Supply", below.
i
!!azardous Waste Regulations. Under the federal Resource Conservation and Recovery Act of ,
)- ~ 1976, as amended ("_ RCRA"), the generation, transportation, treatment, storage and disposal of hazardous i wastes are subject to EPA regulations. Maine has adopted state regulations that parallel RCRA
- regulations, but in some cases are more stringent. The notifications and applications required by the present regulations have been made. The procedures by which the Company handles, stores, treats, and disposes of hazardous waste products have been revised, where necessary, to comply with these i regulations and with more stiingent requirements on hazardous waste handling imposed by amendments
- to RCRA enacted in 1984, i
) . . For a discussion of a continuing matter in which the Company has been named a potentially l
- responsible party by the EPA with respect to the disposal of certain toxic substances, see item 3. Legal
- Proceedings, under the caption "PCB Disposal", below. .
I Electromagnetic Fields. Public concern has arisen in recent years as to whether electromagnetic fields associated with electric transmission and distribution facilities and appliances and wiring in . j buildings (" EMF") centribute to certain public health problems. This concern has resulted in some areas in l l opposition to existing or proposed utility facilities, requests for new legislative and regulatory standards, ! and litigation. On the basis of the scientific studies to date, the Company believes that no persuasive , , evidence exists that would prove a causal relationship or justify substantial capital outlays to mitigate the i perceived risks. Although the Company has suffered no material effect as a result of this concern, the
- Company since 1988 has been compiling and disseminating through a regular periodic publication
[ - information on all related studies and published materials as a central clearing house for such information, as well as providing such information to its customers. The Company intends to continue to monitor all significant developments in this field. j Capital Expenditures. The Company estimates that its capital expenditures for environmental purposes for the five years from 1992 through 1996 totaled approximately $213 million. The Company
- cannot prt sently predict the amount of such expenditures in the future, as such estimates are subject to j change in accordance with changes in applicable environmental regulations.
t
- Emniovec Information 3 A local union affiliated with the International Brotherhood of Electrical Workers (AFL-CIO) l represents operating and maintenance employees in each of the Company's operating divisions, and certain office and eierical employees, At December 31,1996, the Company had 1,655 full time employees, of whom approximately 44 percent were represented by the union. At the end of 1990 the Company had 2322 full. time employees. The reduction in the number of full time employees from 1991 i through 1996 was due largely to the implementation of an early-retirement program and other efficiency
! measures in 1991 and 1992, further staff reductions in the first quarter of 1994 in connection with the Company's restructuring and cost-reduction program and another early-retirement program in mid-1995. 1 G:\ WORD \BLP\l996-10K. DOC 11
in April 1995 the Company and the union agreed to a three year labor contract extension that provided for an annual wage increase of 2 percent on May 1,1995,2 percent on hiay 1,1996, and a reopening of wage negotiations for the year commencing May 1.1997. The wage negotiations are scheduled to start in early April 1997.
}1cn_2. PitOPEllTIES.
. Existine Fullitin The electric properties of the Company form a single integrated system which is connected at 345 kilovolts and 115 kilovolts with the lines of Public Service Company of New Hampshire at the southerly end and at 115 kilovolts with Bangor 11ydro Electric Company at the northerly end af the Company's system. The Company's system is also connected with the system of The New Brunswick Power Corporation and with Bangor Ilydro Electric Company,in each case through the 345 kilo.olt interconnection constructed by MEPCO, a 78 percent owned subsidiary of the Company. At December 31,1996, the Company had approximately 2,293 circuit miles of overhead transmission lines,19,254 pole miles of overhead distribution lines and 1,330 miles of underground and submarine cable. The maximum one hour firm system net peak load experienced by the Company during the winter of 1996 was approximately 1,301 megawatts on January 3,1996. At the time of the peak, the Company's net capability was 1,893 megawatts. The Company operates 30 hydroelectric generating stations, of which 29 are owned by the Company, with an estimated net capability of 369 megawatts, and it purchases an additional 74 megawatts of non-utility hydroelectric generation in Maine. The Company also operates one oil fired staam-electric generating station, William F. Wyman Station in Yarmouth, hiaine. The Company's share rf William F. Wyman Station has an estimated net capability of $93 megawatts. The oil fired station is located on tidewater, permitting waterborne delivery of fuel. The Company also has internal combustion generating facilities with an estimated aggregate net capability of 38 megawatts. The Company has ownership interests in fivt; nuclear genereting plants in New England. The largest is a 38-percent interest in the Maine Yankee plant in Wiscasset, Maine. In addition, the Company onas a 9.5 percent interest in Yankee Atomic Electric Company (" Yankee Atomic"), discussed below, which has permanently shut down its plant located in Rowe, Massachusetts, a 6 percent interest in Connecticut Yankee Atomie Power Company (" Connecticut Yankee"), discussed below, which has permanently shut down its plant x daddam, Connect: cut, and a 4 percent interest in Vermont Yankee Nuclear Power Corporation ( ;rmont Yankee"), which owns an operating plant in Vernon, Vermont (collectively, with hlaine Yanke .ne " Yankee Companies"). In addition, pursuant to ajoint ownership agreement, the Company has a 2.5 percent direct ownership interest in the Millstone 3 nuclear unit (" Millstone 3") in Waterford, Connecticut, which has been off line for regulatory reasons since March 31,1996. In December 1996, the Board of Directors of Connecticut Yankee Atomic Power Company voted to permanently shut down the Connecticut Yankee plant for economic reasons, and to decommission the plant. An economic analysis conducted by Connecticut Yankee estimated that the early closmg of the plant would save over $100 million (net present value) over its remaining license life to the year 2007, compared with the costs of continued operation. The Company's 6 percent equity interest totaled G AWORDiBLPil996-10K. DOC 12
approximately $6.4 million at December 31,1996. The plant did not operate after July 22,1996. The Company estimates its share of the cost of Connecticut Yankee's continued compliance with regulatory requirements, recovery ofits plant investments, decommissioning and closing the plant to be approximately $45.8 million and has recorded a regulatory asset and a liability on the consolidated balance sheet. The Company is currently recovering through rates an amount adequate to recover these expenses. In 1993 the FERC approved a settlement agreement regarding the decommissioning plan, recovery of plant investment, and all issues with respect to the prudence of the decision to discontinue operation of the Yankee Atomic plant. The Company estimates its remaining share of the cost of Yankee Atomic's continued compliance with regulatory requirements, recovery ofits plant invest.nents, decommissioning and closing the plant, to be approximately $16.5 million. This estimate, which is subject to ongoing review and revision, has been recorded by the Company as a regulatory asset and a liability on the Company's balance sheet. As part of the MPUC's decision in the Company's 1993 base rate case, the Company's current share of costs related to the deactivation of Yukee Atomic is being recovered through rates. The Company's share of the capacity of the three operating nuclear generating plants, as of December 31,1996, amounted to the following: Maine Yankee 329 MW Vermont Yankee 19 MW Millstone 3 29 MW The Company is obligated to pay its proportionate share of the operating expenses, including depreciation and a return on invested capital, of each of the Yankee Companies referred to above for periods expiring at various dates to 2012. Pursuant to the joint ownership agreement for Millstone 3, the Company is similarly obligated to pay its proportionate share of the operating costs of Millstone 3. The Company is also required to pay its share of the estimated decommissioning costs of each of the Yankee Companies and Millstone 3. The estimated decommissioning costs are paid as a cost of energy in the amounts allowed in rates by the FERC. MEPCO owns and operates a 345 kilovolt transmission interconnection, completed in 1971, extending from the Company's substation at Wiseasset to the Canadian border where it connects with a line of The New Brunswick Power Corporation ("NB Power") under an interconnection agreement. MEPCO transmits power between NB Power and various New England utilities under separate agreements. NEPOOL, of which the Company is a member, contracted in connection with its Hydro-Quebec projects to purchase power from Hydro-Quebec. The contracts entitle the Company to 85.9 megawatts of capacity credit in the wmter and 127.25 megawatts of capacity credit during the summer. The Company also entered into facilities-support agreements for its share of the related transmission facilities, with its share of the support responsibility and of associated benefits being approximately 7 percent of the totals. The Company is making facilities-support payments on approximately $28.8 million, its share of the construction cost for the transmission facilities incurred through December 31,1996. G:\ WORD \BLP\l996-10K. DOC 13 m 1 ---- . - - , e -. .v. , ,,. - , , - . ,- n. , , , _ 3 , , . . ,. - - - . . . wnm , , ,
Maine Yankee Decommissioning. Effective in 1998 hiaine Yankee began collecting 59.1 million annually for decommissioning the Maine Yankee plant, based on a FERC approved funding level of $167 million. In 1994, Maine Yankee, pursuant to FERC authorization, increased its annual collection to $14.9 million and reduced its return on common equity to 10.65 percent, for a total increase in rates of approximately $3.4 million. The increase in decommissioning collection was based on the estimated cost of decommissioning the Maine Yankee Plant, assuming dismantlement and removal, of $317 million (in 1993 dollars) based on a 1993 external engineering study. The estimated cost of decommissioning nuclear plants is subject to change due to the evolving technology of decommissioning and the possibility of new legal requirements. The market value of Maine Yankee's accumulated decommissioning funds was $163.5 million (including actual interest earned) as of December 31,1996. Maine Yankee Low-Level Waste Disposal. The federal Low Level Radicactive Waste Policy l Amendments Act (the " Waste Act"), enacted in 1986, required operating disposal facilities to accept low. level nuclear waste from other states until Decemoer 31,1992. Maine did not satisfy its milestone obligation under the Waste Act requiring submission of a site license application by the end of 1991, and therefore became subject to surcharges on its waste and did not have access to regulated disposal facilities after the end of 1992. Maine Yankee then began storing all low level waste generated at an on site storage facility. On July 1,1995, however, the State of South Carolina restored access to its facility and Maine Yankee began to ship low level waste to the South Carolina facility for disposal. The states of Maine Texas and Vermont have been pursuing the implementation of a compact for the disposal oflow level waste at a site in Texas. The rati6 cation bill for the compact is before Congress for consideration at its 1997 session. The compact provides for Texas to take Maine's low level waste over a 30-year period for disposal at a planned facility in west Texas. In return, Maine would be required to pay
$25 million, assessed to the Company by the State of Maine, payable in two equal installments, the first after rati6 cation by Congress and the second upon commencement of operation of the Texas facility. In addition, Maine Yankee would be assessed a total of $2.5 million for the benefit of the Texas county in which the facility would be located and would also be responsible for its pro-rata share of the Texas governing commission's operating expenses. The Maine Low Level Radioactive Waste Authority suspended its search for a suitable disposal site in Maine and, as of June 30,1994, ceased operations.
In the event the required rati6 cation by Congress is not obtained, subject to continued NRC approval, Maine Yankee has said it will ship low-level waste offsite for disposal in South Carolina or other available sites as long as such sites are available, reserving its capacity to store approximately ten to twelve years' production oflow-level waste at its facility at the Plant site. Subject to obtaining necessary regulatory approval, Maine Yankee could also build a second facility on the Plant site. Maine Yankee 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. The Company cannot predict whether the Gnai required rati6 cation of the Texas compact or other regulatory approvals required for on site storage will be obtained, but Maine Yankee has stated that it intends to utilize its on site storage facility as well as dispose oflow level waste at the South Carolina site or other available sites in the interim and continue to cooperate with the State of Maine in pursuing all appropriate options. l G:\WORDiBLPil99610K. DOC 14 l
Nuclear Insurance. The Price Anderson Act is a federal statute providing, among other things, a limit on the maximum liability for damages resulting from a nuclear incident. Coverage for the liability is provided for by existing private insurance and retrospective assessments for costs in excess of those covered by insurance, up to $79.3 million for each reactor owned, with a maximum assessment of $10 million per reactor in any year. Based on the Company's stock ownership in four nuclear generating facilities and its 2.5 percent direct ownership interest in the hiillstone 3 nuclear unit, the Company's retrospective premium could be as high as $6 million in any year, for a cumulative total of $47.6 million, exclusive of the effect ofin0ation indexing and a 5 percent surcharge in the event that total public liability claims from a nuclear incident should exceed the funds available to pay such claims. In addition to the insurance required by the Price-Anderson Act, the nuclear generating facilities mentioned above carry additional nuclear property-damage insurance. This additional insurance is provided from commercial sources and from the nuclear electric utility industry's insurance company through a combination of current premiums and retrospective premium adjustments. Based on current premiums and the Company's indirect and direct ownership in nuclem generating facilities, this adjustment could range up to approximately $7.7 million annually. For a discussion ofissues relating to hiaine Yankee's spent nuclear fuel disposal, see " Fuel Supply" -
" Nuclear", below.
Construction Procram The Company's plans for improvements and expansion of generating, transmission and distribution facilities and power supply sources are under continuing review. Actual construction expenditures depend on the availability of capital and other resources, load forecasts, customer growth, and general business conditions. Recent economic and regulatory considerations have led the Company to hold its planned 1996 capital investment outlays, including deferred demand side management expenditures, to minimum levels. Durir.g the five-year period ended December 31,1996, the Company's construction and acquisition expenditures amounted to $264.8 million (including investment in jointly-owned projects and excluding hiEPCO). The program is currently estimated at approximately $56 million for 1997 and $246 million for 1C98 through 2001. The following table sets forth the Company's estimated capital expenditures as discussed above: 1998 1997 2001 Intal Tyne of Facilities (Dollars in Millions) Generating Projects S8 $ 33 $ 41 Transmission 3 14 17 Distribution 27 124 151 General facilities and Other _lji _lf! .92 Total SM M SlD2 G:\WORDiBLP\l996-10K. DOC 15
I Demand-side Manacement The Company's demand side management initiatives have included programs aimed at residential, commercial and industrial customers. Among the residential efforts have been programs that offer energy audits, low-cost insulation and weatherization packages, water heater wraps, energy-efficient light bulbs, and water heater cycling credits. Among the commercial and industrial efforts have been programs that offer rebates for efficient lighting systems and motors, energy-management loans, grants to customers who make efficiency improvements, and shared savinga arrangements with customers who undertake qualifying conservation and load management programs. Actual demand side management expenditures depend on such factors as availability of capital and other resources, load forecasts, customer growth, and general business conditions. Because of budget constraints, the Company is seeking to concentrate its efforts where the need and cost effectiveness are the greatest, while continuing to honor contractual committnents. NEPOOL The Company is a member of the Ns agland Power Pool (NEPOOL), which is open to all investor owned, municipal and cooperative electric utilities in New England under a 1971 agreement that provides for coordinated planning and operation of approximately 99 percent of the electric power production, purchases and transmission in New England. The NEPOOL Agreement imposes obligations concerning generating capacity reserve and the use of major transmission lines, and provides for central dispatch of the region's facilities. On April 24,1996, the Federal Energy Regulatory Commission (FERC) issued Order No. 888, which requires all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to file open access non-discriminatory transmission tariffs that offer both load based, network and contract based, point-to point service, including ancillary service to eligible customers containing minimum terms and conditions of non discriminatory senice. This senice must be comparable to the senice they provide themselves at the wholesale level; in fact, these utilities must take wholesale transmission senice they provide themselves under the filed tariffs. The order also permits public utilities and transmitting utilities the opportunity to recover legitimate, prudent and verifiable wholesale stranded costs associated with providing open access and certain other transmission senices. It further requires public utilities to functionally separate transmission from generation marketing functions and communications. The intent of this order is to promote the transition of the electiic utility industry to open competition. Order No. 888 also clarifies federal and state jurisdiction over transmission in interstate commerce and local distribution end orovides for deference of certain issues to state recommenc'ations. On July 9,1996, the Company and MEPCO submitted compliance filings to meet the new pro forma tariff non price minimum terms and condiions of non-discriminatory transmission. Since July 9,1996, the Company and MEPCO have been transmitting energy pursuant to their filed tariffs, subject to refund. FERC subsequently issued Order No. 888-A which generally reaffimis Order No. 888 and clarifies certain terms. G AWORDiBLP\l99610K. DOC 16
i 1 1 l' Also on April 24,1996 FERC issued Order No. 889 which requires public utilities to futtetionally separate their wholesale power marketing and transmission operation functions and to obtain informatica i about their transmission system for their own wholesale power transactions in the sanie way their j competitors do through the Open Access Same-time Infonnation System (OASIS). The rule also i prescribed standards of conduct and protocols for obtaining the information. The standards of conduct are designed to prevent employees of a public utility engaged in marketing functions fro.m obtaining : preferential information. The Company participated in efforts to develop a regional OASIS, which was s operational January 3,1997. FERC subsequently approved a New England Power Pool wide Open ! Access Tariff, subject to refund and issuance of further orders. The Company also participated in revising the New England Power Pool Agreement to comply with the new regulatory requirements. The revised
- agreement is pending FERC approval.
j Fuel Supply [ The Company's total kilowatt hour production by energy source for each of the last two years and as estimated for 1997 (consistent with the actual mix for January 1997 with Maine Yankee off line)is shown i below. The 1997 estimate could change when, and if. Maine Yankee resumes operaticn. ! Actual Estimated Source H2fi H21 H22 Nuclear 19 % 7% 2% l-lydro 17 15 17 1 Oil 16 21 29 Non utility 32 37 38-l l Other purchases . 1.fi .20 M l MQ% HQ% 10.0 % i The 1997 estimated kilowatt hour output from oil and purchased power may vary depending upon the , relative costs of Company. generated power and power purchased through independent producers and i other sources. i 011. The Company's William F. Wyman Station in Yarmouth, Maine, and its intemal combustion electric generating units are oil fired. The Company's last contract for the supply of fuel oil requirements at market prices was allowed to expire in 1993. Since then the Company has been purchasing its fuel-oil requirements on the open market. j The average cost per barrel of fuel oil purchased by the Company during the five calendar years l
- commencing with 1992 was $14.02, $13.12, $12.93, $16.16 and $18.18, respectively. A substantial
} portion of the fuel oil burned by the Company and the other member utilities of NEPOOL is imported.
' The availability and cast of oil to the Company, both under contract and in the open market, could be adversely affected by policies and events in oil-producing nations and other factors affecting world
- supplies and domestic governmental action.
i G:\ WOR D\BLP\l99610K. DOC 17
.-r-,.v.- .c.,,--w- , , - .m.v., ,.-.-,.,...,,~,.i-v -,-e, y--vw.m.,menn.,,.w ..,_.-w,-,. r, , m..-.e,-.,.w .-r - - , , . . . , , , ,._,.,._y..z,wr.y. . . - -.- -,, ,7 ,w,
Nuclear. As described above, the Company has interests in a number of nuclear generating units. The cycle of production and utilization of nuclear fuel for such units consists of(1) the mining and milling of uranium ore,(2) the conversion of the resulting concentrate to uranium hexafluoride,(3) the enrichment of the uranium hexafluoride,(4) the fabrication of fuel assemblies,(5) the utilization of the nuclear fuel, and (6) the disposal of spent fuel. hiaine Yankee has entered into a contract with the United States Department of Energy (" DOE") for disposal ofits spent nuclear fuel, as required by the Nuclear Waste Policy Act of 1982, pursuant to which a fee of one dollar per megawatt hour is currently assessed against net generation of electricity and paid to the DOE quarterly. Under this Act, the DOE was given the responsibility for disposal of spent nuclear fuel
- produced in private nuclear reactors. In addition, hiaine Yankee is obligated to make a payment with i ter, pact to generaticn prior to Aril 7,1983 (the date current DOE assessments began), hiaine Yankee has
-lected under terms of this contact to make a single payment of this obligetion prior to the first delivery of spent fuel to DOE, scheduled to begin no earlier than 1998. The payment will consist of $50.4 million (all of which hiaine Yankee has previously collected from its customers, but for which a reserve was not funded), which is the approximate one time fee charge, plus interest accrued at the 13 week Treasury Bill 7 ate compounded on a quarterly basis from April 7,1983, through the date of the actual payment. Current costs incurred by hiaine Yankee under this contract are recoverable under the terms ofits Power Contracts with its sponsoring utilities, including the Company, hiaine Yankee has accrued and billed $63.8 million ofinterest cost for the period April 7,1983, through December 31,1996.
hiaine Yankee has fonned a trust to provide for payment ofits long-term spent fuel obligation, and is funding the trust with deposits at least semiannually which began in 1985, with currently projected semiannual deposits of approximately $1.8 million through December 1997. Deposits are expected to total approximately $73.2 million, with the total liability, including interest due at the time of disposal, estimated to be approximately $126.5 million at January 31,1998. hiaine Yankee estimates that trust fund deposits plus estimated earnings will meet this total liability if funding continues without material changes. Under the terms of a license amendment approved by the NRC in 1984, the present storage capacity ~ of the spent fuel pool at the hiaine Yankee Plant will be reached in 1999 and after 1996 the available capacity of the pool will not accommodate a full-core removal. After consideration of available technologies, hiaine Yankee elected to provide additional capacity by replacing the fuel ru.ks in the spent fuel pool at the hia.ne Yankee Plant for more compact storage and in hiarch 1994 the NRC granted its authorization. Installation of the new racks began in 1996 and is expected to be completed during 1997. hiaine Yankee believes that the replacement of the fuel racks will provide adequate storage capacity through the hiaine Yankee Plant's licensed operating life. hiaine Yankee has stated that it cannot predict with certainty whether or to what extent the storage capacity limitation at the plant will affect the operation of the plant or the future cost of disposal. Federal legislation enacted in December 1987 directed the DOE to proceed with the studies necessary to develop and operate a permanent high-level waste (spent fuel) disposal site at Yucca h1ountain, Nevada. The legislation also provided for the possible development of a hionitored Retrievable Storage ("h1RS") facility and abandoned plans to identify and select a second permanent disposal site. An h1RS facility would provide temporary storage for high-level waste prior to eventual permanent disposal. In late G:\WORDiBLPil996-10K. DOC 18
1989 the DOE announced that the permanent disposal site is not expected to open before 2010, although originally scheduled to open in 1098. Additional delays due to political and technical problems are probable. In 1994 several nuclear utilities sought a declaration from the United States Court of Appeals for the District of Columbia that existing federal legislation required the DOE to take responsibility for spent nuclear fuel in 1998. On July 23,1996, the court held that the DOE is obligated "to start disposing of [ spent nuclear fuel) no later than January 31,1998," and in October 1996 the DOE said it would not appeal the decision. The Company cannot predict when or how the DOE will meet its responsibility. The Company has been advised by the companies operating nuclear generating stations in which the Company has an interest that each of those companies has contracted for certain segments of the nuclear fuel production and utilization cycle through various dates. Contracts for other segments of the fuel cycle will be required in the future, but their availability, prices and terms cannot now be predicted. Those companies have also advised the Company that they are assessing options generally similar to those described above with respect to Maine Yankee in connection with disposal of spent nuclear fuel. Item 3. LEGAL PROCEEDINGS. PCII Disposal The Company is a party in legal and administrative proceedings that arise in the normal course of business. In connection with one such proceeding, the Company has been named as a potentially respansible party and has been incurring costs to determine the best method of cleaning up an Augusta, Maine, site formerly owned by a salvage company and identified by the Environmental Protection Agency (EPA) as containing soil contaminated by polychlorinated biphenyls (PCBs) from equipment originally owned by the Company, in July 1994, the EPA approved changes to the remedy it had previously selected, the nrincipal change being to adjust the soil cleanup standard to 10 parts per million from the standard of one part per million established in the EPA's 1989 Record of Decision, on the part of the site where PCBs were found in their highest concentration. The EPA stated that the purpose of adjusting the standard of cleanup was to accommodate the selected technology's current inability to reduce PCBs and other chemical components on the site to the original standarc'. In June 1995, after discussions between the Company and the EPA, design work on the selected remedy was suspended. On July 7,1995, the Company formally requested that the EPA abandc.n that remedy for an already-designated alternative remedy that the Company believes could result in substantially lower costs. On October 10,1995, the EPA approved the new amedy after determining that the old remedy was no longer feasible or cost-effective at the site. The new remedy involves transporting the contaminated soil to a secure off site landfill. The Company believes that its share of the remaining costs of the cleanup under the new method could total approximately $2.7 million to $4.2 million. This estimate is net of an agreed partial insurance recovery and the 1993 court-ordered contribution of 41 percent from Wesuitghouse Electric Corp., but GAWORDsBLP\l996-10K. DOC 19
does not reflect any possible contributions from other insurance carriers the Company has sued, or from any other parties. The Company has recorded an estimated liability of $2.7 million and an equal regulatory asset, reflecting an accounting order to defer such costs and the ant cipated ratemaking recovery of such costs when ultimately paid. In addition, the Company has deferred as a regulatory asset
$5.1 million of costs incurred through December 31,1996.
The Company cannot predict with certainty the level and timing of the cleanup costs, the extent they will be covered by insurance, or the ratemaking treatment of such costs, but believes it should recover substantially all of such costs through insurance and rates. The Company also believes that the ultimate resolution of the legal and environmental proceedings in which it is currently involved will not have a material adverse effect on its financial condition. lictL4 SUIIMISSION OF MNFTERS TO A VOTE OF SECURITY llOLDERS. Not applicable. 1 G:\WORDiBLPil996-10K. DOC 20
Item 4.1 EXECUTIVE OFFICERS OF Tile REGISTRANT. The following are the present executive officers of the Company with all positions and offices held. There are no family relationships between any of them, nor are there any arrangements or understandings pursuant to which any were selected as officers. Name, Age, and Year first Became Officer OfEtc David hi. Jagger,55,1996 Chairman of the Board of Directors . Charles 11. Abbott,61,1996 Vice Chairman of the Board of Directors David T. Flanagan,49,1984 President and Chief Executive Officer, and Director Arthur W. Adelberg,45,1985 Vice President, Law and Power Supply Richard A. Crabtree,50,1978 Vice President, Retail Operations David E. Marsh,49,1986 Vice President, Corporate Services, Treasurer and Chief Financial Officer Curtis A. Mildner,43,1994 Vice President, hiarketing . Gerald C. Poulin,55,1984 Vice President, Generation and Technical Support Anne M. Pare,43,1996 Secretary and Clerk Each of the executive officers has for the past five years been an officer or employee of the Company except hiessrs. Jagger and Abbott, who have been non-employee directors since 1988, and hir. hiildner. Mr. Mildnerjoined the Company as Vice President, Marketing, on February 7,1994. Prior to his employment by the Company, he had been employed since 1987 by Hussey Seating Company of Berwick, Maine, as Vice President, Marketing, and in related capacities. l l l G:\WORDiBLPil996-10K. DOC 21 i
l PART 11 ltem 5 MARKET FOR Tile REGISTRANT'S COMMON EQUITY AND RELATED STOCK 110LDER MATTERS. The Company's common stock is traded on the New York Stock Exchange. As of December 31, 1996, there wue 40,413 holders of record of the Company's common stock. Price Range of and Dividends on Common Stock Market Price Dividends liigh Los Declared
.19.2f1 First Quarter $161/4 $131/4 $0.225 Second Quarter 14 1/2 12 1/4 0.225 Third Quarter 13 7/8 11 5/8 0.225 Fourth Quarter 12 3/8 11 0.225 1991 First Quarter $141/8 $10 3/4 $0.225 Second Quarter 12 5/8 10 1/4 0.225 Third Quarter 13 1/2 11 0.225 Fourth Quarter 15 1/8 13 0.225 Under the most restrictive terms of the indenture securing the Company's General and Refunding Mortgage Bonds and of the Company's Articles ofIncorporation, no dividend may be paid on the common stock of the Company if such dividend would reduce retained earnings below $29.6 million. At December 31,1996, the Company's retained earnings were $72.5 million, of which $42.9 million was not so restricted. Future dividend decisions will be subject to future eamings levels and the financial condition of the Company and will reflect the evaluation by the Company's Board of Directors of then existing circumstances.
Item 6. SELECTED FINANCIAL DATA. The following table sets forth selected consolidated financial data of the Company for the five years ended December 31,1992 through 1996. This information should be read in conjunction with
" Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto included in items 7 and 8 hereof. The selected consolidated financial data for the years ended December 31,1992 through 1996 are derived from the audited consolidated financial statements of the Company.
G:\ WORD \BLP\l99610K. DOC 22 1
t Selected Consolidated Financial Data (Dollars in Thousands, Except Pc" Share Amounts)
. )96 1995 1994 19,3 1992 Electric operating revenue $ 967,046 $ 916.016 $ 904,883 $ 893.577 $ 877,695 60,229 37,980 (23,265) 61,302 63,583 Net income (Icss) 587,987 622,251 638,841 581,844 499,029 Long term obligations Redeemable preferred stock 53,528 67,528 80,000 80,000 40,750 2,010,914 1,992,919 2,046,007 2,004,862 1,690,005 Total assets Earnings (loss) per common share $1.57 $0.86 $(1.04) $1.65 $1.85 Dividends declared per common share $0.90 $0.90 $0.90 $1.395 $1.56 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview in 1996, the Company experienced higher than normal costs associated with its investments in nuclear generating units, particularly the Maine Yankee nuclear plant, and incurred replacement power costs due to unplanned nuclear-plant outages. While the return to service of the Maine Yankee nuclear plant in mid January 1996 ended an 11-month consecutive outage, the plant's operating capacity was limited to 90% ofits maximum production capacity during periods of operation in 1996 and unscheduled outages reduced the availability of the plant to less than 10 months of operation. The additional costs incurred by the Company under its power contract with Maine Yankee were approximately $3.6 million. Replacement-power costs associated with the reduced level of output and limited availability of the plant amounted to approximately $13.5 million for a total of $17.1 million or an earnings reduction of $0.31 per share, after tax, during 1996. The Company's 1996 financial results benefited by approximately $15.3 million, after tax, or 50.47 per share, as a result of non-recurring items related to a favorable resolution of federal income-tax issues with the Inernal Revenue Service, a reduction in purchased power costs associated with an extended outage at a non utility generator (NUG) under contracts to the Company, an energy swap agreement with another utility that reduced purchased power costs, and the affirmation of the rme recovery of a regulatory asset. Eamings per share in 1996 were $1.57, after recognizing the higher nuclear-related costs and benefits of non-recurring events, compared to 50.R6 per share in 1995. The 1995 eamings per share included the recognition cf 50.70 per share in Maine Yankee-related repair and replacement power costs. The Maine Yankee nuclear plant was shut down on December 6,1996, for inspection and repairs. Maine Yankee has notified the Company that, due to the need to replace 92 fuel assemblies, it will refuel the plant during the current outage. While the plant is out of service, Maine Yankee must, in addition to G:\ WORD \BLP\l996-10K. DOC 23
replacing the fuel assemblies, conduct an intensive inspection ofits steam generators, resolve cable- . separation and other regulatory issues, and obtain NRC approval to restart the plant. The Company believes the plant will be out of service at least until August 1997, but cannot predict when or whether all 4 of the regulatory and operational issues will be satisfactorily resolved, or what effect the repairs and improvements to the plant will have on its operating economics. The Company will incur significantly higher costs in 1997 for its share ofinspection, repairs and refueling costs at Maine Yankee, and will also need to purchase replacement power while the plant is out of service. While the amount of higher costs is uncertain, hiaine Yankee has indicated that it expects its operations-and maintenance costs to increase by up to approximately $45 million in 1997, before refueling costs. The Company's share of such costs, based on its power entitlement of approximately 38%, would be up to approximately $17 million. In addition, the Company estimates its share of the refueling costs will amount to approximately $15 million: $10 4 million has been accrued as of December 31,1996. The Company has been incurring incremental replacement power costs of approximately $1 million per week while the plant has been out of service and expects such costs to continue at approximately the same rate
- until the plant retums to service.
The impact of these uper nuclear related costs on the Company's 1997 financial results will be significant and is likely to trigger a low earnings bandwidth provision of the Alternative Rate Plan (ARP). Under the ARP, actual carnings for 1997 outside a bandwidth of 350 basis points, abtve or below the 10.68% rate of return allowance, triggers the profit sharing mechanism. A return below the low end of the range provides for additional revenue through rates equal to one half of the difference between the actual camed rate of return and the 7.18% (10.68 - 3.50) low end of the bandwidth. While the Company believes the profit-sharing mechanism is likely to be triggered in 1997, it cannot predict the amount, if any, of additional rmnues that may ultimately result. The ARP was structured to permit reasonable assurance of continued recovery of the cost of services, including past deferrals, provide a higher degree of price stability and predic%bility, and reduce regulatory costs while providing financial incentives for improved efficiencies and protection against significant t unforeseen events. The Company declared dividends totaling $0.90 per share in 1996, unchanged from 1995 and 1994 levels. Dividend and capital structure policy will continue to be reviewed by management and the Board of Directors and will take into consideration such issues as sustainable long-term earnings, capital needs, business opportunities and business risk, the structure of the Company and the industry, and the overall need to assure that financial risk and business risk are aligned, in the near term, the Company anticipates significant downward pressure on its earnings capacity as a result of the higher cost and outages of the hiaine Yankee and Millstone Unit No. 3 nuclear facilities. The capacity of the Company to attain earnings levels that support the current dividend are closely related to the performance and cost associated with the Company's Maine Yankee investment and power entitlement.
~
Sustained nuclear unit outages combined with higher nuclear operating cost: in 1997 will be a major obstacle to achieving satisfactory results in 1997 despite prudent control of other operating costs. On a prospective basis, a contract with a major NUG representing 62.5 MW of capacity expires on October 31, GMVORD\BLPil99610K. DOC 24 l l- - - - _ _ - _ _____ _
l 1997. Net annual savings due to the contract expiration would be approximately $25 million, with 1997 savings amounting to approximately $4 million. The Company continues to face the challenges of competition and industry restructuring, and must achieve and maintain financial performance and resources commensurate with both the provision of service demanded by customers and the obligation to achieve competitive returns on investor capital. The Company is aggressively addressing the challenges of restructuring, the pressure from competitive energy sources, customers' desire for choices and enhanced service, and nuclear plant outages in 1997. The following long term Snancial objectives are key to sustainable fcture earnings and growth and will be a major focus of our 1997 activities:
- 1. Continue increasing the ef0ckney e Nperations: cost management under price-cap regulation must replace the cost plus culture encouraged by traditior.al regulation.
- 2. Focus on volume of sales as a revenue builder.
- 3. Align financial policies to changing business needs and risks; competition tends to increase business risk, which impacts the desired level of Exed-charge obligations.
- 4. Expand areas ofinvestment for growth; open competition in electric energy could signincantly reduce traditional sales-growth opportunitim.
- 5. Recover the substantial investments made and costs being incurred for existing service obligations; open competition could strand these costs, absent a transition mechanism for recovery.
Earnings and Dividends For 1996, the Company generated net income of $60.2 million, compared to 538.0 million in 1995, and a net loss of $23.3 million in 1994. Earnings applicable to common stock were $50.8 million in 1996 or
$1.57 per share, compared to $27.8 million or $0.86 per share in 1995. In 1994, the loss applicable to common stock was $33.8 million or $1.04 per share. The Company benefited from higher sales, cost management initiatives, surplus power sales and certain non-recurring events during the year as discussed below. In addition, net income in 1996 reDects replacement power costs for unscheduled nuclear unit outages of approximately $18.5 million. Increased nuclear operations, maintenance and study costs to comply with NRC safety actions amounted to approximately $4.3 million in 1996. See " Maine Yankee Regulatory issues" and "Other Nuclear Issues" for more information.
Certain favorable one-time events took place in 1996. Due to a Dood in the fall of 1996, a non utility generator was temporarily forced out of service for an extended period. This enabled the Company to purchase replacement power at a lower cost for a savings of approximately $5.4 million. An energy-swap agreement signed in 1994 with Northeast Utilities allowed the Company to save approximately $6 million in purchased power costs. A settlement with the Internal Revenue Service on audits for the years 1988-1991 provided a decrease to income tax expense of approximately $4.8 millien. The 1996 Maine Public Utilities Commission's (MPUC) Alternative Rate Plan (ARP) decision provided the Company recovery in G:\WORDiBLP\l99610K. DOC 25
( rates for its wwkers' compensation regult'ory asset of $6.4 million, which resulted in the reversal of a 1995 charge due to uncertainty about recovery 'n rates. Net income in 1995 reflects $29 million of replacement purchased power energy expense and $10 million for the Company's share of sleeving repair costs during the extended shutdown at Maine Yankee. These two items reduced earnings applicable to common stock by $22.9 million after income taxes, or $0.70 per share. The loss in 1994 reflects the write-off of approximately $100 million ($60 million after taxes) of deferred balances in accordance with the MPUC order in the ARP proceeding discussed fully below under the captio'i" Alternative Rate Plan" and Note 3 to Consolidated Financial Statements," Regulatory Matters Alternative Rnte Plan." This write-off had the effect of reducing earnings per share by $1.85. Absent the write-off, camings for 1994 would have been $0.81 per share. Dividends declared per common share have remained at $0.90 on an annual basis for the three years ended December 31,1996. Revenues and Sales Electric operating revenues increased by $51.0 million or 5.6% to $967.0 million in 1996, and by $11.1 million or 1.2% to $916.0 million in 1995. The components of the change in electric operating revenues are as follows: (Dollars in millions) 192fi 1925 , Revenues from Company service-area kilowatt-hour sales $15.0 $4.5 Revenues from non territorial sales 33.4 (9.2) Other Company operating revenues 3.0 8.7 Maine Electric Power Company, Inc. fuel cost recovery and other revenues .[(L4) _2J. Total Change in Electric Operating Revenues SilA $1L1 Refer to " Alternative Rate Plan" below, for a discussion of new rr.tes and their impact on revenues. The Company's service-area sales for the years 1996,1995, and 1994 are shown in the following table: (Kilowatt hours in millions) 1299f2 1925 1994 K NH change KWH change KWH change Residential 2,829 1.0% 2,802 (2.0)% 2,860 (0.9)% Commercial 2,489 0.5 2,477 1.6 2,439 2.2 Industrial 3,689 4.0 3,547 (4.7) 3,720 (1.9) Wholesale and lighting _217 18 9 . 136 UL2) 140 (3L5) Total Service-Area Sales 9.224 29% fL962 CL2)% 9.168 Mji)% G:\WORDiBLP\l996-10K. DOC 26
The primary factors in the service-area kilowatt-hour sales increase were residential customers' taking advantage of the Company's water-heating programs, increased sales in the pulp and paper industry, and the addition of a wholesale customer. The decreases in 145 and 1994 were attributed to low economic growth. the loss of a major industrial customer in September 1994, energy management, and loss of sales due to conversions from electricity to alternative fuels for such purposes as space and water heating. The average number of residential customers increased by 5,157 in 1996,5,076 in 1995, and 4,679 in 1994, while average usage per residential customer declined slightly in 1996,3.1% in 1995 and 1.9% in 1994. The 1996 increase in commercial sales reflect increases in the retail and wholesale trade and service sectors. Combined, these sectors comprise approximately 68% of commercial sales. Sales to all others in the commercial sector wue lower than 1995. Sales to Maine Yankee increased by 4 million kilowatt hours in 1996, and by 14.7 million kilowatt hours in 1995 due to the Plant's operating capacity limit of 90% and extended outages in both periods. Industrial sales levels are significantly affected by sales to the pulp-and paper industry, which accounts for approximately 62% ofindustrial sales and approximately 25% of total service area sales. Sales to the pulp-and-paper sector increased by 3.7% in 1996 and decreased by 8.6% in 1995, and by 3.6% in 1994. The increase in 1996 reflects special arrangements the Company has made with several paper c mpanies to back down some of their self-generation and buy electricity from the Company at a discounted rate. The 1995 and 1994 decreases reflect lower sales levels primarily due to the late-1994 loss of a major customer that had previously purchased approximately 280 million kilowatt-hours annually. Refer to
" Alternative Rate Plan" and " Competition and Economic Development," below, and Note 4 to Consolidated Financial Statements, " Commitment's and Contingencies - Competition," for additional information regarding the loss of this customer and the Company's actions to preserve its remaining large-industrial customer base and other customer groups. Sales to all other industrial customers as a group increased 4.5% in 1996,2.7% in 1995, and 1.5% in 1994.
Revenues from non-territorial sales were significantly higher ir. .96 due to sales to an out-of-state utility impacted by nuclear plant outages. In March 1995, a conuact with a power broker expired, resulting in a decrease of $9.2 million in 1995 in non-territorial sales. Alternative Rate Plan in December 1994, the MPUC approved a stipulation, signed by most of the parties to the Company's ARP proceeding, which took effect January 1,1995. This follow-up proceeding to the Company's 1993 hase-rate case was ordered by the MPUC in an effort to develop a five-year plan containing price-cap, profit-sharing, and pricing-flexibility components. The price-cap mechanism provides for adjusting the Company's retail rates annually on July 1, commencing in 1995, at a percentage combining (1) a price index (2) a productivity offset, (3) a sharing mechanism, and (4) flow-through items and mandated costs. 7 The price cap ; yplies to all of the Company's retail rates, and includes fuel-and-purchased-power costs that previously had been treated separately. The components of the July 1,1995, price-cap increase of 2.43% are the inflation index of 2.92%, reduced by a productivity offset of 0.5%, and increased by 0.01% for flow-through items and mandated costs. The components of the July 1,1996, price-cap increase of - G AWORDiBLP\l996-10K. DOC 27
l.26% consisted of an inflation index of 2.55% and eamings sharing and mandated cost items of 0.64%, reduced by a productivity offret of 1.0%, and s'iaring of c. itract restructuring and buyout savings of 0.93%. As originally stated in the MPUC's order approving the ARP, operation under the ARP continues to meet the criteria of Statement of Financial Accounting Standards No. 71," Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). As a result, the Company will continue to apply the provisions of SFAS No. 71 to its accounting transactions and to its financial statements. In 1994, the Company agreed in the ARP negotiations to record charges of approximately $100 million ($60 million, net of tax) against 1994 earnings. The Company believes the ARP provides the benefits of needed pricing flexibility to set prices between defined floor and ceiling levels in three service categories: (1) existing customer classes, (2) new customer classes for optional targeted services, and (3) special rate contracts. The Company believes that the added flexibility will position it more favorably to meet the competition from other energy sourc ; that has croded segments ofits customer base. Some price adjustments can be implemented upon 30-days' notice by the Company, while certain others are subject to expedited review by the MPUC. The Company has utilized this feature in providing new rates to approximately 19,000 customers representing approximately 40% of annual kilowatt-hour sales and 27% of service area revenues. These reductions in rates were offered to customers after consideration of associated NUG cost reductions, savings from further NUG consolidations and other general cost reductions. The ARP also contains provisions to protect the Company and ratepayers against unforeseen adverse results from its operation. These include review by the MPUC if the Company's actual retum on equity falls outside a designated range, a mia period review of the ARP by the MPUC in 1997 (including possible modificction or termination), and a " final" review by the MPUC in 1999 to determine whether or with what changes the ARP should continue after 1999. The Company will submit its 1997 compliance filing and mid-period review filing in March 1997. The MPUC decision on the mid-period review is expected by September 30,1997. While the ARP provides the Company with an expanded opportunity to be rewarded for efficiency, it also presents the risk of reduced rates of return if costs rise unexpectedly, like those that have resulted from the recent outages at Maine Yankee, or if revenues from sales decline or are not adequate to fund costs. The Company believes the ARP continues to be a competitive advantage and does not plan to propose any significant change during the mid-period review. For a detailed discussion of the ARP, refer to Note 3 to Consolidated Financial Statements," Regulatory Matters - Altemative Rate Plan," and " Meeting the Requirements of SFAS 71." Maine Yankee Regulatory issues The Company owns 38% of the common stock of Maine Yankee and is responsible for an approximately equal percentage ofits costs. The 879-megawatt Maine Yankee nuclear generating plant in Wiscasset, 3 Maine (the Plant), like others with pressurized water reactors, had been experiencing degradation ofits steam generator tubes. Until early 1995, this was believed to be limited to a relatively small number of G:\ WORD \BLP\l99610K. DOC 28
tubes. During a refueling shutdown in February 1995, new inspection methods used by Maine Yankee revealed that approximately 60% of the Plant's 17,000 steam generator tubes appeared to have defects. Following a detailed analysis of safety, technical and financial considerations, Maine Yankee repaired the tubes by inserting and welding short reinforcing sleeves of an improved material in substantially all of the Plant's steam generator tubes. Repairs were completed in December 1995. The Company's approximately $10-million share of the repair costs adversely affected the Company's 1995 earnings by
$0.18 per share, net of taxes, in spite of significant cost-reduction measures implemented by both the Company and Maine Yankee. In addition, the Company incurred incremental replacement-power costs during the outage totaling approximately $29 million, or 50.52 per share, net of taxes, for 1995.
Also in December 1995, the Nuclear Regulatory Commission's (NRC) Office of the Inspector General (OlG) and its Office ofInvestigations (01) initiated separate investigations of certain anonymous "whistleblower" allegations of wrongdoing by Maine Yankee and Yankee Atomic Electric Company (Yankee Atomic)in 1988 and 1989 in connection with operating license amendments. On May 9,1996, the OlG, which was responsible for investigating only the actions of the NRC staff and not those of Maine Yankee or Yankee Atomic, issued its report. The report found deficiencies in the NRC staft'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." Any such violations by Maine Yankee are within the purview of the 01 investigation, which, with related issues, is being reviewed by the United States Department of Justice. A sepacate internal investigation commissioned by the boards of directors of Maine Yankee and Yani ee Atomic and conducted by an independent law firm noted several areas that could have been impmved, including regulatory communications, definition of responsibilities between Maine Yankee and Yankee Atomic, and documentation and tracking of regulatory compliance, but found no wrongdoing by Maine Yankee or Yankee Atomic or any of their employees. Issues raised by the anonymous allegations caused the NRC to limit the Plant to an operating level of approximately 90% ofits full thermal capacity, pending resolution of those issues. The Company cannot predict the results of the investigations by the 01 and Department of Justice. The December 1995 allegations caused the Plant's extended tube-sleeving outage to be further extended into January 1996, and the Plant returned to the 90% operating level on January 24. 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 OlG 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." 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 be a low-cost energy provider had limited available resources to address corrective actions and some improvements, and (2) that lack of a " questioning culture" had resulted in a failure to identify or promptly correct significant problems in areas perceived by Maine Yankee to be oflow safety significance. In a letter to Maine Yankee accompanying the ISA report, NRC G:iWORDiBLPil996-10K. DOC 29
Chairman Shirley Ann Jackson noted that although overall performance at Maine Yankee was considered edequate for operation, a number of significant weaknesses and deDeiencies identified in the report would result in NRC violations. The 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 identified the NRC offices that would be responsible for overseeing corrective actions and taking any appropriate enforcement actions against Maine Yankee. On December 10,1996, Maine Yankee filed its formal response to the ISA 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 root causes and associated deficiencies no'ed in the report, and that the improvements would include physical and operating changes at the Plant, along with a 10% increase in staffing, primarily in the engineering and maintenance areas, and other changes. In a release accompanying the response, Maine Yankee stated that a " fundamental shift in corporate culture" would accompany the changes and that Maine Yankee would not seek to retum the Plant to the 100% power level from its authorized 90% level until it had reviewed the margins on all the key safety systems at the Plant, which had been another matter of concern to the NRC. The Plant operated substantially at the 90% capacity level until July 20,1996, when it was taken off-line after a comprehensive review by Maine Yankee of the Plant's systems and equipment revealed a need to add pressure relief capacity to the Plant's primary component cooling system. On August 18,1996, while the Plant was in the restart process, Maine Yankee conducted a review ofits electrical circuitry testing procedures pursuant to a generic NRC letter to nuclear-plant licensees that was intended to ensure that every feature of every safety system be routinely tested. During the expanded review, Maine Yankee found a deficiency in an electrical circuit of a safety system and therefore elected to conduct an 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% operating level on September 3,1996. On December 6,1996, Maine Yankee took the Plant off-line to resolve cable-separation and other operational and design issues. On January 3,1997, Maine Yankee announced that it would use the opportunity presented by that outage to inspect the Plant's 217 fuel assemblies, since daily monitoring had indicated evidence of a small number of defective fuel rods. As a result of the inspection, Maine Yankee determined that all of the assemblies manufactured by one supplier and currently in the reactor core (approximately one-third of the total) would have to be replaced before the hont could be restarted. Maine Yankee will therefore keep the Plant off-line for refueling, which had previously been scheduled for late 1997. In addition, Maine Yankee will make use of the outage to inspect 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 continued operation of the Plant, Maine Yankee would review the economics of continued operation before incurring the substantial capital expenditures that would be required. ( In January, the NRC announced that it had placed the Plant on its " watch list" in " Category 2", which includes plants that display " 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 G:\WORDiBLP\l996-10K. DOC 30
demonstrates a period ofimproved performance." The Plant is one of fourteen nuclear units on the watch list announced that day by the NRC, which regulates slightly over 100 civilian nuclear power plants in the United States. After year end, Maine Yankee and Entergy Nuclear, Inc. (Entergy), which is a subsidiary of Entergy Corporation, a Louisiana based utility holding company and leading nuclear plant operator, entered into a contract under which Entergy is providing management senices to Maine Yankee. At the same time, officials from Entergy assumed management positions, including President, at Maine Yankee. While the Plant remains out of service, Maine Yankee must, in addition to replacing the fuel assemblies and conducting an intensive inspection ofits steam generators, 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 to restart the Plant, following a mandated NRC process that includes an NRC-approved restart plan and opportunities for public panicipation. The Company believes the Plant will be out of service at least u il August 1997, but cannot predict when or whether all of the regulatory and operational issues will be r.isfactorily resolved or what effect the total of the repairs and improvements to the Plant will have on the economics of operating the Plant. The Company will incur significantly higher costs in 1997 for its share ofinspection, repairs and refueling costs at Maine Yankee and will also need to purchase replacement power while the Plant is out of service. While the amount of higher costs is uncertain, Maine Yankee has indicated that it expects it operations and maintenance costs to increase by up to approximately $45 million in 1997, before refueling costs. The Company's share of such costs based on its power entitlement of approximately 38% would be up to approximately $17 million. In addition, the Company estimates its share of the refueling costs will amount to approximately $15 million, of which $10.4 million has been accrued as of December 31,1996. The Company has been incurring incremental replacement-power costs of approximately $1 million per week while the plant has been out of senice and expects such costs to continue at approximately the same rate until the plant returns to service. The impact of these higher nuclear related costs on the Company's 1997 financial results will be significant and is likely to trigger the low earnings bandwidth provision of the ARP. Under the ARP, actual earnings for 1997 outside a bandwidth of 350 basis points, above or below a 10.68% rate of return allowance, triggers the profit sharing mechanism. A return below the low end of the range provides for additional revenue through rates equal to one-half of the difference between the actual earned rate of return and the 7.18% (10.68 - 3.50) low end of the bandwidth. While the Company believes that the profit sharing mechanism is likely to be triggered in 1997, it cannot predict the amount, if any, of additional revenues that may ultimately result. Other Nuclear issues On December 4,1996, the Board of Directors of Connecticut Yankee Atomic Power Company voted to permanently shut .%wn the Connecticut Yankee plant, for economic reasons, and to decommission the unit. The Company has a 6% equity interest in Connecticut Yankee, totaling approximately 56.4 million at December 31,1996. The plant did not operate after July 22,1996, causing the Company to incur replacement power costs of approximately 51.5 million in 1996. The Company estimates its share of the G:\ WORD \BLP\l996-10K. DOC 31
cost of Connecticut Yankee's continued compliance with regulatory requirements, recovery ofits plant investments, decommissioning and closing the plant to be approximately $45.8 million and has recorded a regulatory asset and a liability on its consolidated balance sheet. The Company is currently recovering through rates an amount adequate to recover these expenses. The Company has a 2.5% ownership interest in Millstone Unit No. 3 which is operated by Northeast Utilities. This facility has been off-line since March 31,1996 due to NRC concerns regarding license requirements and the Company cannot predict when it will return to service. Millstone Unit No. 3, along with two other units at the same site owned by Northeast Utilities, is on the NRC's " watch list" in " Category 3," which requires formal NRC action before a unit can be restarted. The Company estimates that it will incur approximately $300,000 to $500,000 in replacement power costs each month Millstone Unit No. 3 remains o.:t of service. The Company incurred replacement power costs of $3.5 million in 1996. Environmental Actions The Company has been named by the Environmental Protection Agency (EPA) as a "potentially responsible party" (PRP) and has been incurring costs to determine the best method of cleaning up an Augusta, Maine, site formerly owned by a salvage company and identified by the EPA as containing soil contaminated by PCBs from equipment originally owned by the Company. The Company also has been named as a PRP at eleven former gas plant sites, six former waste oil sites, and two former pole treatment and storage locations. Refer to Note 4 to Consolidated Financial Statements," Commitments and Contingencies - Legal and Environmental Matters," for a more detailed discussion of this matter. Industry Restructuring and Strandable Costs The Federal Energy Policy Act of 1992 accelerated planning by electric utilities, including the Company, for a transition to a more competitive industry. The functional areas in which competition will take place, the regulatory changes that will be implemented, and the resulting structure of both the industry and the Company are all uncertain, but regulatory steps have already been taken toward competition in generation and non-discriminatory transmission access. A departure from traditional regulation and industry restructuring, however, could have substantial impacts on the value of utility assets and on electric utilities' abilities 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. In January,1996, the Company filed its recommendations for an orderly transition to competition and adequate reimbursement ofits potentially strandable costs with the MPUC. In December 1996, the MPUC issued its Report and Recommended Plan for Electric Utility Restructuring in Maine. The major elements of the MPUC plan, which are similar in most, but not all, respects to the Company's proposal include: (1) By January 2000, investor owned utilities would transfer all generating assets to entities distinct from transmission and distribution (T&D) assets and obligations. (2) By January 2006, the Company would be required to divest all generation assets (except Maine Yankee). G:\WORDiBLP\l996-10K. DOC 32
(3) By January 2000, investor-owned utilities would be required to transfer the rights to market power fiom all qualifying facilities contracts. (4) Contracts between investor-owned utilities and qualifying facilities would remain with the T&D company. (5) Beginning January 1,2000, all customers would have the option to purchase power directly from power suppliers or from intermediaries such as load aggregators, power marketers or energy service companies. (6) Standard-offer service would be provided to customers who do not choose a competitive po.wer provider and who cannot obtain power in the market on reasonable terms. (7) The MPUC would not regulate companies that produce or sell power once customers can pt.rchase power in a competitive market. (8) T&D companies would continue to be regulated. T&D companies would have exclusive service territoris and an obligation to connect customers to the power grid. (9) A " reasonable opportunity" to recover strandable costs would be achieved through the regulated rates of the T&D utilities. Amounts recovered could include costs of fulfilling obligations under contracts with NUGs, as well as investments (and returns thereon) and other obligations undertaken by the Company in fulfilling its legal duty to serve, with requirements for the Company to mitigate such costs where practicable. (10) The MPUC recommended that the Legislature fund low-income assistance programs; otherwise, these programs would continue to be funded through T&D company rates. (11) All companies selling power to retail customers in Maine would be required to include a minimum amount of renewable energy in their generation mix, and customers would continue to fund cost effective energy efficiency programs thn> ugh T&D rates. The Company has substantial exposure to cost stranding relative to its size. In its January 1996 filing, the Company estimated its net-present-value strandable costs could be approximately $2 billion as of January 1,1996. These costs represent the excess costs of purchased-power obligations and the Company's own generating costs over the market value of the power, and the costs of deferred charges and other regulatory assets. Of the $2 billion, approximately $1.3 billion is related to above-market costs of purchased-power obligations, approximately $200 million is related to estimated net above-market cost of the Company's own generation, and the remaining $500 million is related to deferred regulatory assets. The MPUC also provided estimates of strandable costs for the Company, which they found to be within a wide range of a negative $445 million to a positive $965 million. These estimates were prepared using assumptions that differ from those used by the Company, particularly a starting date for measurement of January 1,2000 versus a measurement starting date of January 1,1996 utilized by the Company. The GSWORDiBLP\l996-10K. DOC 33 l l
MPUC concluded that there is a high degree of uncertainty that surrounds stranded costs numbers, resulting from having to rely on projections and assumptions about future conditions. Given the inherent uncertainty and volatility of these projections, the Company believes that an annual estimation of stranded costs could serve to prevent significant over-or-under-collection beginning in the year 2000. Estimated strandable costs are highly dependent on estimates of the future market for power. Higher market rates lower stranded cost exposure, while lower market rates increase it. In addition to market-ulated impacts, any estimate of the ultimate level of strandable costs depends on state and federal regulations; the extent, timing and form that competition for electric service will take; the ongoing level of the Company's costs of operations; regional and national economic conditions; growth of the Company's sales; timing of any changes that may occur from state and federal initiatives on restructuring; and the extent to which regulatory policies ultimately address recovery of strandable costs. The estimated market rate for power is based on anticipated regional market conditions and future costs of producing power. The present value of future purchased-power obligations and the Company's generating costs reflects the underlying costs of those sources of generation in place today, with reductions for contract expirations and continuing depreciation. Deferred regulatory asset totals include the current uncollected balances and existing amortization schedules for purchased-power contract restructuring and buyouts negotiated by the Company to lessen the impact of these obligations, energy management costs, financing costs, and other regulatory promises. The Company expects its strandable-cost exposure to decline over time as the market price of power increases, non-utility generator (NUG) contracts expire, and regulatory assets are recovered. Major cost stranding would have a material adverse effect on the Company's financial position. The Company believes it is entitled to recover substantially all ofits potential strandable costs, but cannot predict when or if open electric energy competition will occur in its service territory, or how much it might ultimately be allowed to recover through state or federal regulation, the future market price of electricity, or the timing or implementation of any formal recommendations in any regulatory or legislative proceedings dealing with such issues. The Company believes there are many uncertainties associated with any major restructuring of the electric utility industry in Maine. Among them are: the positions that will ultimately be taken by the Maine Legislature and the MPUC; the role and policies of the FERC in any restructuring involving the Company, the extent and effect of Congressional involvement; whether political consensus is attained; and the extent to which the Company will be permitted to rece er its strandable costs. The Company is pursuing efforts to mitigate its exposure to stranded costs. One method of mitigation that is being actively pursued is securitization of stranded costs including regulatory assets, above market NUG costs and above market company owned generation costs. Pursuant to a future legislative mandate and subject to determination by the MPUC, a portion of existing revenues related to stranded costs would be assigned by the Company for repayment of these costs. The property ris, created by this assignment could be used as security by a trust to sell bonds, the proceeds of which could be used by the Company to refinance existing obligations. Similarly a portion of existing revenues could also be dedicated directly to payment of above market non-utility power contract obligations, reducing the risks for the suppliers as well as for the Company. Mitigation from this mechanism would result from lower cost financing of G:iWORDiBLPil996-10K. DOC 34 l 1
stranded costs, enhanced credit worthiness of the utility, which should further reduce the Company's costs, and from increased availability oflow cost funds to finance additional purchased power contract restructuring efforts. Any mitigation achieved would be passed on to residential and small commercial customers through lower rates. The Company cannot predict when or iflegislative support for the use of securitization may occur. Open-Access Transmission Service Ruling On April 24,1996, the Federal Energy Regplatory Commission (FERC) issued Order No. 888, which requires all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to file open access non-discriminatory transmission tariffs that offer both load-based, network and contract-oased, point-to-point service, including ancillary service to eligible customers containing minimum terms and conditions of non discriminatory service. This service must be comparable to the service they provide themselves at the wholesale level; in fact, these utilities must take wholesale transmission service they p ovide themselves under the filed tariffs. The order also permits public utilities and transmitting utilities the opportunity to recover legitimate, prudent and verifiable wholesale stranded costs associated with providing open access and certain other transmission services. It further requires public utilities to functionally separate transmission from generation marketing functions and communications. The intent of this order is to promote the transition of the electric utility industry to open competition. Order No. 888 also clarifies federal and state jurisdiction over transmission in interstate commerce and local distribution and provides for deference of certain issues to state recommendations. On July 9,1996, the Company and MEPCO submitted compliance filings to meet the new pro forma tariff non-price minimum terms and conditions of non-discriminatory transmission. Since July 9,1996, the Company and MEPCO have been transmitting energy pursuant to their filed tariffs, subject to refund. FERC subsequently issued Order No. 888-A which generally reaffirms Order No. 888 and clarifies certain terms. Also on April 24,1996, FERC issued Order No. 889 which requires public utilities to functionally separate their wholesale power marketing and transmission operation functions and to obtain information about their transmission system for their own wholesale power transactions in the same way their competitors do through the Open Access Same-time Information System (OASIS). The rule also prescribed standards of conduct and protocols for obtaining the information. The standards of conduct are designed to prevent employees of a public utility engaged in marketing functions from obtaining preferential information. The Company participated in efforts to develop a regional OASIS, which was operational January 3,1997. FERC subsequently approved a New England Power Pool-wide Open Access Tariff, subject to refund and issuance of further orders. The Company also participated in revising the New England Power Pool Agreement, which is pending FERC approval. Competition and Economic Development The Company faces competition in several aspects of its traditional business and anticipates that competition will continue to put pressure on both sales and the price the Company can charge for its product. Alternative fuels and recent modifications to regulations that had restricted competition from suppliers outside of the Company's service territory have expanded customers' energy options. As a result, the Company continues to pursue retention of its customer base. This increasingly competitive G:\ WORD \BLPil996-10K. DOC 35
environment has resulted in the Company's entering into contracts with its wholesale customers, as well as with certain industrial, commercial, and residential customers, to provide their energy needs at prices and margins lower than the current averages. Pursuant to the pricing-flexibility provisions of the ARP, the Company redesigned some rates to encourage off-peak usage and discourage switching to alternative fuels. These include water-heat and space-heat retention rates, Super-Saver rates, which discount off peak usage, Diesel Deferral rates, Economic Development rates, and the Maine Made incentive program, which target small businesses. In 1994, the Company lowered tariffs for its large general-service customers and executed separate five-year defmitive agreements with 18 individual customers providing additional reductions. Approximately 40% of annual service area kilowatt-hour sales and 27% of annual revenues are covered under special tariffs allowed under the pricing flexibility provisions of the ARP. These reductions in rates were offered to customers after consideration of associated NUG cost reductions, savings from further NUG consolidations and other genera! cost reductions. Refer to Note 4 to Consohdated Financial Statements,
" Commitments and Contingencies - Competition," for additional information.
Non Utility Generators in accordance with prior MPUC policy and the ARP, $113 million of buy-out or contract-restructuring costs incurred since January 1992 were included in Deferred Charges and Other Assets on the Company's balance sheet and will be amortized over their respective fuel savings periods. The Company restructured 40 contracts representing 316 megawatts of capacity that should result in approximately $301 million in fuel savings over the next five years. The Company also restructured a purchased power contract with a 20 megawatt waste-to-energy facility, which is estimated to save the Company approximately $20 million over the next five years. Refer to Note 6 to Consolidated Financial Statements, " Capacity Arrangements - Non-Utility Generators," for more information. On October 31,1997, a contract with a major NUG from which the Company is obligated to purchase electricity at substantially above-market prices will expire. As a result, the Company expects annual operating income to increase by approximately $25 million. Two months of this benefit, or approximately 54 million, will be reflected in 1997 results. Expansion Of Lines Of Business The Company is also preparing for competition by expanding its business opportunities through subsidiaries that capitalize on core competencies. One such subsidiary, MaineCom Services, which was approved by the MPUC on July 13,1995, is developing opportunities in expanding markets by arranging fiber optic data service for bulk carriers, o. ing support for cable-TV or " super-cellular" personal-communication vendors, and providing other telecommunications consulting services. The Company invested $10.7 million in MaineCom during 1996 to develop an interchange network from Portland, Maine, to various points in New Hampshire, Massachusetts and Connecticut. In addition, the Company has subsidiaries or divisions that provide energy-efficiency services, utility consulting (domestic and international) and research, engineering and environmental services, management of rivers and G:\WORDiBLP\l996-10K. DOC 36
recreational facilities, locating of underground utility facilities and infrared photography, real estate brokerage and management, modular housing, and credit and collections services. All subsidiaries utilize skills of former Company employees and compete for business with other companies. In July 1996, the Company and Maine Electric Power Cowany, Inc. (MEPCO), a 78%-owned subsidiary of the Company, entered into option agreements with Man.mes and Northeast Pipeline, L.L,C. (M&N) in which the Company and MEPCO agreed to provide exclusive options to M&N to acquire property interests in certain transmission line rights of way to sections of M&N's proposed natural gas pipeline from the Umted States-Canada border at Woodland, Maine, to Dracut, Massachusetts. in November 1996, while the parties were still engaged in negotiating the terms of the proposed long-term arrangement, the options expired by their terms. Subsequent to the expiration the parties have met to discuss a long-term arrangement for use of the Company's and MEPCO's rights of way for the proposed pipeline, but the Company cannot predict whether final agreement on such an arrangement will be reached. Expenses and Taxes The Company's fuel expense, comprising the cost of fuel used for company generation and the energy portion of purchased power (the largest expense category), was 49% of total operating expense in 1996, . 51% in 1995, and 54% in 1994. Purchased-power energy expense includes costs associated with purchases from NUGs, which amounted to 74% of this expense category in 1996. Fuel expense fluctuates , with changes in the price of oil, the level of energy generated and purchased, and changes in the Company's own generation mix.
- Through December 31,1994, changes in fuel expense were provided rate treatment through a fuel clause.
Under the ARP, effective January 1,1995, fuel-expense recovery is subject to the annual index-based price change. Fuel cost decreases are generally retained by the Company. Fuel expense for MEPCO was fully recoverable through billing to MEPCO participants. See Note 3 to Consolidated Financial Statements," Regulatory Matters - Open Access Transmission Service Ruling," for a discussion on FERC Order No. 888 and its effect on MEPCO's operations. The extended outages and reduced operating level at Maine Yankee (see " Maine Yankee Regulatory issues") resulted in significant increases in fuel expense, including purchased-power energy and purchased-power capacity expense, and affected the Company's generation mix in 1996 and 1995. The Company replaced this pcwer through short-term agreements. Purchased power expense in 1996 reflected savings of approximately $5.4 million related to a paper company's extended forced outage ofits cogeneration facility due to a flood. Additional savings of approximately $6 million were achieved through a five-year capacity exchange arrangement with Northeast Utilities designed to reduce replacement power cost when either Maine Yankee or Northeast Utilities facilities are off-line. Although this agreement was suspended in 1995, Northeast Utilities owed the Company energy, which they delivered in 1996. The Company benefited by purchasing this power at rates lower than market rates. See Note 4 to Consolidated Financial Statements," Commitments and Contingencies - Competition," for more information on this matter. GMVORDiBLP\1996-10K. DOC 37
The Company's oil-fired generation decreased 0 6 of the Company's net generation in 1996, compared to 21.6% in 1995 net generation, and 12.1% in 1994. The NUG component of the energy mix decreased from 36.8% in 1995, to 31.4% in 1996, as a result of the ongoing efforts to reform the Company's NUG contracts and an extended forced outage at one NUG facility. The average price of NUG energy of 8.3 cents per kilowatt-hour is signincantly higher than the Company's own cost of generation, and much higher than the price of energy on today's open market. The Company continues to try to moderate the cost of non utihty generation by pursuing renegotiation of contracts, by supporting legislative bills that would promote that objective, and by other means such as s:rict contract-term enforcement. Purchased-power capacity expense is the non-fuel operation, maintenance, and cost-of-capital expense associated with power purchases, primarily from the Company's share of the Yankee nuclear generating facilities. In 1996, purchased-power capacity expense increased by $15.2 million. Maine Yankee capacity expense decreased by $12.2 million in 1996, due mainly to the 1995 $10-million steam generator tube repair costs.1996 costs increased primarily as a result of an accrual for the 1997 refueling outage that accounted for a year over year increase of $13 million, in addition, expense increased by $9.4 million resulting from the restructuring of a contract with a non-utility generator. This agreement significantly decreased the cost of purchased-power fuel resulting in a net savings in total purchased power costs. The level of purchased-power capacity expense also Buctuates with the timing of the maintenance and refueling outages at the other Yankee nuclear generating facilities in which the Company has equity interests. The cost of capacity increases during refueling periods, in December 1996, the Board of Directors of Connecticut Yankee Atomic Power Company announced a permanent shutdown of the Connecticut Yankee plant for economic reasons and their intent to decommission the plant. The Company has a 6% equity interest in Connecticut Yankee, totaling approximately $6.4 million at December 31, 1996. Purchased power capacity expense in 1996,1995 and 1994 includes $11.5 million, $11.5 million, and $10 million, respectively, of costs related to this facility. During 1992, Yankee Atomic Electric Company, in which the Company is a 9.5% equity ,vner, discontinued power generation and prepared a plan for decommissioning. Purchased-power capac ny expense in 1996,1995, and 1994 contained approximately $4.8 million, $3.9 million, and $5.2 million, respectively, of costs related to this facility. Refer to Note 6 to Consolidated Financial Statements," Capacity Arrangements - Power Agreements," and "Other Nuclear issues" above for a more detailed discussion. The 1996 reduction in other operation and maintenance expense is attributed to thc ;eversal of a reserve of
$6.4 million established in 1995 for the Company's workers compensation regulatory asset for which recovery was not certain. In the June 1996 ARP decision, the MPUC approved recovery of this regulatory asset. Also in 1996, the Company increased the workers compensation obligation and charged the increase of $1.6 million to expense. As a result, a net year-over-year reduction of $11.2 million for workers compensation was recorded. The Company did incur an increase in distribution expenses of 54.1 million, mainly due to line-clearance activities. The Company has contractual obligations related to demand side energy-management programs which increased expense by $2.8 million in 1996.
Maintenance expense other than distribution increased $3.5 million, of which $1.4 million was for repairs at the Millstone Unit No. 3 nuclear facility G:\WORDiBLP\l996-10K. DOC 38 1
The 1995 other operation and maintenance expense increase reflects significantly higher charges totaling approximately $27.7 million for amonization and cost of purchased power contract buy-outs. Also reflected is a one-time charge of $5.6 million related to a Special Retirement Offer (SRO) to all employees aged 50 or more who had at least five years of continuous service. The goal of the SRO was to help the Company achieve financial savings and make the organizational changes it needed to be an effective competitor in the energy marketplace. Approximately 200 employees accepted the SRO. The Company continued its reengineering effort that began in 1995 to analyze the financial controls and customer service sectors of the business. Employee teams have begun implementing solutions that are expected to yield irnprovements in work processes and result in cost savings. The Company is also continuing cost containment measures. Interest expense decreased in 1996 by $1.4 million due to lower levels of Medium-Term Notes and the repurchase of SI1.5 million of Series N General and Refunding hjortgage Bonds. Long-term debt interest expense includes 51 million of accelerated amortization ofloss on reacquired debt, as specified in the 1996 ARP. In 1995, interest expense included a full year's interest costs on the Company's October 1994 note to the Finance Authority of Maine to finance the buy-out of a major NUG contract, and lower interest cost from a decrease in the amount of Medium-Term Notes outstanding. Short-term interest costs over the period 1994 through 1996 fluctuated with the levels of rates and outstanding balances of short-term debt. In July 1996, the Company redeemed $14 million ofits 8 7/8% Series Preferred Stock at par, under the mandatory and optional sinking-fund provisions of that series. This reduced dividends by approximately
$700,000 in 1996. The Cnmpany reduced the level of Flexible Money Market Preferred Stock outstanding in 1995 by $5.5 million in anticipation of the 1999 sinking-fund requirement, thereby reducing dividends in 1995 by $300,000.
State and federal income taxes fluctuate with the level of pre-tax earnings and the regulatory treatment of taxes by the MPUC A settlement with the Intemal Revenue Service on audits for the years 1988-1991 provided a decrease to income tax expense of approximately $4.8 million in 1996. The significant increase in income-tax expense for 1995 is due to the impact of the loss from the write-off of deferred balances in accordance with the MPUC's ARP order in 1994, See Note 2 to Consolidated Financial Statements, " income Taxes," for more information. Liquidity and Capital Resources The MPUC approved increases in electric retail rates of 1.26% and 2.43% in 1996 and 1995. respectively, that produced additional cash pursuant to the price cap mechanism in the ARP. Increases in rates under the ARP were based on increases in the related price index, the sharing mechanism and provisions for certain mandated costs. Prior rate increases were provided to fund costs of fuel, energy-management programs, operations, maintenance, systems improvements, and investments in generation needed to ensure the Company's continued ability to provide reliable electric service. Approximately 5141.7 million of cash was provided from net income after adding back non-cash items. Approximately $16..! million of cash was used for fluctuations in working capital. Other operating G:\ WORD \BLP\l996-10K. DOC 39
activities, including the Snancing cf deferred energy management programs and the buy-out of NUG contracts, required cash resources. The level of cash balances and activity in capital investment programs have required little investment-related activity during 1996 and 1995. The issuance and redemption of Medium-Term Notes and the purchase of 8 7/8% Series Preferred S'ock used $24 million and $14 million, respectively, of cash during 1996. Dividends paid on common stock were $29.2 million, while preferred-stock dividends were 59.8 million. Capital-investment activities, primarily construction expenditures, utilized $57.1 million in cash during 1996. Construction expenditures comprised approximately $6.3 million for generating projects, $3.0 million for transmission, $27.9 million for distribution, and $9.7 million for general facilities and other construction expenditures. The Company invested $12.1 million in subsidiaries in 1996, of which $10.7 million was in MaineCom Services. The Company estimates its capital expenditures for the period 1997 through 2001 at approximately $302 million. Actual capital expenditures will depend upon the availability of capital and other resources, load forecasts, customer growth, and general business conditions. During the Sve-year period, the Company also anticipates incurring approximately $462 million for sinking funds, and debt and equity maturities. The Company estimates that for the period 1997 through 2001, internally generated funds from operating activities should provide a substaritial portion of the construction-program requirements.11owever, the availability at any particular time of internally generated funds for such requirements'will depend on working capital needs, market conditions, and other relevant factors. Replacement power costs and increased operation, maintenance and refueling costs for Maine Yankee will have a signincant negative effect on cash and liquidity in 1997. The Company has been incurring incremental replacement-power costs of approximately $1 million per week while the plant has been out of service and expects such costs to continue at approximately the same rate until the plant retums to service. Maine Yankee has indicated that it expects its operations and maintenance costs to increas~e by up to approximately $45 million, before refueling costs. The Company's share of such costs would be up to approximately $17 million. In addition, the Company estimates its shue of the refueling costs will amount to approximately $15 million. Internally generated funds from operating activities will not be sufficient to meet these demands. The Company also plans to utilize its Medium-Term Note program and revolving credit facilities, as described below, for these cash requirements. The Company's $150-million Medium-Term Note program was implemented to provide nexibility to meet financing needs and provide access to a broad range of debt maturities. As of December 31,1996,
$68 million of Medium-Term Notes were outstanding which, under the terms of the program, permits issuam.e of an additional $82 million of such notes. The Company is planning to seek the consent ofits preferred stockholders to increase the capacity of the Medium-Term Note program from $150 million to $500 million at its annual meeting of stockholders on May 15,1997, in order to increase its financing flexibility in anticipation of restructuring and increased competition. The Company cannot predict whether such consent will be obtained.
G:\ WORD \BLP\l996-10K. DOC 40
L in 1996, the Company deposited approximately $29.6 million in cash with the Trustee under the Company's General and Refunding Mortgage Indenture in satisfaction of the renewal and replacement fund and other obligations under the Indenture. The total of such cash on deposit with the Trustee as of December 31,1996, was approximately $59.5 million. Under the Indenture such cash may be applied at any time, at the direction of the Company, to the redemption of bonds outstanding under the Indenture at a price equal to the principal amount of the bonds being redeemed, without premium, plus accrued interest to the date fixed for redemption. Such cash may also be withdrawn by the Company by substitution of allocated property additions or available bonds. , To support its short-term capital requirements, on October 23,1996, the Company entered into a $125 million revolving credit facility with several banks, with The First National Bank of Boston and The Bank of New York acting as agents for the. knders. The credit facility has two tranches: a $75 million,364-day revolving credit facility that matures on October 22,1997, and a $50 million,3-year revolving credit facility that matures on October 23,1999. Both credit facilities require annual fees on the unused portion of the credit lines. The fees are based on the Company's credit ratings and allow for various borrowing options including LIBOR-priced, base-rate-priced and competitive-bid-priced loans. Access to commercial paper markets has been substantially reduced, if not precluded, as a result of downgrading of the Company's credit ratings. The amount of outstanding short-term borrowing will fluctuate with day-to-day operational needs, the timing oflong-term financing, and market conditions. There was $7.5 million outstanding as of December 31,1996, under this agreement. Factors That May Affect Future Results This management's discussion and analysis section contains forecast information items that are " forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. All such forward-looking information is necessarily only estimated. There can be no assurance that actual results will not materially differ from expectations. Actual results have varied materially and unpredictably from past expectations. Factors that could cause actual results to differ materially include, among other matters, electric utility restructuring, including the ongoing state and federal activities; future economic conditions; earnings-retention and dividend-payout policies; developments in the legislative, regulatory, and competitive environments in which the Company operates; and other circumstances that could affect anticipated revenues and costs, such as unscheduled maintenance or repair requirements and compliance with laws and regulations. Nuclear investments and obligations, which are subject to increased regulatory scrutiny, and the amount of expenditures and the timing of the return of the Maine Yankee generating plant to service, could have a material effect on the Company's financial position. G:\ WORD \BLp\l996-10K. DOC 41 l
- l
ltem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. P33C Index to Financial Stag ments and Financial Statement Schedule . Financial Statements: i O Management report on responsibility for financial reporting 43 Report ofIndependent Accountants 44 Consolidated Statement of Eamings for the three years ended December 31,1996,1995 and 1994 45 Consolidated Balance Sheet as of December 31,1996 and 1995 46 Consolidated Statement of Cash Flows 48 Consolidated Statement of Capitalization and Interim Financing 50 Consolidated Statement of Changes in Common-Stock Investment 51 Notes to Consolidated Financial Statements 52 Financial Statement Schedule: Schedule 11 - Valuation'and Qualifying Accounts 101 G:\ WORD \BLP\l996-10K. DOC 42
4
- Report of Management The Management of Central Maine Power Company and its subsidiary is responsible for the consolidated financial statements and the related financial information appearing in this annual report. The fmancial statements are prepared in confomiity with generally accepted accounting principles and include amounts based on informed estimates and judgments of management. The financial information included elsewhere in this report is consistent, where applicable, with the financial statements.
The Company maintains a system ofintemal accounting controls that is designed to provide reasonable assurance that the Company's assets are safeguarded, transactions are executed in accordance with management's authorization, and the financial records are reliable for preparing the financial statements. While no system ofinternal accounting controls can prevent the occurrence of errors or irregularities with absolute assurance, management's objective is to maintain a system ofinternal accounting controls that meets its goals in a cost-effective manner. The Company has policies and procedures in place to support and document the internal accounting controls that are revised on a continuing basis. Internal auditor: conduct reviews, provide ongoing assessments of the effectiveness of selective internal controls, and report their findings and recommendations for improvement to management. The Board of Directors has established an Audit Committee, composed entirely of outside directors, which oversees the Company's financial reporting process on behalf of the Board of Directors. The Audit Committee meets periodically with management, internal auditors, and the independent public accountants to review accounting, auditing, intemal accounting controls, and financial reporting matters. The intemal auditors and the independent public accountants have full and free access to meet with the Audit Committee, with or without management present, to discuss auditing or financial reporting matters. Coopers & Lybrand L.L.P., independent public accountants, has been retained to audit the Company's consolidated financial stctements. The accompanying report of indepe:41ent public accountants is based i on their audit, conducted in accordance with generally accepted auditing ar dards, including a review of selected internal accounting controls and tests of accounting procedures and records. David T. Flanagan David E. Marsh President and Chief Executive Officer Vice President, Corporate Services. Treasurer and Chief Financial Officer G:\ WORD \BLP\l996-10K. DOC 43
REPORT OF INDEPENDENT ACCOUNTANTS To the Directors and Stockholders Central Maine Power Company We have audited the consolidated financial statements and the fmancial statement schedule of Central Maine Power Company and subsidiary listed in Item 8 and item 14(a) of this Form 10-K. These financial statements and financial statements schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 r:spects, the consolidated financial position of Central Maine Power Company and subsidiary as of December 31,1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31,1996,in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information l required to be included therein. Coopers & Lybrand L.L.P. Portland, Maine , January 23,1997 0:\ WORD \BLP\l996-10K. DOC 44 l 1
Consolidated Financial Statements - Consolidated Statement of Earnings
. (Dollars in thousands, except per-share Year ended December 31.
amounts) . 19.2fi 19.95 129.4 Electric Operating Revenues (Notes 1 and 3) $967.046 $916.016 $904.883 Operating expenses Fuel used for company generation (Notes I and 6) 16,827 18,702 14,783 Purchased power - energy (Notes 1 and 6) , 407,926 408,072 430,874 Purchased power - capacity (Note 6) 108,720 93,489 77,775 Other operation 132,910 188,013 153,700 Maintenance 37,449 32,862 32,820 Depreciatio and amortization (Note 1) 53,694 55,023 55,992 Federal arc state income taxes (Note 2) 30,125 13,328 28,300 Taxes other than income taxes 27.861 27.885 25.512 Total Operating Expenses 865.512 837.374 819.756 Equity in Earnings of Associated Companies
- (Note 6) 6.138 7.217 5.109 Operating income 107.672 85.859 90.236 - Other income (expense)
Allowance for equity funds used during construction (Note 1) 851 663 807 Other, net (Note 3) 5,255 7,170 (105,133) Income taxes (Notes 2 and 3) (1.897) (2.704) 42.443 _ Total Other income _(Expense) 4.209 5.129 (61.883)
- Income Before Interest Charges 11LS.81 -90.988 28.353 Interest charges Long-term debt (Note 7) 47,966 50,307 46,213 Other interest (Note 7) ,
4,341 3,244 5,887 Allowance for borrowed funds used during
- construction (Note 1) (655) (543) (482)
Total Interest Charges 51.652 53.008 51.618 Net income (loss) 60,229 37,980 (23,265) Dividends on preferred stock 9.452 10.178 10.511 Earnings (Loss) Applicable to Common . $_50.777 $ 27.802 $(33.776) Stock Weighted Average Number of Shares of Common Stock Outstanding 32,442,752 32,442,752 32,442,408 Earnings (Loss) Per Share of Common Stock $1.57 $0.86 $(1.04) Dividends Declared Per Share of Common Stock $0.90 $0.90 $ 0.90 The accompanying notes are an integral part of these financial statements. G:\ WORD \BLP\l996-10K. DOC 45 A
9 Consolidated Balante Shret (Dollars in thousands) ])cember 31 Assets JS2$ 1995 Electric property, at original cost (Notes 6 and 7) $ 1,644,434 $ 1,611,941 Less: accumulated depreciation (Notes I and 6) 598 A15 560.078 E!cciric propedy in service 1.046.019 1.051.863 C0tistruction work in progress (Note 4) 20,007 15,928 Nuclear fuel, less accumulated amortization of $9,035 in 1996 and $8,909 in 1995 1.157 1.391 Net electric property 1,067,183 1,069,182 investments in associated companies, at equity (Notes 1 and
- 6) 67.809 54.669 Net Electric Property and Investments in Associated Companies 1.134.992 1.123.851 Current assets Cash and cash equivalents 8,307 57,677 Accounts receivable,less allowances for uncollectible accounts of $4,177 in 1996 and $3,313 in 1995:
Senice - billed 84,396 87,140 Service - unbilled (Notes 1 and 3) 45,721 41,798 Other accounts receivable 17,517 15,131 Prepaid income taxes (Note 2) 264 - Fuel oil inventory, at average cost 9,256 3,772 Materials and supplies, at average cost 12,172 12,772 Funds on deposit with trustee (Note 7) 59,512 29,919 Prepayments and other current assets 9.500 __3.J92 Total Current Assets 246.645 257.401 Deferred charges and other assets Recoverable costs of Seabrook 1 and abandoned projects, net (Note 1) 89,551 95,127 Yankee Atomic purchased-power contract (Note 6) 16,463 21,396 Connecticut Yankee purchased power contract (Note 6) 45,769 - Regulatory assets - deferred taxes (Note 2) 239,291 235,081 Deferred charges and other assets (Notes 1 and 3) 238.203 260.063 Total Deferred Charges and Other Assets 629.277 611.667 Total Assets $2.010.914 $1.002.919 The accompanying notes are an integral part of these financial statements. G:\WORDiBLP\l996-10K. DOC 46
Stockholders' Investment and Liabilities Capitalization (see separate statement)(Note 7) Common stock investment- $ 511,578 5 490,005 Preferred stock 65,571 65,571 Redeemable preferred stock 53,528 67,528 Long-term obligations 587.987 622.251 Total Capitalization 1.218.664 1.245.355-Current liabilities and interim financing Interim financing (see separate statement)(Note 7) ~ 32,500 34,000 Sinking-fund requirements (Note 7) 9,375 10,455 Accounts payable 93,197 108,170 Dividends payable 9,512 9,823 Accrued interest 11,610 12,648 Accrued mcome taxes (Note 2) - 3,668 Miscelle.cous current liabilities 21.342 13.870 Total Current Liabilities and Interim Financing 177.536 192.634 Commitments and Contingencies (Notes 4 and 6) Reserves and deferred credits Accumulated deferred income taxes (Note 2) 357,994 351,868 i Unamortized investment tax credits (Note 2) 31,988 32,452
- Yankee Atomic purchased-power contract (Note 6) 16,463 2),396 Connecticut Yankee purchased-power contract (Note 6) 45,769 -
Regulatory liabilities - deferred taxes (Note 2) 52,616 50,366 Other reserves and deferred credits (Note 5) 109.884 98.848 Total Reserves and Deferred Credits 614.714 554.930 Total Stockholders' investment and Liabilities $2.010.914 $1.992.919 The accompanying notes are an integral part of these financial statements. s G:\WORDiBLPil996-10K. DOC 47
Consolidated Statement of Cash Flows (Dollars in thousands) Year ended December 31 122fz 1921 .L14 Operating Activities Net income (loss) S 60,229 5 37,980 S(23,265) ltems not requiring (providing) cash: ARP-related charges (Note 3) - - 100,390 Depreciation 44,104 43,676 42,627 Amortization 34,881 37,196 32,790 Deferred income taxes and investment tax credits, net 3,318 (3,710) 11,022 Allowance for equity funds used during construction (851) (663) (807) Changes in cutain assets and liabilities: Accounts receivable (3,565) (12,539) 5,175 Inventories (4,884) 595 4,230 Other current assets (308) (1,954) (1,391) Retail fuel costs - - 32,922 Accounts payable (16,862) 12,025 4,062 Accrued taxes and interest - (4,970) 30,282 (25,311) Miscellaneous current liabilities 7,472 3,335 (2,602) Deferred ::nergy-management costs (5,222) (4,075) (5,789) Maine Yankee outage accrual 8,280 (4,710) S,197 Purchased-power contract buyouts (75) (13,405) (91,274) Other, net 3.961 11.495 (5.604) Net Cash Provided by Operating Activities 125.508 135.528 85.372 investing Activities Construction expenditures (46,922) (44,867) (42,246) Investments in associated companies (12,059) (600) (2,004) Changes in accoents payable - investing { activities 1.889 (1.655) (679) Net Cash Used by Investing Activities (57.092) L47.122) (44.929) Financing Activities issuances: Mortgage bonds - - 25,000 Common stock - - 927 Medium-term notes 10,000 30,000 32,000 Other Long-Term Obligations 870 - - Finance Authority of Maine - - 66,429 Redemptions: Mortgage bonds (11,500) - - Preferred stock (l4,000) (5,472) - Medium-term notes (34,000) (65,000) (43,000) Finance Authority of Maine (6,300) - - Short term obligations, net 7,500 (8,000) (25,500) G:\ WORD \BLP\l996-10K. DOC 48
Year ended December 31 (Dollars in thousands) 1993 1931 1994 Other long-term obligations (1,780) (860) (860) Funds on Deposit with Trustee -(29,593) - - Dividends: Common stock (29,220) (29,222) (29,222)- i10.061)
' Preferred stock (9.763) (10.287)
Net Cash Provided (Used) by Financing Activities (117.786) (88.841) 15.713 Net increase (Decrease) in Cash and Cash Equivalents- (49,370). (435) 56,156 Cash and cash equivalents, beginning of year 57.677 58.112 1.956 Cash and Cash Equivalents, end of year S 8.307 $ 57.677 $ 58.112 Supplemental Cash-Flow inforr:ation: Cash paid during the year for: _ interest (net of amounts capitalized) $47,835 $51,127 $44,874 Income taxes (net of amounts refunded of
$0, $29,045 and $2,802 in respective years indicated) $32,632 $(11,994) $1,568 For purposes of the statement of cash flows, the Company considers all highly liquid instruments ,
purchased having a maturity of thee months or less to be cash equivalents. The accompanying notes are an integral part of these financial statements. , G:\ WORD \BLP\l996-10K. DOC 49
. ~ _ - - - _ - - - - - - . -
Consolidated Statement of Capitalization and Interim Financing December 31 (Dollars in thousands) .1226 1121 Amount % Amount %- Capitalization (Note 7) Common-stock investment: Common stock, par value $5 per share: Authorized - 80,000,000 shares - Outstanding - 32,442,752 shares in 1996 and 1995 $ 162,214 $ 162,214 Other paid-in capital 276,818 276,287 Retained earnings 72.546. 51.504 Total Common-Stock Investment 511.578 .1(1.2% 490.005 .183% Preferred Stock - not subject to mandatory redemption '65.571 _5,2 65.571 _1,1 Preferred Stock - subject to mandatory redemption 60,528 74,528 Less: current sinking fund requirements 7.000 7.000 Redeemable Preferred Stock - subject to 4 mandatory redemption 53.528 ._43 67.528 _il Long-term obligations: Mortgage bonds 421,000 432,500 Less: unamortized debt discount 1.620 1.807 Total Mortgage Bonds 419.380 430.693 Medium-term notes 68,000 '92,000 Less: unamortized debt discount - 8 Total Medium-Term Notes 68.000 91.992 Other long-term obligations:
- Lease obligations 36,283 38,112
. Pollution-control facility and other notes 91.699 98.909
' Total Other Long-Term Obligations 127.982 137.021 Less: Current Sinking Fund Requirements and Current Maturities 27.375 37.455 Total Long-Term Obligations 587.987 _4L(1 622.251- .48J Total Capitalizmion 1.218.664 _22d 1.245.355 .22 2 Interim financing (Note 7):
Short-tenn obligations 7,500 - Current maturities of long-term obligations 25.000 34.000
' TotalInterim Financing 32.500 _2.6 34.000 _2,2 Total Capitalization and Interim Financing $ 1.251.164 1(l(LQ% $1.279.355 100.0 %
The accompanying notes are an integral part of these financial statements. G:\ WORD \BLPil996-10K. DOC 50
.._s .
i Consolidated Statement of Changes in Common-Stock Investment For the three years ended December 31,1996 (Dollars in thousands) Amount Other at par paid-in Retained Shares ulus capital eamings Icial Balance - December 31,1993 32.379.937 $161.900 $274.343 $117.146 $553.389 Net loss (23,265) (23s265) Dividends declared: Common stock (29,213) (29,213) Preferred stock (10,511) (10,511) Cost for reacquired preferred stock 675 (675) Issues of common stock 62,815 314 613 927 Capital stock expense (4) (4) Balance - December 31,1994 32.442.752 '62.214 275.627 53.482 491.323 Net income 37,980 37,980 Dividends declared: Common stock (29,199) (29,199)
. Preferred stock (10,178) (10,178) . Cost for reacquired preferred stock 581 (581)
Shareholders Rights Plan redemption (324) (324) Capital stock expense 403 403 Balance - December 31,1995 32.442.752 162.214 276.287 51.504 490.005 Net income 60,229 60,229 Dividends declared: Common stock (29,199) (29,199) Preferred stock (9,452) (9,452) Cost for reacquired preferred stock 536 (536) Capital stock expense (5) (5) Balance - December 31,1996 32.442.752 $162.214 $276.818 $72.546 $511.578 The accompanying notes are an integral part of these financial statements. G:\ WORD \BLP\l996-10K. DOC 51
f Notes to Consolidated Financial Statements Note 1: Summary of Significant Accounting Policies General Description Central Maine Power Company (the Company) is an investor-owned public utility primarily engaged in the sale of electric energy at the wholesale and retail levels to residential, commercial, industrial, and other classes of customers in the State of Maine. Financial Statements The consolidated financial statements include the accounts of the Company and its 784 owned subsidiary, Maine Electric Power Company, Inc. (MEPCO). The Company accounts for its investments in associated companies not subject to consolidation using the equity method. The preparation of financial 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 assets and liabilities at the date of the f.nancial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Regulation The rates, operations, accounting, and certain other practices of the Company and MEPCO are subject to the regulatory authority of the Maine Public Utilities Commission (MPUC) and the Federal Energy Regulatory Commission (FERC). Electric Operating Revenues Electric operating revenues include amounts billed to customers and estimates of unbilled sales and fuel costs. Through December 31,1994, the Company's approved tariffs provided for the recovery of the cost of fuel used in Company generating facilities and purchased-power energy costs. The Company also - collected interest va unbilled fuel.and paid interest on fuel-related over-collections. Effective January 1, 1995, with the implementation of the Altemative Rate Plan ( ARP), these costs are no longer subg to reconciliation through the annual fuel-cost adjustment. See Note 3, " Regulatory Matters - Alternative Rate Plan," for further information. , Depreciation Depreciation of electric property is calculated using the straight-line method. The weighted average composite rate was 3.0% in each of 1996,1995 and 1994. Allowance for Funds Used During Construction (AFC) An allowance for funds (including equity funds), a non-operating item, is capitalized as an element of the cost of construction. The debt component of AFC is classified as a reduction of interest expense, while the G:\ WORD \BLP\l996-10K. DOC 52
equity component, a non-cash item, is classified as other income. The average AFC rates applied to construction were 8.7% in 1996,8.4% in 1995, and 8.9% in 1994. Asset Valuation .The Company adopted Statement of Financial Accounting Standards No.121," Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of," effective January 1, 1996. The standard requires impairment losses on long-lived assets to be recognized when an asset's book value exceeds its expected future cash flows (undiscounted and without interest). The new standard also imposes stricter criteria for retention of regulatory-created assets by requiring that such assets be probable of future recovery at each balance sheet date. The Company's adoptio 1 of this standard in 1996 had no impact on acccmpanying financial statements. However, this may change in the future as chuges are made .n the current regulatory framework or as competitive factors influence wholesale and retail pricing in the electric utility industry. Deferred Charges and Other Assets The Company defers and amortizes certain costs in a manner consistent with authorized or probable ratemaking treatment. The Company capitalizes carrying costs as a part of certain d.ferred charges, principally energy-management costs, and classifies such ca rying costs as other income. The following table depicts the components of deferred charges and other assets at December 31,1996, and 1995: (Dollars in thousands) 129.fi .1125 NUG contract buy-outs and restructuring (Note 6) $113,796 $126,485 , Energy-management costs 35,986 36,224 Postretirement benefits (Note 5) 22,962 21,849 Financing costs 20,684 24,775 Environmental site clean-up costs (Note 4) 7,876 7,375 Non-operating property, net 7,176 7,486 Electric Lifeline Program 2,368 3,603 Other,incbding MEPCO 27.355 .32,2fift Total $238.203 $260.063 Certain costs are being amortized and recovered in rates over periods ranging from three to 30 years. Amortization expense for the next five years is shown below: (Dollars in Amount thounnds) 1997 $26,790 1998 26,053 1999 23,910 2000 22,807 2001 19,304 G:\ WORD \BLP\l996-10K. DOC 53
i l l . _. . . Recoverable Costs of Seabrook I and Abandoned Projects - The recoverable after-tax investments in Seabrook I and abandoned projects are reported as assets, pursuant to May 1985 and February '991 MPUC rate orders. The Company is allowed a current return on these assets based on its authorized rate of return. In accordance with these rate orders, the deferred taxes related to these recoverable costs are amortized over periods of four to 10 years. As of December 31, 1996, substantially all deferred taxes related to Seabrook I have been amortized. The recoverable investments as of December 31,1996, and 1995 are as follows: December 3 i Recovery (Dollars in thousands) 1993 1921 neriods ending Recoverable costs of: SeabrookI $141,084 $141,084 ?.015 Other Projects .5.2 f 1 57.491 2001 '
. 198.575 198.575 Less: accumulated amortization 108,209 102,248 Less: related income taxes 815 1.200 Total Net Recoverable Investment S 89.551 $ 95.127 Note 2: Income Taxes The components of federal and state income-tax provisions (benefits) reflected in the, Consolidated Statement of Earnings are as follow:
)- Year ended December 31 (Dollars in thousands) 1926 19.21 .122.4 Federali Current $21,682 $15,965 $(18,579) Deferred 5,751 2,278 2,175 Investment tax creo.ts, net (464) (1,715) (2,512) Regulatory deferred- (623) (2.619) 8.379
- Total Federal Taxes - 26.346 13.909 (10.537)
State: Current $ 7,022 $ 3,777 $ (6,586) Deferred (10) 343 3,603 . Regulatory deferred (1.336) _(.L222) (23) Total State Taxes 5.676 2.123 (3.606) Total Federal and State income Taxes $32.022 $16A32 Sf14.143) Federal and state income taxes charged to: Operating expenses $30,125 $13,328 $ 28,300 Other inco.nc - _L892 . 2.704 (42.443)
$32.022 $16.032 $(14.143)
G:\ WORD \BLPil996-10K. DOC 54
Federal income tax, excluding federal regulatory dererred taxes, differs from the amount of tax computed by multiplying income before federal tax by the statutory federal rate. The following table reconciles the statutory federal rate to a rate determ!ned by dividing the total federal income tax expense by income before that expense: Year ended December 31
.1926 1221! 122.4 Amount % Amount % Ammmt %
(Dollars in thousands) Income tax expense at statutory federal rate $30.301 ljLQ% $18,161 310% $(11.831) 150% Permanent differences: Investment tax credit amortization (1,482) (1.7) (1,613) (3.1) (1,613) 4.8 Dividend received deduction (1,895) (2.2) (2,219) (4.3) (1,469) 4.3 Other, net .(293) LQ1) (217) LOA) (68) Q.2 26,631 103 14.112 212 (14.981) 14.1 Effect of timing differences for items which receive flow through treatment: Tax-basis repairs (1,229) (1,4) (891) (1.7) (924) 2.7 Depreciation differ nces flowed through in prior years 2,327 2.7 2,291 4.4 2,315 (6.8) Accelerated flowback of deferred taxes on loss on abandoned generating projects 1,708 1.9 1,873 3.6 2,051 (6.1) , Deduction of removal costs (202) (0.2) (189) (0.4) (163) 0.5 r Carrying costs, net 186 0.2 253 0.5 429 (1.3) Adjustment to tax accrual for change in rate treatment 300 0.3 - - 420 (1.2) Excess property taxes paid - - - - (116) 0.4 1RS audit resolutmn regarding depreciation methods (3,230) (3.7) - - - - Provision for deferred taxes relating to normalization of certain short-term timing (2,545) a differences * - - (4.9) - - Other, net (l45) (0.2) _f99f) LL2) 43.2 til) Federal income Tax Expense and Effective Rate $26.346 10A % $13.909 262% $(10.537) lL2%
*During 1995, the Company adjusted the deferred tadalances for certain normalized items (Note 3).
G:\ WORD \Bl.P\l996-10K. DOC 55 t _
The Company and MEPCO record deferred income tax expense in accordance with regulatory authority: they also defer investment and energy tax credits and amortize them over the estimated lives of the assets that generated the credits. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns as required under Statement of Financial Accounting Standards No.109," Accounting for income Taxes"(SFAS No.109). Under this method, effective January 1,1993, deferred tax liabilities and assets are determined based on the dif"crence between the financial statement and tax basis of assets and liabilities using ti;e enacted tax rates
- in e.Tect in the year in which the differences are expected to reverse.
At adoption adjustments to accumulated deferred taxes were required, as well as the recognition of a liability to ratepayers for deferred taxes established in excess of the amount calculated using income. tax rates applicable to future periods. Additionally, deferred taxes were recorded for the etunulative timing differences for which no deferred taxes had been recorded previously. Concurrently, the Company, in accordance with Statement of Financial Accounting Standards No. 71," Accounting for the Effects of Certain Types of Regulation"(SFAS No. 71), recorded a regulatory asset representing its expectations that, consirtent with current and expected ratemaking, it will collect these additional taxes recorded through rates when they a:e paid in the future. A valuation allowance has not been recorded at December 31,1996, and 1995, as the Company expects that all deferred income tax assets will be realized in the future.
- Accumulated deferred income taxes consisted of the following in 1996 and 1995:
(Dollars in thousands) 1326 IS95 Deferred tax assets resulting from: Investment tax credits, net $ 22,050 $ 22,370 Regulatory liabilities 17,919 13,882 Alternative minimum tax 10,241 23,850 All other 26.588 22.545 76.798 82.647 Deferred tax liabihties resulting from: Property 288,370 273,565 Abandoned plant 61,729 65,573 Regulatory assets _E53fi 96.577 435.607 435.715 Accumulated deferred income taxes, end of year, net $358.809 $153A6fi Accumulated deferred income taxes recorded as: Accumulated deferre:1 income taxes $357,994 5351,868 Recoveratile costs of Seabrook 1 and abandoned projects, net 815 1.200
$358.809 5353.06fi G:\ WORD \BLPil99610K. DOC 56
Note 3: Regulatory hiatters Alternative Rate Plan in December 1994, the hiPUC approved a stipulation signed by most of the parties to the Company's
> ARP proceeding. This follow up proceeding to the Company's 1993 base-rate case was ordered by the hiPUC in an effort to develop a five year plan containing price cap. profit sharing, and pricing Dexibility components. Although the ARP is a major reform, the hiPUC is continuing to regulate the Company's operations and prices, provide for continued recovery of deferred costs, and specify a range for its authorized rate of return. The ARP was adopted effective January 1,1995. -
The Company believes the ARP provides the benefits of needed pricing flexibility to set prices between defined floor and ceiling levels in three service categories: (1) existing customer classes, (2) new customer classes for optional targeted services, and (3) special rate contracts. The Company believes that the added Hexibility will position it more favorably to meet the competition from other energy sources. See Note 4 to Consolidated Financial Statements," Commitments and Contingencies - Competition," for a discussion 1 of a:tions taken by the Company uader the ARP's pricing flexibility provisions. ! The ARP also contains provisions to protect the Company and ratepayers against unforeseen adverse results from its operation. These include review by the hiPUC if the Company's actual return on equity falls outside a designated range, a mid-period review of the ARP by the hiPUC in 1997 (including possible modification or termination), and a " final" review by the h1PUC in 1999 to determine whether or . with what changes the ARP should continue in effect after 1999. The Company will submit its 1997 compliance filing and the mid period review fi'ing in March 1997. The mid-period review decision is expected from the MPUC by September 30,1997.
- The company believes, as stated in the MPUC's order approving the ARP, that operation under the ARP continues to meet the criteria of SFAS No. 71. In its order, the MPUC reaffirmed the applicability of previous accounting orders allowing the Company to reflect amounts as deferred charges and regulatory assets. As a result, the Company will continue to apply the provisions of SFAS No. 71 to its accounting transactions and its future financial statements.
The ARP contains a mechanism that provides price caps on the Company's retail rates to increase annually on July 1, commencing July 1,1995, by a percentage combining (1) a price index, (2) a l pro 6uctivity offset. (3) a sharing mechanism, and (4) flow-through items and mandated costs. The price i cap applies to all of the Company's retail rates, including the Company's fuel-and purchased power cost, which previously had been treated separately. Under the ARP, fuel expense is no longer subject to L reconciliation or specific rate recovery, but is subject to the annual indexed price cap changes. A specified standard innation index is the basis for each annual price-cap change. The inflation index is " reduced by the sum of two productivity factors, a general productivity offset of 1.0%,(0.5% for 1995), 4 and a second formula based offset that started in 1996 intended to reflect the limited effect ofinnation on the Company's purchased power costs during the proposed five year initial term of the ARP. G:\WORDiBLP\l99610K. DOC 57 i
The sharing mechanism will adjust the subsequent year's July price cap change in the event the Company's carnings are outside a range of 350 basis points above or below the Company's allowed return on equity, starting at the 10.55% allowed return (1995) and indexed annually for changes in capital costs. Outside that range, profits and losses would be shared equally by the Company and ratepayers in computing the price cap adjustment. This feature commenced with the price-cap change of July 1,1996, and reflected 1995 results. The ARP also provides for partial flow through to ratepayers of cost savings from non utility generator contract buy outs and restructuring, recovery of energy management costs, penalties for failure to attain customer service and energy efficiency targets, and specific recovery of half the costs of the transition to Statement of Financial Accounting Standards No 106," Accounting for Postretirement Benefits Other Than Pensions"(SFAS No.106), the remaining 50% to be recovered through the annual price-cap change. The ARP also generally defines mandated costs that would be recoverable by the Company notwithstanding the index based price cap. To receive such treatment, a mandated cost's revenue requirement must exceed $3 million and have a disproportionate effect on the Company or the electric-power industry. Effective July 1,1995, the MPUC approved a 2.43% increase pursuant to the annual price-change provision in the ARP. Th: primary component of the increase was the inflation index change of 2.92%, reduced by a productivity offset of 0.5%, and increased by .01% for flowthrough items and mandated costs. On June 28,1996, the MPUC approved a 1.26% increase in rates under the ARP effective July 1, 1996. The components of the increase included the inflation-index of 2.55% and earnings sharing and mandated cost items of 0.64%, reduced by the productivity offset of 1.0% and sharing of contract restructuring and buyout savings of 0.93%. The Company agreed in the ARP negotiations to record charges in 1994 reflecting the write-off of approximately $100 million ($60 million, net of tax, or $1.85 per share) which consisted of undercollected balance of fuel and purchased power costs, unrecovered energy management costs, unrecovered unbilled ERAM revenues and unrecovered deferred charges related to the possible extension of the operating life of one of the Company's generating stations. The $100 million charge was included in "Other income (expense)- Other, net" on the Consolidated Statement of Earnings. The $40-million tax impact was included in "Other income (expense)- Income taxes." These charges, with the other provisions of the ARP, lessen the impact of future price increases for MPUC-mandated and fuel-related costs. Restructuring The Maine Legislature in 1995 took action by Legislative Resolve (Resolve) to develop recommendations for the MPUC on the future structure of the electric utility industry in Maine. 'I : Resolve stated that the findings of the MPUC would have no legal effect, but that the MPUC's study w zuld " .. provide information to the Legislature in order to allow the Legislature to make infomied decisions when it evaluates those plans." In accordance with the Resolve, on December 31,1996, the MPUC, pursuant to the mandate of the Maine Legislature, filed its Report and Recommended Plan for Utility Industry Restructuring (Restructuring Report). G:\WORDiBLPi1996-10K. DOC 58
The Company believes there are many uncertainties associated with any major restructuring of the electric utility industry in Maine. Among them are: the actions that will be ultimately taken by the legislature and the MPUCt the role of the FERC in any restructuring involving the Company and the ultimate positions it will take on relevant issues within its jurisdiction; to what extent the United States Congress will become involved in resolving or redefining the issues through legislative action and,if so, with what results; whether the 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, particularly with respect to the Company, to what extent utilities will be permitted to recover strandable costs. The Company has substantial exposure to cost stranding relative to its size. The Company estimated its net present value strandable costs could be approximately $2 billion as of January 1,1996. These costs represent the excess costs of purchased power obligations and the Company's own generating costs over the market value of the power, and the costs of deferred charges and other regulatory assets. Of the $2 billion, approximately $1.3 billion is related to above market costs of purchased power obligations, approximately $200 million is related to estimated net above market cost of the Company's own generation, and the remaining $500 million is related to deferred regulatory assets. Meeting the Requirements of SFAS No. 71 The Company continues to meet the requirements of SFAS No. 71, as described above. The standard provides specialized accounting for regulated enterprises, which requires recognition of assets and liabilities that enterprises in general could not record. Examples of regulatory assets include deferred income taxes associated with previously flowed through items, NUG buyout costs, losses on abandoned plants, deferral of postemployment benefit costs, and losses on debt refinancing. If an entity no longer meets the requirements of SFAS No. 71, then regulatory assets and liabilities must be written off. The ARP provides incentive based rates intended to recover the cost of service plus a rate of return on the Company's investment together with a sharing of the costs or earnings between ratepayers and the shareholders should the camings be less than or exceed a target rate of retum. The Company has received recognition from the MPUC that the rates implemented as a result of the ARP continue to provide specific recovery of costs deferred in prior periods. The MPUC's Restructuring Report submitted to the Legislature in December 1996 recognizes that a reasonable opponunity to recover strandable costs is essential to a successful transition to competition, with incentives for the Company to mitigate such costs where practicable. The Company is actively 4 pursuing securitization of regulatory assets, which would provide further assurance of their recoverability. Open-Access Transmision Service Ruling On April 24,1996. FERC issued Order No. 888, which requires all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to file open access non-discriminatory transmission tariffs that offer both load-based, network and contract based, point to-point senice, including ancillary service to eligible customers containing minimum temis and conditions of non-discriminatory service. This scnice must be comparable to the senice they provide themselves at the GnWORD\BLP\1996-10K. DOC 59
wholesale level; in fact, these utilities must take wholesale transmission service they provide themselves under the filed tariffs. The order also pennits public utilities and transmitting utilities the opportunity to recover legitimate, prudent and verifiable wholesale stranded costs associated with providing open access and certain transmission services. It further requires public utilities to functionally separate transmission from generation marketing functions and communications. The intent of this order is to promote the transition of the electric utility industry to open competition. Order No. 888 also clarifies federal and state jurisdiction over transmission in interstate commerce and local distribution and provides for deference of certain issues to state recommendations. On July 9,1996, the Company and MEPCO submitted its compliance filings to meet the new pro forma tarifTnon price minimum terms and conditions of non discriminatory transmission. Since July 9,1996, the
- Company and MEPCO have been transmitting energy pursuant to their filed tariffs, subject to refund. FERC subsequently issued Order No. 886 A, which reaffinns Order No. 888 and clarifies certain tenns.
Also on April 24,1996, FERC issued Order No. 889 which requires public utilities to functionally separate their wholesale power marketing and trrinsmission operation functions and to obtain information about their transmission system for their own wholesale power transactions in the same way their cornpetitors do through the Open Access Same time Information System (OASIS). The rule also prescribed standards of conduct and protocols for obtaining the infonnation. The standards of conduct are designed to prevent employees of a public utility engaged in marketing functions from obtaining preferential information. The Company participated in efforts to develop a regional OASIS, which was operational January 3,1997. FERC subsequently approved a New England Power Pool-wide Open l Access Tariff, subject to refund and issuance of further orders. The Company also participated in revising the New England Power Pool Agreement, which is pending FERC approval. Note 4: Commitments and Contingencies
- Construction Program The Company's plans for improving and expanding generating, transmission, distribution facilities, and power-supply sources are under continuing review. Actual construction expenditures will depend upon the availability of capital and other resources, load forecasts, customer growth, and general business conditions. The Company's current forecast of capital expenditures for the five year period 1997 through 2001, are as follows
, (Dollars in millions) 1997 1998-2001 Total Type of Facilities: Generating projects S8 $ 33 $ 41 Transmission 3 14 17 Distribution 27 124 151 General facilities and other 1B _Z5 .21 Total Estimated Capital Expenditures $56 5246 5102 f G:\ WORD \BLP\l996-10K. DOC 60
l Competition in September 1994, the Town of Madison's Department of Electric Works (Madison), a wholesale customer of the Company, began receiving power from Northeast Utilities (NU) as a result of a competitive bidding process available under the federal Energy Policy Act of 1992. Substantially all of the 45 megawatts involved supply the large paper making facility of Madison Paper Industries (MPI)in Madison's service territory that had been served directly by the Company under a special service agreement with Madison during the preceding 12 years. The MPUC approved the stipulation filed by the Company, Madison, and NU, whereby the related MPUC and FERC regulatory proceedings were deemed to be settled among the parties, and the Company withdrew its request for compensation for stranded costs. In return, NU agreed to ' pay the Company $8.4 , million over a seven-year period, MPI agreed to pay the Company $1.4 million over a three year period, a
- transmission rate was agreed upon for the Company's transmission service to Madison commencing September 1,1994, and the parties agreed that Madison would be supplied by NU through 2003, with
, Madison having an option for an addidonal five years. In addition, NU and the Company agreed to a five-3 ear capacity excFange arrangement designed to achieve sign ficant replacement power cost savings for the Company when the Company's largest source of generation, the Maine Yankee Plant, is off line, and provides Maine Yankee power to NU when certain NU facilities are shut down. The agreement provides more economic benefit to the Company than ifit had under bid NU for Madison's business, but less than if Madison stayed on the Company's system at the former rates. The Company records income under this contract as the amounts are received. .
Madison was the largest of the Company's three wholesale customers. The Company later reached agreement with its other two wholesale customers to continue to supply them at negotiated prices and l margins that are lower than the previous averages. Subsequent to year end, these customers initiated a request for proposals to supply their energy needs after 1998. During 1994, the Company engaged in discussions with its large general service customers. Those customers have alternative energy options that the Company believed needed to be addressed by lowering its applicable tariffs. In response to those discussions, in November 1994, the Company filed revised tariff schedules lowering prices 15% for its two high voltage transmission level rate classes. The Company then entered into five year definitive agreements with 18 of these customers that lock in non-cumulative rate reductions of 15% for the three years 1995 through 1997,16% for 1998, and 18% for 1999, below the December 1,1994, levels. These contracts also protect these customers from price increases that might otherwise be allowed under the ARP. The participating customers agreed to take electrical service from the Company for five years and not to switch fuels, install new self-generation equipment, or seek another supplier of electricity for existing electrical load during that period. New electrical load in excess of a stated minimum level could be served by other sources, but the Company could compete for that load. A 1 G AWORDWLP\l996-10K. DOC 61
The Company believes that without offering the competitive pricing provided in the agreements, a number of shese customers would be likely to install additional self generation or take other steps to decrease their electricity purchases from the Company. The revenue loss from such a usage shift could have been substantial. The Company estimates that based on the rate reductions effective January 1,1995, its gross revenues were approximately $27 million lower in 1995, and approximately $45 million lower in 1996, than would have been the case if these customers continued to pay full retail rates without reducing their purchases from the Company. [ llowever, these rate reductions were negotiated giving consideration to important related cost savings. - Electricity price changes affect the cost of some NUG power contracts. The reduction in rates to large customers reduced purchased power costs by approximately $20 million as a result oflinkage between retail tariffs and some contract prices. Legal and Environmental Matters The Company is a pany in legal and administrative proceedings that arise in the normal course of business, in connection with one such proceeding, the Company has been named a potentially responsible i party (PRP) and has been incurring costs to determine the best method of cleaning up an Augusta, Maine, site formerly_ owned by a salvage company and identined by the Environmental Protection Agency (EPA) as containing soil contaminated by polychlorinated biphenyls (PCBs) from equipment originally owned by the Company.
- In 1995, the EPA approved a remedy to adjust the soil cleanup standard to 10 parts per million. The cleanup method using solvent extraction wa< found to be technically infeasable. On July 30,1996, the j EPA approved the off site disposal of the contaminated soil to a EPA licensed secure landfill.
4 The Company believes that its share of the remaining costs of the cleanup under the approved remedy could total approximately $2.7 million to $4.2 million. This estimate is net of an agreed partial insurance recovery and the 1993 court-ordered contribution of 41% from Westinghouse Electric Corp., t does not reDect any possible contributions from other insurance carriers the Company has sued, or from any other parties. The Company has recorded an estimated liability of $2.7 million and an equal regulatory asset, reDecting an accounting order to defer such costs and the anticipated ratemaking recovery of such costs when ultimately paid. In addition, the Company has deferred, as a regulatory asset, $5.1 million of costs j incurred through December 31,1995. The Company cannot predict with certainty the level and timing of the cleanup costs, the extent they will be covered by insurance, or their ratemaking treatment, but believes it should recover substantially all of such costs through insurance and rates. 2 Other Environmental Sites The Company has been named as a PRP at eleven former manufactured gas plant sites, six former waste oil sites, and two former pole treatment and storage locations. The Company believes that its share of the a G:\WORDiBLPil996-10K. DOC 62
investigation and cleanup and other costs associated with these sites could total approximately 50.9 million which was charged to income in 1996. The Company believes that the ultimate resolution of current legal and environmental proceedings will not have a rnaterial adverse effect on its financial condition. 1 Nuclear Insurance The Price Anderson Act (Act)is a federal statute providing, among other things, a limit on the maximum
- liability for damages resulting from a nuclear incident. The liability is provided for by existing private insurance and by retrospective assessments for costs in excess of that covered by insurance, up to $79.3 million for each reactor owned, with a maximum assessment of $10 million per reactor in any yar. Based
- on the Company's indirect ownership in four nuclear generation facilities (See Note 6," Capacity
- Arrangements - Power Agreements") and its 2.5% ownership interest in the Millstone Unit No. 3 nuclear plant, the Company's retrospective premium could be as high as $6 million in any year, for a cumulative total of $47.6 million, exclusive of the effect ofinflation indexing and a 5% surcharge in the event that total public liability claims from a nuclear incident should exceed the funds available to pay such claims.
i In addition to the insurance required by the Act, the nuclear generating facilities referenced above carry additional nuclear property-damage insurance. This additional insurance is provided from commercial ! sources and from the nuclear electric. utility industry's insurance company through a combination of 4 current premiums and retrospective premium adjustments. Based on current premiums and the Company's indirect and direct ownership in nuclear generating facilities, this adjustment could range up to approximately $7.7 million annually. j Note 5: Pension and Other Post-Employment Benefits I Pension Benefits The Company has two separate non contributory, defined benefit plans that cover substantially all ofits union and non union employees. The Company's funding policy is to contribute amounts to the separate plans that are sufficient to meet the funding requirements set forth in the Employee Retirement income Security Act (ERISA), plus such additional amounts as the Company may determine to be appropriate. Plan benefits under the non-union retirement plan are based on average final camings, as defined within . the plan, and length of employee service; benefits under the union plan are based on average career ! earnings and length of employee service.
- During 1995, the Company offered a Special Retirement Offer (SRO) to qualifying employees.
i Approximately 200 employees accepted the offer. The $7-million cost of the SRO was included in pension expense. As part of the SPsO, the plans were amended to add five years to age and five years to credited service for all plan participants for purposes of eligibility and early retirement discounts. Early ] 4 Retirement incentive Program (ERIP) expenses for 1994 relate to a 1991 ERip reflected in accordance with an MPUC accounting order. . G:\ WORD \BLP\l996-10K. DOC 63
A summary of the components of net periodic pension cost for the non union and union defined benefit plans in 1996,1995 ano 1994 follows: 1926 1921 1924 (Dollars in Non- Non- Non-thousands) union Union union Union union Union Service cost - benefits earned during the period $2,334 $1,780 $2,014 $1,414 $2,367 $1,684 Interest cost on projected benefit obligation 5,225 3,852 5,653 3,889 5,469 3,816 Return on plan assets (8,168) (5,036) (16,135) (9,786) 2,336 1,397 Net amortization and deferral 2,911 1,536 10,030 6,028 (8,174) (5,311) Early Retirement incentive Programs - - 32Lo 3.L4.1 _ 222 JA52 Net Periodic Pension Cost $2.3.02 $2132 SL421 SL616 52.200 $3A43. Assumptions used in accounting for the non-union and union defined benefit plans in 1996,1995, and 1994 are as follows: 1926 1921 1924 Weighted average discount rate 7.50 % 7.25 % 8.25 % Rate ofincrease in future compensation levels 4.5% 4.5% 5.0% Expected long term return on assets 8.5% 8.5% 8.5% G:\ WORD \BLP\l99610K. DOC 64
i 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: , 4 1296 1291
- (Dollars in thousands) Non- Non-union Utdan union Union Actuarial present value of benefit obligations
Vested benefit obligation $62.461 $47.617 $61216 $47.948 Accumulated benefit obligation 64.394 48.783 $64.916 $47.948 Projected benefit obligation 75,570 55,688 $77,939 $53,735 Plan assets at estimated market value (primarily stocks, bonds, and guaranteed annuity contracts) 77.996 48.091 73.973 45.061 ! Funded status projected benefit 1 obligation in excess of or (less than) plan (2,425) 7,597 3,966 8,674 I
. assets l 4
Unrecognized prior senice cost (1,785) (1,481) (1,940) (1,610) l Unrecognized net gain 19,819 3,745 11,309 2,530 Unrecognized (net obligation) net asset (163) 1.675 (192) 1.945 Net Pension Liability Recognized in the
- Balance Sheet $15.445 $11.536 $13J43. $1L519 l
Savings Plan i The Company offers an employee savings plan to all employees which allows participants to invest from - 2% to 15% of their salaries among several attematives. An employer contribution equal to 60% of the first 4 5% of the employees' contributions is initially invested in Company common stock. The Company's contributions to the savings-plan trust were $1.7 million in 1996, $1.6 million in 1995, and $1.8 million in 1994. Other Post Employment Benefits In addition to pension and savings-plan benefits, the Company provides certain health-care and life-insurance benefits for substantially all ofits retired employees. The MPUC approved a rulemaking on SFAS No.106, effective July 20,1993, that adopted the accrual method of accounting for the expected cost of such benefits dunng the employees' years of senice, and authorized the establishment of a regulatory asset for the deferral of such costs until they are " phased in" for ratemaking purposes. The effect of the change can be reflected in annual expenses over the active service life of employees or a period of 20 years, rather than in the year of adoption. G:\ WORD \BLP\l996-10K. DOC 65
The MPUC prescribes the maximum amortization period of the average remaining service life of active employees or 20 years, whichever is longer, for the transition obligation. The Company '"ilizing a 20 year amortization period. Segregation in an external fund is required for amounts collect rates. The Company is proposing initial funding of $3 million annually. Until amounts are funded, no return on assets will be renected in postretirement benent cost. As a result of the MPUC order, the Company records the cost of these benefits by charging expense in the period recovered through rates ($9.8 million in 1996, $6.7 million in 1995, and $5.5 million in 1994), with the excess over that amount of $1.1 million in 1996, $6.2 million in 1995 and $7.1 million in 1994, deferred for future recovery. The total amount defined as a regulatory asset as of December 31,1996 was $23 million. Concurrent with the initial ARP price change, the Company began to phase in the cost of SFAS No.106 over a three year period, $3 million for the first year beginning July 1,1995 and an additional $2.1 million for the year beginning July 1,1996. The ainaunts deferred until that point are being amortized over the same period as the transit ion obligation. A summary of the~ components of net periodic postretirement benefit cost for the plan in 1996,1995 and 1994 follows: (Dollars in thousands) .12.2fi L915 L9994 Service cost $1,347 $ 846 $1,472 Interest on accumulated postretirement benefit obligation 5,720 7,389 6,712 Special retirement offer - 200 - Amortization of transition obligation 4,080 4,606 4,606 Amortization of prior service cost 35 42 - Amortization of gain (329) (188) .(171) Postretirement benefits expense 10,853 12,895 12,619 Deferred postretirement benefits expense 1.056 6.204 .7.108 Postretirement Benefit Expense Recognized in the Statement of Earnings $ 9.797 $ 6.691 $ 5,511 The following table sets forth the accumulated postretirement benefit obligation, the funded status of the plan, and the liability recognized on the Company's balance sheet at December 31,1996 and 1995: (Dollars in thousands) L99fi Lo91! Accumulated postretirement benefit obligation: Retirees $51,815 $ 87,632 Fully eligible active plan participants 2,707 4,791 Other active plan participants 19.381 15.060 Total accumulated postretirement benefit obligation 73,903 107,492 Plan assets, at fair value 849 879 Accumulated postretirement benefits obligation in excess of plan assets 73,054 106,613 Unrecognized net gain (loss) 15,987 (2,511) Unrecognized prior service cost (5) (1,131) Unrecognized transition obligation (59.267) (78.303) Accrued Postretirement Benefit Cost Recognized in the Balance Sheet $20.769 $ 2 L6fdr G:\ WORD \BLP\l996-10K. DOC 66
i , I b i The assumed health care cost trend rates range from 5.7% to 6.8% for 1996, reducing to 5.0% overall 1
; over a period of 25 years. Rates range from 6.4% to 9.3% for 1995, reducing to 5.0% overall, over a !
period of 10 years. Rates range from 6.8% to 10.4% for 1994, reducing to 5.0% overall, over a period of 10 years. The effect of a one percentage point increase in the assumed health care cost trend rate for each future year would increase the aggregate of the service and interest cost components of the net periodic postretirement benent cost by 50.7 million and the accumulated postretirement benent obligation by $8.9 million. Additional assumptions used in accounting for the postretirement benent plan in 1996,1995 and j 1994 are as follows: t i M $95 M l Weighted average discount rate 7.50 % 7.25 % 8.25 % Rate ofincrease in future compensation levels 4.50 % 4.50 % 5.0% The Company is exploring alternatives for mitigating the cost of postretirement benents and for funding its obligations. These alternatives include mechanisms to fund the obligation prior to actual payrnent of benents, plan design changes to limit future expence increases, and additional cost-control and cost-sharing programs. Effective September 1,1996, the Company implemented a phase out of the long term care portion ofits i retiree medical plans. With the exception of one group of approximately 200 retirees, all benents of this i type will be eliminated by September 1,2002. These changes decreased Plan liabilities by approximately ) $16 million, based on 1996 actuarial valuation results. Note 6: Capacity Arrangements Power Agreements The Company, through certain equity interests, owns a portion of the generating capacity and energy
- production of four nuclear generating facilities (the Yankee companies), two of which have been l permanently shut down, and is obligated to pay its proportionate share of costs, which include fuel, j depreciation, operation and maintenance expenses, a return on invested capital, and the estimated cost of
- decommissioning the nuclear plants.
T G:\WORDiBLPil99610K. DOC 67 L . - - - - - . - - - . . - -. - - . .
Pertinent data related to these power agreements as of December 31,1996, are as follows: (Dollars in thousands) Maine Vermont Connecticut Yankee XanLcc Yankee Yankee' Atomic' Ownership share 18 % d% 6% M% Contract expiration date 2008 2012 1998 2000 Capacity (MW) 879 531 - - Company's share of: Capacity (MW) 329 19 - - Estimated 1996 costs $79,282 $6,525 $12,355 54,896 Long term obligations and redeemable preferred stock $94,559 $6,950 $10,447 $ - Estimated decommissioning obligation $118,586 513,150 $45,769 $16,463 Accumulated decommissioning fund $61,254 $5,474 $12,269 $11,408
- See following for discussion on Connecticut Yankee and Yankee Atomic.
Under the terms ofits agreements, the Company pays its ownership share (or entitlement share) of estimated decommissioning expense to each of the Yankee companies and records such payments as a cost of purchased power. Effective August 16,1988, Maine Yankee Atomic Power Company (Maine Yankee) began collecting $9.1 million annually for decommissioning. In 1994, Maine Yankee, pursuant to FERC authorization, increased its annual collection to $14.9 million and reduced its retum on common equity to 10.65%, for a total increase in rates of approximately $3.4 million. The increase in decommissioning collection is based on the ed.nated cost of decommissioning the Maine Yankee Plant, assuming dismantling and remcyal, of $31' adilion (in 1993 dollars) based on a 1993 external engineering study. Accumulated decommissioning funds were $163.5 million as of December 31,1996. The estimated cost of decommissioning nuclear plants is subject to change due to the evolving technology of decommissioning and the possibility of new legal requirements. The Maine Yankee Plant, like other pressurized water reactors, experienced degradation ofits steam generator tubes, principally in the form of circumferential cracking, which, until early 1995, was believed to be limited to a relatively small number of tubes. During a refueling and maintenance shutdown in February 1995, Maine Yankee detected through new inspection methods that approximately 60% of the Plant's 17,000 steam generator tubes appeared to have defects. Following a detailed analysis of safety, technical and financial considerations, Maine Yankee repaired the tubes by inserting and welding short reinforcing sleeves of an improved niaterial in substantially all of the Plant's steam generator tubes, which was completed in December 1995. The Compar.y's approximately
$10 million share of the repair costs adversely affected the Company's 1995 earnings by $0.18 per share, net of taxes, in spite of significant cost-reduction measures implemented by both the Company and Maine Yankee. In addition, the Company's incremental replacement power costs during the outage totaled approximately $29 million, or 50.52 per share, net of taxes, for 1995.
G:\ WORD \BLPil996-10K. DOC 68 t- -
Also in December 1995, the Nuclear Regulatory Commission's (NRC) Of0cc of the inspector General (OlG) and its Office ofInvestigations (01) initiated separate investigations of certain anonymous "whistleblower" allegations of wrongdoing by Maine Yankee and Yankee Atomic Electric Company (Yankee Atomic)in H88 and 1989 in connection with operating license amendments. On May 9,1996, the 010, which was responsible for investigating only the actions of the NRC staff and not those of Maine Yankee or Yankee Atomic, 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 "signincant indications of possible licensee violations of NRC requirements and regulations." Any such violations by hiaine Yankee are within the purview of the 01 investigation, which, with rehted issues, is being reviewed by the United States Department of Justice. A separate intemal investigation commissioned by the boards of directors of Maine Yankee and Yankee Atomic and conducted by an independent law firm noted several areas that could have been improved, including regulatory communications, dennition of responsibilities between Maine Yankee and Yankee Atomic, and documentation and tracking of regulatory coinpliance, but found no wrongdoing by Maine Yank,ee or Yankee Atomic or any of their employees. Issues raised as a result of the anonymous allegations caused the NRC to limit the Plant to an operating level of approximately 90% ofits full thermal capacity, pending resolution of those issues. The Company cannot predict the results of the investigations by the 01 and Department of Justice. On January 11,1996, Maine Yankee began start up operations and was up to a 90% generation level on January 24,1996. The Plant operated substantially at that level until July 20,1996, when it was taken off-line after a comprehensive review by Maine Yankee of the Plant's systems and equipment revealed a need to add pressure relief capacity to the Plant's primary component cooling system. On August 18,1996, while the Plant was in the restart process, Maine Yankee conducted a review ofits electrical circuitry testing procedures pursuant to a generic NRC letter to nuclear-plant licensees that was intended to ensure that every feature of every safety system be routinely tested. During the expanded review, Maine Yankee found a denciency in an electrical circuit of a safety system and therefore elected to conduct an 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% operating level on September 3,1996. On December 6,1996, Maine Yankee took the Plant off line to resolve cable separation and associated issues. On January 3,1997, Maine Yankee announced that it would use the opportunity presented by that outage to inspect the Plant's 217 fuel assemblies, since daily monitoring had indicated evidence of a small nuniber of defective fuel rods. As a result of the inspection, Maine Yankee determined that all of the assemblies manufactured by one supplier and currently in the reactor core (approximately one-third of the total) have to be replaced. Maine Yankee will therefore keep the Plant off line for refueling, which had previously been scheduled for late 1997, in addition, Maine Yankee will make use of the outage to inspect the Plant's steam generators 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 identined at other plants, in January 1997, the NRC announced that it had placed the Plant on its " watch list" in " Category 2", which includes plents that display " 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 "unal the licensee demonstrates a period ofimproved performance." The Plant is one of fourteen nuclear units on G:\ WORD \BLPil996-10K. DOC 69
- __ -_ \
the watch list announced that day by the NRC, which regulates slightly over 100 civilian nuclear power i plants in the United States. After year end, Maine Yankee and Entergy Nuclear, Inc. (Entergy), which is a subsidiary of Entergy Corporation, a Louisiana based utility holding company and lcading nuclear plant operator, entered into a contract under which Entergy is providing management services to Maine Yankee at the same time, officials from Entergy assumed management positions, incl, ding President, at Maine Yankee. The Maine Yankee nuclear plant was shut down on December 6,1996, for inspection and repairs. While d the plant is out service, Maine Yankee must, in addition to replacing the fuel assemblies, conduct an intensive inspection ofits steam generators, resolve cable separation issues and other regulatory issues, and obtain the approval of the NRC to restart the plant. 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 repairs and improvements to the plant will have on the economics of operating the plant. The Company will incur significantly higher costs in 1997 for its share ofinspection, repairs and refueling costs at Maine Yankee and will also need to purchase replacement powcr while the plant is out of service. While the amount of higher costs is uncertain, Maine Yankee has indicated that it expects it operations and maintenance costs to increase by up to approximately $45 million in 1997, before refueling costs. The . Company's share of such costs based on its power entitlement of approximately 38% would be up to approximately $17 million. In addition, the Company estimates its share of the refueling costs will amount to approximately $15 million, of which $10.4 million has been accrued as of December 31,1996. The Company has been incurring incremental replac-at power costs of approximately $1 million per week while the plant has been out of service and eq as such costs to continue at approximately the same rate until the plant returns to service. The impact of these higher nuclear related costs on the Company's 1997 financial results will be significant and is likely to trigger the low earnings bandwidth provision of the ARP. Under the ARP actual earnings for 1997 outside a bandwidth of 350 basis points, above or below a 10.68% rate of return
- allowance, triggers the profit sharing mechanism. A return below the low end of the range provides for additional revenue through rates equal to one-half of the difference between the actual earned rate of return and the 7.18% (10.68 - 3.50) low end of the bandwidth. While the Company believes eat the profit sharing mechanism is likely to be triggered in 1997, it cannot predict the amount, if any, of auditional revenues that may ultimately result.
4 Condensed financial information on Maine Yankee Atoraic Power Company is as follows: (Dollars in thousands, 19 5 E M , Earnings: Operating revenues $183,661 $205,977 $173,857 Operating income 17,150 18,527 16.223 Net income 8,106 8,571 8,573 Earnings applicable to common stock .. 6.637 7.057 7.014 Company's Equity Share of Net Earnings $ 2.522 $ 2.682 $ 2.665 G:\ WORD \BLPil996-10K. DOC 70 l
(Dollars in thousands) 1226 1991 122.4 investment: Net electric property and nuclear fuel $222,360 5242,399 $254,820 Current assets 44,979 34,799 38,950 Deferred charges and other assets 334.722 303.760 256.140 . Total Assets 602.061 580.958 549.910 , Less: Redeemable preferred stock I8,000 18,600 19,200 Long term obligations 223,572 224,185 226,491 Current liabilities - 34,265 30,904 29,210 Reserves and deferred credits 255.472 236.653 208.100 Net Assets Sl(L7.52 $ 70.616 $ 66.900 Company's Equity in Net Assets S.16R6 $_ 26.834 5 25.425 in December 1996, the Board of Directors of Connecticut Yankee Atomic Power Company announted a permanent shutdown of the Connecticut Yankee plant hi lladdam, Connecticut, and decided to decommission the plant for economic reasons. An economic analysis conducted by Connecticut Yankee estimates that the early closing of the Plant would save over $100 million (net present value) over its remaining license life to the year 2007, compared with the costs of continued operation. The Company has a 6% equity interest in Connecticut Yankee, totaling approximately 56.4 million at December 31, 1996. The plant did not operate after July 22,1996. The Company estimates its share of the cost of Connecticut Yankee's continued compliance with regulatory requirements, recovery ofits plant investments, decommissioning and closing the plant to be approximately $45.8 million and has recorded a regulatory asset and a liability on the consolidated balance sheet. The Compar,y is current ly recovering through rates an amount adequate to recover these expenses. On February 26,1992, the Board of Directors of Yankee Atomic Electric Company (Yankee Atomic) decided to permanently discontinue power operation at the Yankee Atomic Plant in Rowe, hiassachusetts, and to decommission that facility. The Company relied on Yankee Atomic for less than 1% of the Company's system capacity. Its 9.5% equity investment in Yankee Atomic is approximately $2.2 million. On hiarch 18,1993, the FERC approved a settlement agreement regarding the Yankee Atomic decommissioning plan, recovery of plant investment, and all issues with respect to prudence of the decision to discontinue operation. The Company has estimated its remaining share of the cost of Yankee Atomic's continued compliance with regulatory requirements, recovery ofits plant investments, decommissioning and closing the plant, to be approximately $16.5 million. This estimate, which is subject to ongoing review and revision, has been recorded by the Company as a regulatory asset and a liability on the accompanying consolidated balance sheet. As part of the hiPUC's decision in the Company's 1993 base rate case, the Company's current share of costs related to the deactivation of Yankee Atomic is being recovered through rates. The Company has approximately a 60% ownership interest in the jointly owned, Company-operated,620-megawatt oil fired W. F. Wyman Unit No. 4. The Company also has a 2.5% owr.ership interest in the hiillstone Unit No. 3 r.uclear plant operated by Northeast Utilities, and is entitled to approximately 29-megawatt share of that unit's capacity. The Company's share of the operating costs of these units is G:\ WORD \BLPil99610K. DOC 71 , 1
included in the appropriate expense categories in the Consolidated Statement of Earnings. The Company's plant in service, nuclear fuel, decommissioning fund, and related accumulated depreciation and amortization attributable to these units as of December 31,1996, and 1995 were as follows: Wyman 4 Millstone 3 (Dollars in thousands) 192f2 1921 .L22f2 1221 Plant in service, nuclear fuel and decommissioning fund $116,372 $116,447 $112,040 $112,033 Accumulated depreciation and amortization 63,023 59,832 39,181 36,411 Millstone Unit No. 3 has been out of service since April,1996, due to NRC concerns regarding operating license requirements and the Company cannot predict when it will return to service. The Company estimates < that it will incur approximately $300,000 to $500,000 in replacement power costs each month Millstone Unit No. 3 remains out of service. The Company incurred replacement power costs of $3.5 million in 1996. Power Pool Agreements The Ne'v England Power Pool, of which the Company is a member, has contracted in its 1-lydro-Quebec Projects to purchase power from llydro-Quebec. The contracts entitle the Company to 85.9 megawatts of capacity credit in the winter and 127.25 megawatts of capacity credit during the summer. The Company has entered into facilities support agreements for its share of the related transmission facilities. The Company's share of the support responsibility and of associated benefits is approximately 7%. The Company is making facilities support payments on approximately $28.8 million, its remaining share of the construction cost for these transmission facilities incurred through December 31,1996. These obligations are reflected on the Company's consolidated balance sheet as lease obligations with a corresponding charge to electric property. Non Utility Generators The Company has entered into a number oflong term, non-cancelable contracts for the purchase of capacity and energy from non utility generators (NUG). The agreements generally have terms of five to 30 years, with expiration dates ranging from 1997 to 2021. They require the Company to purchase the energy at specified prices per kilowatt hour, which are often abos e market prices. As of December 31, 1996, facilities having 573 megawatts of capacity covered by these contracts were in-service. The costs of purchases under all of these contra:ts amounted to $313.4 million in 1996, $314.4 million in 1995, and
$373.5 million in 1994.
During 1996, the Company reached agreement with three NUGs to buy out contracts or to give the Company options to restructure their contracts through lump sum or periodic payments. In accordance with prior MPUC policy and the ARP, at December 31,1996, $113 million of buy-out or restructuring costs incurred since January 1992 were included in Deferred Charges and Other Assets on the Company's balance sheet and are amortized over their respective fuel savings periods. G:\ WORD \BLPil99610K. DOC 72
The Cet .pany's estimated contractual obligations with NUGs as of December 31,1996, are as follows: (Dollars in Amount millions) 1997 $ 331 1998 291 1999 295 2000 294 . 2001 268 2002 -2015 2.369
$3,848 in early 1996, the Company entered into a restructuring agreement with hiaine Energy Recovery Company (MERC), a 20 megawatt waste to energy facility located in Biddeford, hiaine. The agreement provides for a significant reduction in energy rates for energy sold to the Company and extended the previous power contract five years, in addition, the Company will make capacity payments to CL Power Sales One.
Note 7: Capitalization and Interim Financing Retained Earnings Under terms of the most restrictive test in the Company's General and Refunding Mortgage Indenture and the Company's Articles ofIncorporation, no dividend may be paid on the common stock of the Company if such dividend would reduce retained earnings below $29.6 million. At December 31,1996, the Company's retained earnings were $72.5 million, of which $42.9 million were not so restricted. Mortgage Bonds Substantially all of the Company's electric-utility property and franchises are subject to the lien of the General ar.d Refunding Mortgage. The Company's outstanding Mortgage Bonds may be redeemed at established prices plus accrued interest to the date of redemption, subject to certain refunding limitations. Bonds may also be redeemed under certain conditions at their principal amount plus accrued interest by means of cash deposited with the trustee under certain provisions of the mortgage indenture. In 1996, the Company deposited approximately $29.6 million in cash with the Trustee under the Company's General and Refunding Mortgage Indenture in satisfaction of the renewal and replacement fund and other obligations under the Indenture. The total of such cash on deposit with the Trustee as of December 31,1996, was approximately $59.5 million. Under the Indenture such cash may be applied at any time, at the direction of the Company, to the redemption of bonds outstanding under the Indenture at a price equal to the principal amount of the bonds being redeemed, without premium, plus accrued interest to the date fixed for redemption. Such cash may also be withdrawn by the Company by substitution of allocated property additions or available bonds. G:\WORDiBLP\l996-10K. DOC 73
Mortgage Bonds outstanding as of December 31,1996, and 1995 were as follows: (Dollars in thousands) Interest Series Redeemed / maturity talc 9 19_96 12M Central hia!ne Power Company General and Refunding hiortgage Bonds: U 1998 April 15 7.54 % $ 25,000 $ 25,000 S 1998 August 15 6.03 60,000 60,000 T 1998 November 1 6.25 75,000 75,000 0 1999 January 1 73/8 50,000 50,000 P 2000 January 15 7.66 7$,000 75,000 N 2001 September 15 8.50 11,000 22,500 Q 2008 Merch 1 7.05 75,000 75,000 R 2023-June 1 77/8 50.000 50.000 Total hiortgage Bonds $421.000 $132.500 Limitations on Unsecured indebtedness The Company's Articles ofincorporation limit certain unsecured indebtedness that may be outstanding to 20% of capitalization, as defined; 20% of defined capitalization amounted to $219 million as of December 31,1996. Unsecured indebtedness, as defined, amounted to $96 million as of December 31,1996. In hiay 1989, holders of the Company's preferred stock consented to the issuance of unsecured hiedium. Term Notes in an aggregate principal amoant of $150 million outstanding at any one time; the notes are therefore not subject to such limitations. hiedium Term Notes Under the terms of the Company's hiedium Term Note program, the Company may offer hiedium Term Notes up to an aggregate principal amount of $150 million, hiaturities can range from nine months to 30 years; interest rates pertaining to such notes are established at the time ofissuance. Interest on fixed rate notes is payable on h1 arch I and September 1, while interest on floatingcate notes is payable on the dates indicated thereupon. G:\ WORD \BLP\l996-10K. DOC 74
f Medium Term Notes outstanding as of December 31,1996, and 1995 were as follows: (Dollars in thousands) Maturity Interest rate 1226 -9 1995 Series A: 2000 9.65 % $5,000 $ 5,000 Series B: 1996-1998 4.92 7.98 23,000 57,000 Series C: 1997 2001 7.40-7.50 40.000 30.000 Total Medium Term Notes $68,000 $92.000 Pollution-Control Facil ty and Other Notes Pollution-control facility and other notes outstanding as of December 31,1996, and 1995 were as follows: (Dollars in thousands) Series Interest rate Maturity 19_96 1991 Central Maine Power Company: Yarmouth Installment Notes 63/4% June 1,2002 $10,250 $10,250 Yarmouth Installment Notes 63/4 December 1,2003 1,000 1,000 Industrial Development Authority of the State of 73/8 May 1,2014 11,000 11,000 New Hampshire Notes 73/8 May 1,2014 8,500 8,500 Finance Authority of Maine 8.16 January 1,2005 60,129 66,429 Maine Ehetric Power Company, Inc.: Promissory Notes Variable
- July 1,1996 - 1,730 Variable
- November 1,2000 820 -
Total Pollution-Control Facility and Other Notes $91.699 $98.909 .
*The average rate was 6.3% in 1996 and 6.7% in 1995.
The bonds issued by the Industrial Development Authority of the State of New Hampshire are supported by loan agreements between the Company and the Authority. The bonds are subject to redemption at x option of the Company at their principal amount plus accrued interest and premium, beginning in 200L in September 1994, the Finance Authority of Maine (FAME) approved the Company's application for funds to finance the contract buy-out of a NUG contract for a 32-megawatt wood fired generating plant in Fort Fairfield, Maine. On October 26,1994. FAME issued $79.3 million of Taxable Electric Rate Stabilization Revenue Notes Series 1994A (FAME notes). FAME and the Company entered into a loan agreement imder which the Company issued FAME a note for approximately $66.4 million, evidencing a loan in that amount. The proceeds of the lean, along with $13 million of the Company's own funds, were used to buy out the Fort Fairfield contract. Concurrently, the Company purchased all of the common stock G:\ WORD \BLP\l996-10K.COC 75
of Aroostook Valley Electric Company (AVEC) for $2 million. On October 26,1994. AVEC paid the former owner of the Fort Fairfield facility $2 million and took title to the facility. In connection with the FAME financing, AVEC granted FAh1E a mortgage on the facility. The remaining $12.9 million of FAh1E notes proceeds was placed in a capital reserve account. The amount in the capital reserve account is equal to the highest amount of principal and interest on the FAh1E notes to accrue and come due in any year the FAhiE notes are outstanding. The amounts invested in the capital reserve account are initially invested in government securities designed to generate interest income at a rate equal to the interest on the FAhiE notes. Under the terms of the loan agre:: ment, the Company is also responsible for or receives the benefit from the interest rate differential and investment gains and losses on the capital reserve account. Capital 1. case Obligations The Company leases a portion ofits buildings and equipment under lease arrangements, and accounts for certain transmission agreements as capital leases using periods expiring between 2006 and 2021. The net book value of property under capital leases was $33.1 million and $35.1 million at December 31,1996, and 1995, respectively. Assets acquired under capital leases are recorded as electric property at the lower of fair-market value or the present value of future lease payments, in accordance with practices allowed by the MPUC, and are amortized over their contract te ms. The related obligation is classified as other long-term debt. Under the terms of the lease agreements, executory costs are excluded from the minimum lease payments. Estimated future minimum lease payments for the five years ending December 31,2001, together with the present value of the minimum lease payments, are as follows: (Dollars in thousands) Amount 1997 $ 5,619 1998 5,447 1999 5,276 2000 5,105 2001 4,934 Thereafter 56.298 Total minimum lease payments 82,679 Less: amounts representing interest 46.396 Present Value of Net hiinimum Lease Payments $36.283 G:\WORDiBLPil99610K. DOC 76
Sinking Fund Requirements Consolidated sinking fund requirements for long term obligations, including capital lease payments and maturing debt issues, for the five years ending December 31,2001, are as follows: (Dollars in thousands) Sinking Maturing filnd deht Iolal 1997 $ 2,375 $ 25,000 $ 27,375 1998 9,212 178,000 187,212 1999 9,855 60,000 69,855 2000 10,520 80,000 90,520 2001 10,950 21,000 31,950 Operating Lease Obligations The Company has a number of operating lease agreements primarily involving computer and other office equipment, land, and telecommunication equipment. These leases are noncancelable and expire on sarious dates through 2007. Following is a schedule by year of future minimum rental payments required under the operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31,1996: , (Dollars in Amount thousands) 1997 $4,277 1998 4,042 1999 3,278 2000 3,123 2001 3,099 Thereafter .l.936
$19.755 Rent expense under all operating leases was approximately $5 million,55.7 million, and $7 million for the years ended December 31,1996,1995 and 1994, respectively.
Disclosure of Fair Value of Financial Instruments The methods and assumptions used to estimate the fair value of each 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 and pollution-control facility and other notes is based on quoted market prices as of December 31,1996 and 1995. The fair value oflong-term obligations is based on quoted market prices for the same or similar issues, or on the current rates offered to the Company based on the weighted average life of each class ofinstruments. G:\ WORD \BLP\l996-10K. DOC 77
The estimated fair values of the Company's f'mancial instruments as of December 31,1996, and 1995 are as follows: 19E 1991 Carrying Fair Carrying Fair (Dollars in thousands) amount ulus amount ulue , Cash and temporary investments S 8.307- $ 8,307 $ 57,677 $ 57,677 Redeemable preferred stock 60,528 _57,228 74,528 75,117 Mortgage bonds 421,000 415,578 432,500 435,311 Medium term notes 68,000 67,667 92,000 92,156 Pollution-control facility and other notes 91,699 91,791 98,909 99,694 Preferred Stock Preferred stock balances outstanding as of December 31,1996,1995, and 1994 were as follows: Current shares (Dollars in thousands, except per-share amounts) outstanding 1993 1993 JS24 Preferred Stock - Not Subject to Mandatory Redemption:
$25 par value - authorized 2,000,000 shares; outstanding: None $ - $ - $ - $100 par value noncallable -authorized 5,713 shares; outstanding 6% voting 5,713 571 571 571 $100 par value callable - authorized 2,300,0005 shares; outstanding:
3.50% series (redeemable at $101) 220,000 22,000 22,000 22,000 4.60% series (redeemable at $101) 30,000 3,000 3,000 3,000 4.75% series (redeemable at $101) 50,000 5,000 5,000 5,000 5.25% series (redeemable at $102) 50,000 5,000 5,000 5,000 7 7/8% series (optional redemption after 9/1/97, at $100) 300,000 30.000 30.000 30,000 Preferred Stock - Not Subject to Mandatory Redemption $65.571 $65.571 $65.571 Redeemable Preferred Stock - Subject to Mandatory Redemption:
$100 par value callable - authorized 2,300,000* shares; outstanding: Nonc $ -
Flexible Money Market Preferred Stock, Series A - 7.999% (395,275 shares in 1996 and 1995; 450,000 shares in 1994) 395,275 39,528 39,528 45,000 8 7/8% series (redeemable at $102.958) 210,000 '21.000 35.000 35.000 Redeemable Preferred Stock - Subject to Mandatory Redemption $60.528 $74.528 $80.000
- Total authorized $100 par value callable is 2,300,000 shares. Shares outstanding are classified as Not Subject to Mandatory Redemption and Subject to Mandatory Redemption.
G:\WORDiBLP\l99610K. DOC 78 i
Sinking fund provisions for the 8 7/8% Series Preferred Stock require the Company to redeem all shares at par plus an amount equal to dividends accrued to the redemption date on the basis of 70.000 shares annually commencing on July,1996. The Company also has the non-cumulative right to redeem up to an equal amount of the respective number of shares annually, beginning in 1996, at par plus an amount equal to dividends accrued to the redemption date. The Sking-fund requirement for the five-year period ending December 31,2000 is $7.0 million annually beginning in 1996. The Company redeemed $14 million of these shares at par in 1996 pursuant to the mandatory and optional sinking fund provisions. Sinking fund provisions for the Flexible Money Market Preferred Stock, Series A,7.999%, require the Company to redeem all shares at par plus an amount equal to dividends accrued to the redemption date on the basis of 90,000 shares annually beginning in October 1999. The Company also has the non cumulative right to redeem up to an equal number of shares annually beginning in 1999, at par plus an amount equal to dividends accrued to the redemption date. The sinking fund requirement for the five-year period ending December 31,2000, is $9 million annually beginning in 1999. In 1995, the Company purchased 54,725 shares on the open market that may be used to reduce the sinking fund requirement in 1999. Interim Financing and Credit Agreements The Company uses funds obtained from short-term boirowing to provide initial financing for construction and other corporate purposes. To support its short term capital requirements, on October 23,1996, the Company entered into a 5125 million revolving credit facility with several banks, with The First National Bank of Boston and The Bank of New York acting as agents for the lenders. The credit facility has two tranches which consist of: a $75 million 364-day revolving credit facility which matures on Oct3ber 22,1997 and a $50-million 3-year revolving credit facility which matures on October 23,1999. Both credit facilities require annual fees on the unused portion of the credit lines which are based on the Company's credit ratings and allow for various borrowing options including LIBOR priced, base rate-priced and competitive bid priced loans. The amount of outstanding short-term borrowing will fluctuate with day-to-day operational needs, the timing oflong term financing, and market conditions. There was $7.5 million outstanding as of December 31,1996, under this credit agreement. Note 8i Quarterly Financial Data (Unaudited) Quarterly revenue variability increased after January 1,1995, when the ARP replaced MPUC rules prescribing different revenue allocations for energy sold in winter versus non-winter months. Twelve-month results are unaffected by this reporting change. 4 G:\ WORD \BLP\l996-10K. DOC 79
4 Unaudited, consolidated quarterly financial data pertaining to the results of operations are shown below. (Dollars in thousands, except per-share amounts) Ouarter ended March 31 June 30 Sentember 30 December 31 1996 Electric operating revenues $274,139 $216,358 $228,987 $247,562 Operating income 39,601 20,495 14.667 32,909 Net income 27,857 9,096 3,392 19,884 Earnings per common share * .78 .20 .04 .54 1995 Electric operating revenues $263,312 $202,584 $217,872 $232,248 Operating income 39,361 4,052 22,169 20,277 Net income (loss) 26,376 (8,619) 10,400 9,823 Earnings (loss) per common share * .71 L3_4) .24 la 1994 Electric operating revenues $241,026 $212,336 $233,543 $217,978 Operating income 26,233 26,609 25,652 11,7.42 , Net income (loss) 11,416 15,307 14,083 (64,071) Earnings (loss) per common share * .27 .39 .35 (2.06)
- Earnings per share are computed using the weighted average number of common shares outstanding during the applicable quarter.
G:\ WORD \BLpil996-10K. DOC 80
t lism3. CilANGES IN AND DISAGREEMENTS WITil ACCOUNTANTS ON ACCOUNTING AND DNANCI AL I)lSCL OSUllE. Not applicable. , G:\ WORD \BLP\l996-10K. DOC 81
PART Ill Item 10. DIRECTORS AND EXECUTIVE OFFICERS QF TIIE REGISIQ;, ,5 See the information under the heading " Election of Directors" in the registrant's definitive proxy material for its annual meeting of shareholders to be held on May 15,1097, and item 4.1, Esenttire QFicers of the Registrant, above, both of which are hereby incorporated herein by reference. Item 11. EXECUTIVE COS1PENSATION. See the information under the heading " Board Committees, Meetings and Compensation" and te heading " Executive Compensation" in the registrant's definitive proxy material for its annual meeting of shareholders to be held on May 15,1997, which is hereby incorporated herein by reference. Item 12. SECURITY OWNERbillP OF CERTAIN HENEFICIAL OWNERS AND N1 ANAGEN 1ENT. See the information under the heading " Security Ownership" in the registrant's definitive pr~ ..y material for its annual meeting of shareholders to be held on May 15,1997, which is hereby incorporated herein by reference. Item 13 CERTAIN RELATIONSillPS AND RELATED TRANSACTIONS. " See the information under the headirig, " Board Cc mmittees, Meetings and Compensation" in the registrant's definitive proxy material for its annual meeting of shareholders to be held on May 15,1997, which is hereby incorporated herein by reference. G:\ WORD \BLP\l996-10K. DOC 82
PART IV Item 14. EXilllllTS, FINANCIAL STATEMENT SCIIEDULES, Ahi) REPORTS ON FORM 8-K. 3 (a) List of documents filed as part of this report: (1) Financial Statements and Supplementary Data See the Index to Financial Statements and Schedules ure -Item 8 in Part II hereof, where these documents are listed, on page 42. (2) Exhibits - see (c) below. (b) Benorts on Form 8-K. The Company filed the following reports on Form 8-K during the last [ quarter of 1996 and thereafter to date: Date of Report Items Renorted December 4,1996 Item 5 s \ O The Company reported on Maine Yankee Atomic Power Company's response to the NRC's Independent Safety Assessment. b) The Board of Directors of Connecticut Yankee Atomic Power Company voted to permanently discontinue power operation at the Connecticut Yankee plant at Haddam, Connecticut ("CY Plant"), g and to decommission the CY Plant, for reasons based on the economics of continuing to operate the umt. Date of Renort Items Renorted December 18,1996 Item 5 a) On December 20,1996, Maine Yankee Atomic Power Company announced that its President and Chief Executive Officer Charles D. Frizzle, had submitted his registration to facilitate a broad restructuring effort. b) On December 18,1996, Moody's Investors Service placed the credit ratings of the Company under review for possible downgrade. K Date of Renort Items Renorted Decen.ber 31,1996 Item 5 a) The Company reported that on December 31,1996, the MPUC issued its Report and Recommended Plan on Electric Utility Industry Restructuring. G:\ WORD \BLP\1996-10K. DOC 83
b) The Company reported the iaspection of fuel assemblies and resolution of the cable-separation and associated issues at the Maine Yankee Atomic Power Company nuclear generating plant and that Maine Yankee and Entergy Corporation, a Louisiana based utility holding company and nuclear plant operator, announced the signing of a memorandum of understanding for Entergy to provide management services to Maine Yankee. Date of Report hems Reported January 29,1997 ltem 5 a) 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 " weaknesses that warrant increased NRC attention," but which are not severe enough to warrant a shut-down order, b) The Company reported on a Maine-based group which had announced its intention to start gathering signatures aimed at a new referendum to force a permanent shutdown of the Maine Yankee Atomic Power Company Plant. n s G:\ WORD \BLP\l996-10K. DOC 84 \ _--
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) or'the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Augusta, and State of Maine on the 27th day of March,1997. CENTRAL MAINE POWER COMPANY By C' i' N David E. Marsh Vice President, Corporate Services, Treasurer, and Chief Financial Officer G:\ WORD \BLP\1996-10K. DOC 84
- _ _ _ _ _ _ _ _ _ _ _ . 1
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated. Sienature litic Dme
) ~ President and Chief Executive Officer; March 41997 David T.Qiar(gan 9 Director .
(Principal Executive Officer) d Y. @ Vice President, Co orate Services, Treasurer, and Chie Financial Officer Marcha 1997 David E. Marsh (Principal Financial Officer) [/dc 8
- Comptroller Marcha7,1997 Michael W. Caro Trincip 1 Accounting Officer)
Y vL Chairman of the Board of Directors March 47,1997 a id M.J(yf ' AHI4 / ' M- ~" Vice Chairman of the Board of Directors Marchai,1997 Charles' . Abbott a- 4 44- Director Marcha7,1997 Cha'rle M. Chase YM irector Marchat,1997 E. f[
//O Director Marcha1,1997
. Fitzgerald C Director Marcha7,1997 Robe ardi 'r d /41/ Director Marcha7,1997 4 Pete J. I ih.
A4 AdV Willi J.Ryy 4 bM Director March:7,1997 A 'c h /Av Director Marchat,1997 KhthrynM. Weare Director March:7,1997 Ly jd. J. Wishcarnper 4 _ _ _ _ _ _ _ _ _ _ _ . l
o UNITED STATES SECURITIES AND EXCilANGE COMMISSION ExnIBIT 1(b) WASIIINGTON, D.C. 20549
), FORM 10-Q (Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF TIIE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30.1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF TIIE SECURITIES EXCIIANGE ACT OF 1934 For the transition period from to Commission file number 1-5139 CENTRAL M AINE POWER COMPANY (Exact name of registrant as specified in its charter) Incorporated in Maine 01-0042740 (State or otherjurisdiction of (I.R.S. Employer incorporation or organization) (Identification ~No.) 83 Edison Drive. Aucusta. Maine 04336 (Address of principal executive offices) (Zip Code) 207-623-3521 (Registrant's telephone number including area code) l (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Shares Outstanding as of October 31,1997 Common Stock, $5 Par Value 32,442,752 r:\quarterl\l0q\9-9710-q. doc {
m Central Maine Power Company INDEX Page No. Part I. Financial Information Consolidated Statement of Earnings for the Three Months Ended September 30,1997 and 1996 1 Consolidated Statement of Earnings for the Nine Months Ended September 30,1997, and 1996 2 t Consolidated Balance Sheet - September 30,1997 and December 31,1996: Assets 3 Stockholders' Investment and Liabilities 4 Consolidated Statement of Cash Flows for the Nine Months Ended September 30,1997 and 1996 5 Notes to Consolidated Financial Statements 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Part II. Other Information 26 I r:\quarterl\l0q\9-9710-q. doc l
-_- A
PART I- FINANCIAL INFORMATION Item 1. Financial Statements t o Central Maine Power Company CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) (Dollars in Thousands Except Per Share Amounts) For the Three Months Ended September 30. 1997 1996 ELECTRIC OPERATING REVENUES $226.134 $228.9_87 OPERATING EXPENSES Fuel Used for Company Generation 10,105 5,177 Purchased Power Energy 100,656 101,892 Capacity 29,300 28,471 Other Operation 51,634 49,073 Maintenance 8,721 9,760 Depreciation and Amortization 13,536 13,287 Federal and State Income Taxes (1,382) 1,790 Taxes Other Than Income Taxes 7.210 6.910 Total Operating Expenses 219.780 216.360 EQUITY IN EARNINGS OF ASSOCIATED COMPANIES 1.040 2.040 OPERATING INCOME 7.304 14.6_67 OTHER INCOME (EXPENSE) Allowance for Equity Funds Used During Construction 309 232 Other, Net 252 1,218 Income Taxes Applicable to Other Income (Expense) (183) (446) Toul Other Income (Expense) 378 1.004 INCOME BEFORE INTEREST CHARGES 7.772 15.671 INTEREST CHARGES Long-Term Debt 10,930 11,530 Other Interest 2,892 926 Allowance for Borrowed Funds Used During Construction (205) (177) Total Interest Charges 13.617 12.279 NET INCOME (LOSS) (5,845) 3,392 DIVIDENDS ON PREFERRED STOCK 1.897 2.207 EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (7.742) $ 1.185 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 32,442,752 32,442,752 EARNINGS (LOSS) PER SHARE OF COMMON STOCK $(0.24) $0.04 DIVIDENDS DECLARED PER 'iHARE OF COMMON STOCK $0.225 $0.225 The accompanying notes are an integral part of these financial statements, r:\quarterl\l0q\9-9710-q. doc 1
( Central Maine Power Comnany CONSOLIDATED STATEMENT OF EARNINGS (Unaudited) (Dollars in Thousands Except Per Share Amounts) For the Nine Months Ended September 30. I997 1996 ELECTRIC OPERATING REVENUES $704.575 $719.484 OPERATING EXPENSES Fuel Used for Company Generation 22,631 12,657 Purchased Power Energy 319,430 314,873 Capacity 89,244 77,524 Other Operation 144,901 131,767 Maintenance 23,344 25,282 Depreciation and Amortization 40,530 41,306 Federal and State income Taxes 4,495 25,726 Taxes Other Than income Taxes 21.296 20.725 Total Operating Expenses 665.871 649.860 EQUITY IN EARNINGS OF ASSOCIATED COMPANIES 5.084 5.139 OPERATING INCOME 43.788 74.763 OTIIER INCOME (EXPENSE) Allowance for Equity Funds Used During Construction 811 616 Other, Net 1,696 4,558 Income Taxes Applicable to Other Income (Expense) (754) (1.651) Total Other Income (Expense) 1.753 3.523 INCOME BEFORh INTEREST CHARGES 45.541 78.286 INTEREST CHARGES Long-Term Debt 33,272 35,544 Other Interest 5,193 2,874 Allowance for Borrowed Funds L' sed During Construction (567) (477) Total Interest Charges 37.898 37.941 NET INCOME 7,643 40,345 DIVIDENDS ON PREFERRED STOCK 6.312 7.244 EARNINGS APPLICABLE TO COMMON STOCK $ 1.331 $ 33.101 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 32,442,752 32,442,752 EARNINGS PER SHARE OF COMMON STOCK $0.04 $ 1.02 DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $0.675 $0.675 The accompanying notes are an integral part of these financial statements, r:\quarterl\l0q\9-9710-q. doc 2
l Central Maine Power Comnany CONSOLIDATED BALANCE SHEET c-(Dollars in Thousands) Sept. 30, Dec. 31, 1997 1996 (Unaudited) ASSETS ELECTRIC PROPERTY, at Original Cost $1,658,496 $1,644,434 Less: Accumulated Depreciation 626.152 598.415 Electric Property in Service 1,032,344 1,046,019 Construction Work in Progress 24,846 20,007 Net Nuclear Fuel 1.157 1.157 Net Electri. Property and Nuclear Fuel 1.058.347 1.067.183 INVESTMENTS IN ASSOCIATED COMPANIES, at Equity 76.148' 67.809 ' Net Electric Property, Net Nuclear Fuel and Investments in Associated Companies 1.134.495 1.134.992 CURRENT ASSETS Cash and Temporary Cash Investments 12,693 8,307 Accounts Receivable, Less Allowance for Uncollectible Accounts of $2,450 in 1997 and $4,177 in 1996 Service - Billed 70,018 84,396
- Unbilled 37,987 45,721 Other Accounts Receivable 11,447 17,517 Prcpaid Income Taxes - 3,254 264 inventories, at Average Cost Fuel Oil 3,130 9,256 Materials and Supplies 11,803 12,172 Funds on Deposit With Trustee 61,694 59,512 Prepayments and Other Current Assets 14.451 9.500 Total Current Assets 226.477 246.645 DEFERRED CHARGES AND OTHER ASSETS Recoverable Costs of Seabrook I and Abandoned Projects, 85,398 89,551 Net Regulatory Assets-Deferred Taxes 241,248 239,291 Yankee Atomic Purchase Power Contract 12,794 16,463 Connecticut Yankee Purchase Power Contract 38,587 45,769 Maine Yankee Purchase Power Contract 345,075 -
Other Deferred Charges and Other Assets 214.007 238.203 Deferred Charges and Other Assets, Net 937.109 629.277 TOTAL ASSETS $2.298.081 $2.010.914 The accompanying notes are an integral part of these financial statements. r:\quarterl\l0q\9-9710-q. doc 3
Central Maine Power Comnany CONSOLIDATED BALANCE SIIEET (Dollars in Thousands) Sept. 30, Dec. 31, 1997 19.96 (Unaudited) STOCKilOLDERS' INVESTMENT AND LIABILITIES CAPITALIZATION Common Stock Investment $ 491,011 $ 511,578 Preferred Stock 65,571 65,571 Redeemable Preferred Stock 39,528 53,528 Long-Term Obligations 476.397 587.987 Total Capitalization 1.072.507 1.218.664 CURRENT LIABILITIES AND INTERIM FINANCING Interim Financing 153,000 32,500 Sinking-Fund Requirements 16,210 9,375 Accounts Payable 80,551 93,197 Dividends Payable 9,202 9,512 Accrued Interest 9,423 11,610 Miscellaneous Current Liabilities 11.050 21.342 Total Current Liabilities and Interim Financing 279.445 177.536 COMMITMENTS AND Lun iiNGENCIES RESERVES AND DEFERRED CREDITS Accumulated Deferred Income Taxes 362,633 357,994 Unamortized Investment Tax Credits 30,901 31,988 Regulatory Liabilities-Deferred Taxes 53,026 52,616 Yankee Atomic Purchased Power Contract 12,794 16,463 Connecticut Yankee Purchased Power Contract 38,587 45,769 Maine Yankee Purchase Power Contract 345,075 - Other Reserves and Deferred Credits 103.113 109.884 Total Reserves and Deferred Credits 946.129 614.714 TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES $2.298.081 $2.010.914 The accompanying notes are an integral part of these financial statements. r:\quarterl\l0q\9-9710-q. doc 4
t Central Maine Power Comnany CONSOLIDATED STATEMENT OF CASil FLOWS (Unaudited)(Dollars in Thousands) (Note 1) For the Nine Months Ended September 30. 1997 1996 CASil FROM OPERATIONS Net income $ 7,643 5 40,345 Items Not Requiring (Not Providing) Cash: Depreciation 33,078 32,978 Amortization 25,631 26,597 Deferred Income Taxes and Investment Tax Credits, Net 871 4,524 Allowance for Equity Funds Used During Construction (811) (616) Changes in Certain Assets and Liabilities: Accounts Receivable 28,182 26,120 Accrued inccme Taxes (2.990) (4,628) Other Current Assets (4,951) (4,531) Inventories 6,495 (235) Accounts Payable (7,991) (27,792) Accrued Interest (2,187) (3,032) Miscellaneous Current Liabilities (10,283) 3.512 Deferred Energy-Management Costs (497) (3,497) Maine Yankee Outage Accrual (10,350) 6,210 Purchased-Power Contracts - (75) Other, Net 9.621 4.480 Net Cash Provided By Operating Activities 71.461 100.360 INVE. TING ACTIVITIES Construction Expenditures (29,690) (31,217) Changes in Accounts Payable -Investing Activities (4,655) (869) Investments in Associated Companies (4.915) 0 2.026) Net Cash Used by Investing Activities (39.260) (44.112) FINANCING ACTIVITIES issuances: Medium-Term Notes 10,000 Short Term Revolving Credit Agreement 42,500 Redemptions: Preferred Stock (14,000) (14,000) Mortgage Bonds (11,500)
) Medium Term Notes (25,000) (29,000)
Other Long Term Obligations, net (595) (860) Dividends: Common Stock (21,915) (21,916) Preferred Stock (6,623) (7,556) Funds on Deposit With Trustee (2.182) (29.669) Net Cash Used by Financing Activities (27,815) (104.501) Net Increase (Decrease) In Cash 4,386 (48,253) CASil AND CASil EQUIVALENTS, BEGINNING OF PERIOD 8.307 57.677 CASil AND CASil EQUIVALENTS, END OF PERIOD $ I2.643 $ , 9 424 The accompanying notes are an integral part of %e financial statements. r:\quarterl\l0q\9-9710-q. doc 5
k Central Maine Power Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 1. Summary of Significant Accounting Policies l
Certain infonnation in footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles has been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. liowever, the disclosures herein should be read with the Annual Report on Form 10-K for the year ended December 31,1996 (" Form 10-K"), and are adequate to make the information presented herein not misleading. The consolidated financial statements include the accounts of Central Maine Power Company (the " Company") and its 78 percent-owned subsidiary, Maine Electric Power Company, Inc. ("MEPCO"). The Company accounts for its investments in associated companies not subject to consolidation using the equity method. The Company's significant accounting policies are contained in Note 1 of Notes to Consolidated Financial Statements in the Company's Form 10-K. For interim accounting periods the policies are the same. The interim financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. All such adjustments are of a normal recurring nature. The adoption of the Alternative Rate Plan ("ARP"), effective January 1,1995, eliminated the reconcilable fuel clause used under traditional rate-of-return regulation to account for and collect fuel and purchased-power energy costs. Fuel revenues are now recorded as they are billed rather than deferred and reflected in revenues over time periods established by the Maine Public Utilities Commission ("MPUC"). The elimination of the fuel-clause results in higher revenues in the winter months. For purposes of the statement of cash flows, the Company considers all highly liquid instruments purchased having maturities of three months or less to be cash equivalents. Supplemental Cash Flow Disclosure - Cash paid for the nine months ended September 30,1997 and 1996 for interest, net of amounts capitalized, amounted to $37.6 million and $38.4 million, respectively. Income taxes paid, net of amounts refunded, amounted to $7.4 million and $27.5 million for the nine months ended September 30,1997 and 1996. The Company incurred no new capital lease obligations in either period. Nuclear Plant Shutdown Costs - When a nuclear plant is shut down and the amount of future liabilities is determined, the resulting liability is established on the Company books with an offsetting Regulatory Acset if the payment of the liabihty is provided for in rates. The liability is subsequently reduced as easts are paid, which is generally over the remaining life of the plant but could be another period based upon Federal Energy Regulatory Commission ("FERC") determination. r:\quarterl\l0q\9-9710-q. doc 6
. 2. Impact of New Accounting Standards In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No.128, " Earnings per Share." This statement, which is effective for fiscal years ending after December 15,1997, establishes simplified standards for computing and presenting earnings per share ("EPS"). It requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and disclosure of the calculation of each EPS amount. The Company anticipates that adoption of the standard will not have a significant impact on its reported EPS. In June 1997, the FASB issued SFAS No.130, " Reporting Comprehensive Incene." This statement, which is also effective for fiscal years beginning after December 15,1997, establishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. The Company , anticipates that adoption of the standard will not have a significant impact on its financial statements.
- 3. Commitments and Contingencies The Company has ownership interests in f.ve nuclear generating plants in New England. The largest is a 38-percent equity interest in Maine Yankee Atomic Power Company (" Maine Yankee"), which, as discussed below, has permanently shut down its plant located in Wiseasset, Maine. In addition, the Company owns a 9.5 percen* equity interest in Yankee Atomic Electric Company (" Yankee Atomic"), which has permanently shut down its plant located in Rowe, Massachusetts, a 6 percent equity interest in Connecticut Yankee Atomic Power Company
(" Connecticut Yankee"), discussed below, which has permanently shut down its plant in lladdam, Connecticut, and a 4 percent equity interest in Vermont Yankee Nuclear Power Corporation (" Vermont Yankee"), which owns an operating plant in Vernon, Vermont in addition, pursuant to ajoint ownership agreement, the Company has a 2.5 percent direct ownership interest in the Millstone 3 nuclear unit (" Millstone 3") in Waterford, Connecticut, which has been off-line for regulatory reasons cince March 31,1996. Maine Yankee Atomic Power Company - As previously reported, the Maine Yankee nuclear generating plant at Wiscasset, Maine (the " Plant") was shut down December 6,1996, and was expected to remain off-line at least uniil August 1997. However, on May 27,1997, the Board of Directors of Maine Yankee voted to reduce maintenance-and-repair spending at the Plant and announced that Maine Yankee was considering permanent closure based on economic concerns and uncertainty about operation of the Plant; and on the same day the Maine Yankee Board indicated that it had also been exploring a sale of the Plant to PECO Energy Company ("PECO"). On August 6,1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at the Plant and begin the process of decommissioning the Plant. The formal vote followed an announcement by the Maine Yankee Board on August 1,1997, that Maine Yankee and PECO, after months of negotiations, had been unable to arrive at "a mutually beneficial framework for agreement" on a sale of the Plant to PECO. The decision to shut down the Plant was based on an economic analysis of the costs, risks and uncertainties associated with operating the Plant compared to those associated with closing and decommissioning the Plant. For a detailed discussion of the background of the permanent shutdown, including events leading to r:\quarterl\l0q\9-9710-q. doc 7
the Plant's being placed on the " watch list" by the Nuclear Regulatory Commission ("NRC") and , other significant regulatory and operational issues, management changes, and investigations of Maine Yankee by the NRC and the United States Department of Justice, see the Company's Annual Report on Form 10-K for the year ended Secember 31,1996, its Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,1997 and June 30,1997, and its Current Report on Form 8-K dated September 2,1997. The Company's 38-percent ownership interest in Maine Yankee's common equity amounted to
$29.0 million as of September 30,1997, and under its Power Contract and Additional Power Contract with Maine Yankee the Company is responsible for 38 percent of the costs of decommissioning the Plant. Maine Yankee's most recent estimate of the cost of decommissioning is $380.4 million, based on a 1997 study by an independent engineering consultant, plus estimated costs ofinterim spent-fuel storage of $127.6 million, for a total estimated cost of $508 million (in 1997 dollars). The previous estimate for decommissioning, by the same consultant, was $316.6 million (in 1993 dollars), which resulted in approximately $14.9 million being collected annually from Maine Yankee's sponsors pursuant to a 1994 FERC rate order. Through September 30,1997 Maine Yankee had collected approximately $194.4 million for its decommissioning obligations.
On November 5,1997, Maine Yankee submitted the new cost estimate to the FERC as part of a rate case reflecting the fact that the Plant is no longer operating and has entered the decontmissioning phase. If the FERC accepts the new estimate, the amount of Maine Yankee's collections for decommissioning would rise from the $14.9 million previously allowed by the FERC to approximately $36 million per year. The Company expects several interested parties to intervene in the FERC proceeding, including state regulators, and cannot predict the result of the FERC case. As of September 1,1997, Maine Yankee has estimated the sum of the future payments for the closing, decommissioning and recovery of the remaining investment in Maine Yankee to be approximately $930 million, of which the Company's 38-percent share would be approximetely
$353 million. Legislation enacted in Maine this year calling for restructuring the electric utility industry provides for recovery of decommissioning costs, to the extent allowed by federal regulation through the rates charged by the transmission-and-distribution companies. Based on the legislation and regulatory precedent established with Yankee Atomic, which was similarly shut down, the Company believes that it is entitled to recover substantially all ofits share of such costs from its customers and therefore has recorded a regulatory asset and liability in the amount of $345 million on its consolidated Salance sheet, which is the $353 million discussed above net of the September cost-of-service payment to Maine Yankee. The Company's current annual revenues include recovery of approximately $75 million in Maine Yankee costs predicated on an operating Maine Yankee Plant.
On September 2,1997, the MPUC released the report of a consultant it had retained to perform a management audit of Maine Yankee for the period January 1,1994 to June 30,1997. The report contained both positive and negative conclusions, the latter including: that Maine Yankee's decision in December 1996 to proceed with the steps necessary to restart the Plant was
" imprudent"; that Maine Yankee's May 27,1997 decision to reduce restart expenses while exploring a possible sale of the Plant was " inappropriate," based on the consultant's fmding that a more objective and comprehensive competitive analysis at that time "might have indicated a r:\quarterl\l0q\9-9710-q. doc 8 l
benefit for restarting" the Plant; and that those decisions resulted in Maine Yankee incurring
' $95.9 million in " unreasonable" costs. On October 24,1997, the MPUC issued a Notice of investigation initiating an investigation of the prudence of the Maine Yankee shutdown decision -
and of the operation of Maine Yankee prior to the shutdown, and announced that it had directed its consultant to extend its review to include those areas. The Company does not know how the MPUC plans to use the consultant's report or any negative conclusions ofits investigation, but believes the report's negative conclusions are unfounded and may be contradictory. The Company has been charging its share of the Maine Yankee expenses to income and believes it would have substantial constitutional and jurisdictional grounds to challenge any effort in an MPUC proceeding to alter wholesale Maine Yankee rates made efTective by the FERC. On Wyember 7,1997, Maine Yankee initiated a legal challenge to the MPUC investigation in the Maine Supreme Judicial Court alleging that such an investigation falls exclusively within the jurisdiction of the FERC, and that the MPUC's investigation is therefore barred on constitutional grounds. The Company filed a similar legal challenge on the same day. The Company has been incurring substantial costs as its 38-percent share of Maine Yankee costs, as well as additional costs for replacement power with the Plant out of service. For the nine months ended September 30,1997 such costs amounted to approximately $102.3 million for the Company, as follows: $50.7 million due to basic operations and maintenance costs, $39.2 million for replacement power costs and $12.4 million associated with incremental costs of operations and maintenance. The Maine Yankee Board's decision to close the Plant should mitigate the costs the Company would otherwise incur in 1997 through a phasing down of Maine Yankee's operations and maintenance costs, with Maine Yankee's workforce having been reduced from approximately 475 to 239 employees as of October 31,1997, but it will not reduce the need to buy replacement energy and capacity. The amount of cost for replacement power and energy will vary during the year based on the Company's power requirements and market conditions, but the Company expects such costs to be within a range of approximately $5.0 million to $6.0 million per month during the remainder of 1997, based on current energy and capacity needs and market ' conditions. Under the electric utility restructuring legislation enacted by the Maine Legislatu:e in May 1997 the Company's obligation to provide replacement power will terminate on March 1, 2000, with its other power-supply obligations. In the interim, the previously reported termination of a major non-utility generator contract should result in savings to the Company at an annual rate of cpproximately $25 million commencing November 1,1997. The impact of the nuclear-related costs on the Company will be a major obstacle to achieving satisfactory results in 1997, despite the approximately $75 million in annual Maine Yankee-related costs imbedded in the current determination of the Company's required revenues for ratemaking purposes and despite success in controlling other operating costs. The higher costs incurred to date associated with nuclear plant investments and the costs anticipated to replace energy and capacity needs for the remainder of the year, as a result of the permanent shutdown of the Maine Yankee Plant, will reduce current year earnings to a level that will trigger the low-earnings bandwidth provision of the Company's ARP. That provision is activated if actual earnings for 1997 are outside a bandwidth of 350 basis points above or below a 10.68-percent rate-of-return allowance. A return below the low end of the range provides for additional revenue through rates equal to one half the difference between the actual earned rate of return and the 7.18-percent (10.68 minus 350 basis points) low end of the bandwidth. While the Company believes the mechanism will be triggered in 1997, it cannot predict the amount of additional revenues that may ultimately result. In any case, under the ARP the Company would not be r:\quarterl\l0q\9-9710-q. doc 9
likely to start to receive any additional tevenues before July 1,1998, in addition, the Company , has affirmed its public statements that it would strive to limit its electricity price increases under the ARP to a level at or below the rate ofinflation through 1999, the last year of the term of the ARP, in order to attain its goal of price stability. The Company believes stable prices are essential to its ability to retain and promote electricity sales. Maine Yankee has entered into agreements with the holders ofits outstanding First Mortgage Bonds and its lender banks under which the bondholders and banks agreed that they would not assert that the voluntary shutdown of the Plant constituted a covenant violation under the Company's First Mortgage Indenture or its two bank credit agreements and agreed to continue to n.aintain Maine Yankee's level of bank borrowings at $67 million, out of aggregate commitments of $85 million, which Maine Yankee considers adequate for its foreseeable needs. The agreements, as extended in October 1997, terminate January 15,1998, by which date Maine Yankee must reach agreement on restructured debt arrangements reflecting its decommissioning status. At the same time, Maine Yankee and its sponsors, including the Company, extended their agreement to amend Maine Yankee's Power Contracts and Additional Power Contracts, effective upon approval by the FERC, to clarify and confirm the sponsors' obligations to continue to pay their shares of Maine Yankee's costs during the decommissioning process. Maine Yankee filed the contract amendments with the FERC as part ofits rate proceeding requesting an effective date of January 15,1998. Higher nuclear-related costs are affecting other stockholders of Maine Yankee in varying degrees. Bangor Hydro-Electric Company, a Maine-based 7-percent stockholder, has cited its
" deteriorating" financial condition, suspended its common stock dividend, and is pursuing rate relief. Maine Public Service Company, a 5-percent stockholder, cited problems in satisfying financial covenants in loan documents and reduced its common-stock dividend substantially in early March 1997. Northeast Utilities (20-percent stock ownership through three subsidiaries),
which is 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, has implemented an indefinite suspension ofits quarterly common-stock dividends. A default by a Maine Yankee stc,ckholder in making payments under its Power Contract or Capital Funds Agreement could have a material adverse effect on Maine Yankee, depending on the magnitude of the default, and would constitute a default under Maine Yankee's bond indenture and its two major credit agreements unless cured within applicable grace periods by the defaulting stockholder or other stockholders. The Company cannot predict, however, what effect, if any, the financial di31culties being experienced by some Maine Yankee stockholders will have on Maine Yankee or the Company. Connecticut Yankee - On December 4,1996, the Board of Directors of Connecticut Yankee Atomic Power Company voted to permanently shut down the Connecticut Yankee plant, for economic reasons, and to decommission the unit, which had not operated since July of 1996. The Company has a 6-percent equity interest in Connecticut Yankee, totaling approximately $7.0 million at September 30,1997. The Company incurred replacement power costs of approximately $3.6 million during the nine months ended September 30,1997. Based on cost estimates provided by Connecticut Yankee the Company determined its share of the cost of Connecticut Yankee's continued compliance with regulatory requirements, recovery ofits plant investments, decommissioning and closing the plant to be approximately $38.6 million and has r:\quarterl\10q\9-9710-q. doc 10
- _ _ _ \
recorded a regulatory asset and corresponding liability in that amount on its consolidated balance
, sheet. The Company is currently recovering through rates an amount adequate to recover these expenses.
Millstone Unit No. 3 - The Company has a 2.5 percent direct ownership interest in Millstone Unit No. 3, which is operated by Northeast Utilities. This facility has been off-line since April 1996 due to NRC concerns regarding license requirements and the Company cannot predict when it will return to service. Millstone Unit No. 3, along with two other units at the same site owned by Northeast Utilities, is on the NRC's " watch list" in " Category 3," which requires formal NRC action before a unit can be restarted. The Company incurred replacement power costs related to Millstone Unit No. 3 of approximately $3.6 million during the nine months ended September 30,1997. For a discussion of a lawsuit and arbitration claim filed by the Company and other minority owners of Millstone Unit No. 3 against the operators of the unit, sec
" Millstone Unit No. 3 Litigation," below.
Lecal and Environmental Matters - The Company is subject to regulation by federal and state authorities with respect to air and water quality, the handling and disposal of toxic substances and hazardous and solid wastes, and the handling and use of chemical products. Electric utility companies generally use or generate in their operations a range of potentially hazardous products and by products that are the focus of such regulation. The Company believes that its current practices and operations are in compliance with all existing environmental laws except for such non-compliaa - as would not have a material adverse effect on the Company's financial position. The Company u; 'm its overall compliance and measures the liability quarterly by assessing a range of reasonably likely costs for each identified site using currently available information, including existing technology, presently enacted laws and regulations, experience gained at similar sites, and the probable level ofinvolvement and financial condition of other potentially responsible parties. These estimates include costs for site investigations, remediation, operation and maintenance, monitoring and site closure. New and changing environmental requirements could hinder the construction andkr modification of generating units, transmission and distribution lines, substations and other facilities, and could raise operating costs significantly. As a result, the Company may incur significant additional environmental costs, greater than amounts reserved, in connection with the generation and transmission of electricity and the storage, transportation and disposal of by-products and wastes. The Company may also encounter significantly increased costs to remedy the environmental effects of prior waste handling activities. The cumulative long-temi cost impact ofincreasingly stringent environmental requirements cannot accurately be estimated. On October 10,1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, " Environmental Remediation Liabilities" (" SOP"). The principal objective of the SOP is to improve the manner in which existing authoritative accounting literature is applied by entities to specific situations of recognizing, measuring and disclosing environmental remediation liabilities. The SOP became effective January 1,1997. This SOP has not had a material impact on the company's financial position or results of operations. The Company has recorded a liability, based upon currently available information, for what it believes are the estimated environmental remediation costs that the Company expects to incur for identified waste disposal sites. In most cases, additional future environmental cleanup costs are r:\quarterl\l0q\9-9710-q. doc 11
not reasonably estimatable due to a number of factors, including the unknown magr.itude of
, possible contamination, the appropriate remediation methods, the possible effects of future legislation or regulation and the possible effects of technological changes. At September 30, 1997, the liability recorded by the Company for its estimated environmental ren ediation costs amounted to $2.2 million, which management has determined t. ie the most probable amount within the range of $2.2 million to $10 million. Such costs may be higher if the Company is found to be responsible for cleanup costs at additional sites or identifiable possible outcomes change.
As discussed in Note 4 of Notes to Consolidated Financial Statements in the Company's Form 10-K, in connection with one such proceeding, the Company has been named a PRP and has been incurring costs to determine the best method of cleaning up an Augusta, Maine, site formerly owned by a salvage company and identified by the Environmental Protection Agency as containing soil contaminated by polychlorinated biphenyls from equipment originally owned by the Company. The Company believes its share of the remaining costs of the cleanup of that site could total approximately $1.0 million to $2.3 million. This estimate is net of an agreed partial insurance recovery and a 1993 court-ordered contribution of 41 percent from Westinghouse Electric Corp., but does not reflect any possible contributions from other insurance carriers the Company has sued or from other parties. The Company has recorded an estimated liability of
$1.0 million for tha' ite which is included in the total $2.2 million reserve discussed above, and an equal regulator, met. <cJ ' s na accounting order to defer such costs and the anticipated ratemaking recovery otan t . when ultimately paid. In addition, the Company has deferred, as a regulatory asset, $8.6 million of costs incurred in connection with that site through September 30,1997.
Millstone Unit No. 3 Litication - On August 7,1997, the Company and other minority owners of Millstone Unit No. 3 filed suit in Massachusetts Superior Court and initiated an arbitration claim against Northeast Utilities, its trustees, and two ofits subsidiaries, alleging mismanagement of the unit by the defendants. The minority owners are seeking to recover their additional costs resulting from such mismanagement, including their replacement power costs. The Company cannot predict the outcome of the litigation and arbitration. Proposed Federal Income Tm Adiustments_- On September 3,1997, the Company received from the Internal Revenue Serv ce (" IRS") a Revenue Agent's Report summarizing all adjustments proposed by the IRS as a result ofits audit of the Company's federal income tax returns for the years 1992 through 1994, and the Company has received a notice of deficiency relating to the proposed disallowances. There are two significant disallowances among those proposed by the IRS. The first is a disallowance of the Company's write-off of the under-collected balance of fuel and purchased power costs and the unrecovered balance ofits unbilled Electric Revenue Adjustment Mechanism ("ERAM") revenues, both as of December 31,1994, which were charged to income in 1994 in connection with the adoption of the ARP effective January 1,1995. The second major adjustment would disallow the Company's 1994 deduction of the cost of the buyout of the Fairfield Energy Venture purchased-power contract by the Company in 1994. The aggregate tax impact, including both federal and state taxes, of the unresolved issues amounts to approximately $39.0 million, over 90 percent of which is associated with the two major disallowances. The two major disallowances relate largely to the timing of the deductions and would not affect income except for the cumulative interest impact which, through September 30, 1997, amounted to $11.7 million, or a decrease in net income of $7.0 million, and which is r:\quarterl\l0q\9-9710-q. doc 12
expected to incre:se interest expense approximately $433.3 thousand per month until either the tax deficiency is paid er the issues are resolved in favor of the Company, in which case no l interest is due, if the IRS were to prevail, the Company believes the deductions would be i amortized over periods of up to twenty, post-1994, tax years. The Company believes its tax treatment of the unresolved issues was proper and intends to contest the proposed adjustments vigorously, and as a result the potential interest has not been accrued. The Company cannot I predict the results ofits planned appeals. In addition, the Comn y incurred $1.1 million of income tax expense related to settlements of uncontested items in connection with the 1992-1994 IRS audits, and amended return adjustments for 1995 and 1996. 4 Regulatory and Legislative Matters Alternative Rate Plan - The MPUC approved the Company's Alternative Rate Plan ("ARP") effective January 1,1995. Please refer to Note 3 of Notes to Consolidated Financial Statements included in the Company's Form 10-K for the year ended December 31,1996 for a detailed description. The ARP was established in response to an order by the MPUC to develop a five-year plan containing price-cap, profit-sharing, and pricing-flexibility components. Although the ARP is a major reform, the MPUC is continuing to regtdate the Company's operations and prices, provide for continued recovery of deferred costs and specify a range for its rate of return. The Company believes, as stated in the MPUC's order approving the ARP, that operation under the ARP continues to meet the criteria of Statement of Financial Accounting Standards No. 71,
" Accounting for the Effects of Certain Types of Regulation" ("SFAS No. 71"). In its order, the MPUC reaffirmed the apnlicability of previous accounting orders allowing the Company to reflect amounts as deferred charges and regulatory assets. As a result, the Company will continue to apply the provisions of SFAS No. 71 to its accounting transactions and in its future financial statements. See " Meeting the Requirements of SFAS No. 71", below, in this Note 4.
s The ARP contains a mechanism that provides price-caps on the Company's retail rates to increase annually on July 1, commencing July 1,1995, by a percentage combining (1) a price index, (2) a productivity offset, (3) a sharing mechanism, and (4) flow-through items and mandated costs. The price cap applies to all of the Company's retail rates, including the Company's fuel-and-purchased power cost, which previously had been treated separately. Under the ARP, fuel expense is no longer subject to reconciliation or specific rate recovery, but is subject to the annual indexed price-cap changes. The Company believes the ARP provides the benefits of needed pricing flexibility to set prices between defined floor and ceiling levels in three service categories (1) existing customer classes, (2) new customer classes for optional targeted services, and (3) special rate contracts. The Company believes that the added flexibility is positioning it more favorably to meet the competition from other energy sources that has ewded segments ofits customer base. Some price adjustments can be implemented upon 30-days' notice by the Company, while certain others are subject to expedited review by the MPUC. The Company has utilized this feature in providing new rates to approximately 25,000 customers representing approximately 40 percent of annual kilowatt-hour sales and 27 percent of service-area revenues. These reductions in rates were offered to customers after consideration of associated NUG cost reductions, savings from further NUG consolidations and other general cost reductions. s r:\quarterl\l0q\9-9710-q. doc 13
The ARP also contains provisions to protect the Company and ratepayers against unforeseen '
, adverse results from its operation. These include review by the MPUC if the Company's actual return on equity falls outside a designated range, a mid-period review of the ARP by the MPUC in 1997 (including possible modification or termination), and a " final" review by the MPUC in 1999 to determine whether or with what changes the ARP should continue after 1999. The Company's 1997 compliance filing and mid-period review filing submitted in March 1997 proposed no significant change to the ARP. On June 25, the MPUC approved a partial stipulation which allowed a 1.1% increase in price caps effective July 1,1997, made minor modifications in the parameters for pricing flexibility, and increased the midpoint return on equity for the earnings sharing calculation to 11.5% for 1998. No other significant changes were mat to the ARP as a result of the 1997 review.
While the ARP provides the Company with an expanded opportunity to be rewarded for efficiency, it also presents the risk of reduced rates of return if costs rise unexpectedly, like those that have resulted from the recent outages and shutdown of the Maine Yankee plant, or if revenues from sales decline or are not adequate to fund costs. The Company believes the ARP continues b be a competitive advantage for the Company. Restructurine Lecislation and Divestiture of Generation Assets - On May 29,1997, the Governor of Maine signed into law a bill enacted by the Maine Legislature that will restructure the electric utility industry in Maine by March 1,2000. The principal restructuring provisions of the legislation provide for customers to have direct retail access to generation services and for deregulation of competitive electricity providers commencing March 1,2000, with transmission-and-distribution companies continuing to be regulated by the MPUC. By that date, subject to possible extensions of ume granted by the MPUC to improve the sale value of generation assets, investor-owned utilities are required to divest all generation assets and generation-related business activities, with two major exceptions: (1) non-utility generator contracts with qualifying facilities and contracts with demand-side management or conservation providers, brokers or hosts; and (2) ownership interests in nuclear power plants. However, the MPUC can require the Company to divest its interest in Maine Yankee on or after January 1,2009. The Company has submitted its plan to divest its generation 7.ssets to the MPUC, as required by the legislation, and is proceeding on a schedule calling for a purchase-and-sale agreement to be executed with the successful bidder or bidders in the first quarter of 1998 and a closing in September 1998. The bill also requires investor-owned utilities, after February 28,2000, to sell their rights to the capacity and energy from all generation assets, including the purchased-power contracts that had not previously been divested pursuant to the legislation, with certain minor exceptions. The undepreciated book value for the Company's generation plant assets at December 31,1996 was approximately $502 million. Meeting the Requirements of SFAS No. 71 The Company continues to meet the requirements of SFAS No. 71. The standard provides specialized accounting for regulated enterprises, which requires recognition of" regulatory" assets and liabilities that enterprises in general could not record. Examples of regulatory assets include deferred income taxes associated with previously flowed through items, NUG buyout costs, losses on abandoned plants, deferral of postemployment benefit costs, and losses on debt refinancing. If an entity no longer meets the requirements of SFAS No. 71, then regulatory assets and liabilities must be written off. r:\quarterl\l0q\9-9710-q. doc 14
, 'I he ARP provides incentive-based rates intended to recover the cost of service plus a rate of return on the Company's investment together with a sharing of the costs or earnings between ratepayers and the shareholders should the earnings be less than or exceed a target rate of return. The Company has received recognition from the MPUC that the rates implemented as a result of the ARP continue to provide specific recovery of costs deferred in prior periods. The recent legislation enacted in Maine associated with industry restructuring specifically addressed the issue cf cost recovery of regulatory assets stranded as a result ofindustry restructuring. Specifically, the legislation requires the MPUC, when retail access begins, to provide a " reasonable opportunity" for the recovery of stranded costs through the rates of the transmission-and-distribution company, comparable to the utility's opportunity to recover stranded costs before the implementation of retail access under the legislation. As provided for in EITF 97-4, " Deregulation of the Pricing of Electricity," the Company will continue to record regulatory assets in a manner consistent with SFAS No. 71 as long as future recovery is probable since the Maine legislation provides the opportunity to recover regulatory assets including stranded costs through the rates of the transmission and distribution company. The Company anticipates that once a detailed plan for deregulation of generation is known, the application of SFAS No. 71 to the unregulated generation segment will no longer apply and the Company will be required to discontinue SFAS No. 71 for any remaining generation segment ofits business. The Company further anticipates, based on current generally accepted accounti?g principles, that SFAS No. 71 will continue to apply to the regulated distribution and transmission segments ofits business.
- 5. Debt Financing At the annual meeting of the stockholders of the Company on May 15,1997, the holders of the Company's outstanding preferred stock consented to the issuance of $350 million in principal amount of the Company's Medium-Term Notes in addition to the $150 million in principal amount to which they had previously consented. This expansion of the Medium-Term Note program is being implemented to increase the Company's financing flexibility in anticipation of tructuring and increased competition. As of September 30,1997, $43 million of Medium-n Notes were outstanding which, under the terms of the program, will permit issuance of an Gditional $457 million of such notes. The Company also had $50 million outstanding as of September 30,1997 under the 364-day revolving credit facility with a group of banks.
r:\quarterl\l0q\9-9710-q. doc 15
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This discussion contains forecast information items that are " forward looking statements" as dermed in the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hecof. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers are also urged to carefully review and consider the various disclosures made by the Company which attempt to advise interested parties of the facts which affect the Company's business. Factors that could cause actual results to differ materially include, among other matters, the permanent closure and decommissioning of the Maine Yankee nuclear generating plant and resulting regulatory proceedings; the actual costs of decommissioning the Maine Yankee plant; outages at the other generating units in which the Company holds interests; electric utility restructuring, including the ongoing state and federal activities; future ecenomic conditions; earnings-retention and dividend-payout policies; developments in the legislative, regulatory, and competitive environments in which the Company operates; and other circumstances that could affect anticipated revenues and costs, such as unscheduled maintenance or repair requirements at nuclear plants and other facilities, and compliance with laws and regulations. Operating Results The third quarter of 1997 generated a net loss of $5.8 million compared to net income of $3.4 million for the corresponding period in 1996. Year-to-date net income was $7.6 million versus
$40.3 million for the 1996 period. The loss applicable to common stock was $7.7 million or
$0.24 per share for the third quarter of 1997 compared to earnings of $1.2 million or $0.04 per share for the comparable period in 1996. Year-to-date earnings applicable to common stock were
$1.3 million or $0.04 per share and $33.1 million or $1.02 per share in 1996. Net income for the third quarter of 1997 was significantly impacted ($12.0 million) by increases in repair costs and replacement power expenses relating to the Maine Yankee plant and other New England nuclear units in which the Company holds interests. The costs associated with replacement power will continue and are expected to be in the range of $6.0 million to $7.0 million per month in the near term. Additionally, a $1.1 million impact to net income occurred due to an increase in income tax expense based on partial Internal Revenue Service audit settlements for the years 1992 - 1994 and amended return adjustments filed for 1995 and 1996. Partially offsetting the replacement power costs in the future are expected reductions in Maine Yankee operations and maintenance costs associated with the phase-in of the permanent closure of that facility.
Operating revenues in the third quarter of 1997 totaled $226 million, a decrease of 1.3 percent from $229 million in the third quarter of 1996. Operating revenues decreased by $14.9 or 2.1 percent to $705 million in the nine-month period ended September 30,1997. The decline in revenues is a consequence of the continuing outage of Maine Yankee and other nuclear generating units in which the Company holds interests, since energy produced or purchased from other Company sources was used to satisfy service territory needs and, as a result, significantly less was available for sales outside the service territory. Compared to the nine-month period ended September 30,1996, non-territorial sales were down $32 million. In contrast. Industrial rnquarterl\l0q\9-9710-q. doc I6
t sales increased by approximately $11.0 million or 6 pcreent compared to the nine months ended
, September 30,1996, due to the paper industry rebounding from weak market conditions in 1996 and a facility expansion by an electrical machinery manufacturer.
Service-area sales for the third quarter of 1997 totaled approximately 2.35 billion kilowatt-hours, down 0.3 percent from the third quarter of 1996. Senice-area sales of electricity for the first nine months of 1997 totaled approximately 7.02 billion kilowatt-hours, for an increase of 1.0 percent compared to the first nine months of 1996. Senice Area Kilowatt hour Sales (Millions of KWils) Period Ended September 30, Three Months Nine Months 1997 1996 % Chance 1997 1996 % Chance Residential 651.5 657.2 (0.9)% 2,116.5 2,139.8 (1.1)% . Commercial 660.3 651.9 1.3 1,897.2 1,886.3 0.6 Industrial 983.9 993.4 (1.0) 2,841.2 2,763.9 2.8 Other 52.7 54.1 (2.6) 164.4 161.4 1.9 2.348.4 2.356.6 (0.3) 7.019.3 6.951.4 1.0 The changes in service area kilowatt-hour sales reflect the following: Kilowatt-hour sales to residential customers decreased by 0.9 percent in the third quarter and decreased by 1.1 percent for the nine months ended September 30,1997 compared to 1996; usage per customer was down 2.1 percent for the nine months ended September 30,1997. Warmer temperatures during the first quarter of 1997 versus the first quarter of 1996 were primarily responsible for the nine-month overall decrease in residential sales. Commercial sales increased by 1.3 percent in the third quarter and 0.6 percent for the nine months ended September 30,1997 as compared to 1996. The increase in the third quarter
'vas due primarily to strong sales in the retail trade and service sectors. The increase was offset by decreased sales to Maine Yankee as compared to the third quarter of 1996.
Industrial kilowatt-hour sales decreased by 1.0 percent in the third quarter due primarily to no excess power being available for sale. The 2.8 percent increase for the nine months ended September 30,1997 compared to 1996 is due primarily to an increase in the paper industry, rebounding from weak market conditions in 1996, and the expansion of facilities by an electrical machinery manufacturer. MEPCO's electrical sales and transmission revenues from New England utilities other than the Company amounted to $1.6 and $4.3 million in the third quarter of 1997 and 1996, respectively. The totals for the nine months ended September 30,1997 and 1996 were $9.5 million and $8.4 million, respectively. Under a Participation Agreement that terminated July 9,1996, all of MEPCO's costs, including a retum on invested capital, were paid by the participating utilities (" Participants"), which included the Company and most of the larger New England electric companies. The level of MEPCO's revenues and expenses changes depending upon the level of energy purchases. Effective July 9,1996, MEPCO and the Company filed with FERC under FERC Order 888 for new tariff rates. Refer to "Open-Access Transmission Service Rule" below for further discussion of this matter. r:\quarterl\l0q\9-9710-q. doc 17
y 2 Purchased Power-Energy expense increased $4.6 million compared to 1996, reflecting increased replacement power cost due to the Maine Yankee and other nuclear-plant outages which continued through the entire nine months of 1997. Purchased Power-Capacity expense increased $11.7 million compared to 1996, principally due to the Maine Yankee outage throughout the entire nine months of 1997 and increased maintenance expense prior to the permanent shutdown. Other operation expense increased by approximately $13.1 million for the nine months ended September 30,1997 compared to 1996. The increase is due primarily to a reversal in 1996 of a reserve established in 1995 and the expense recognition of post-retirement benefits being collected in rates under the ARP. Previously post-retirement benefits were deferred for future recovery. Maintenance expense decreased by $1.9 million through September primarily due to decreased storm activity in 1997 versus 1996. Federal and state income taxes fluctuate with the level of pm tax earnings and the regulatorv treatment of taxes by the MPUC. This expense decreased by $21.2 million as a result oflower pre-tax earnings for the nine months ended September 30,1997, when compared to 1996. In the third quarter of 1997 $1.1 million of expense was incurred as a result of a partial audit settlement, relating to 1992 through 1994, and amended tax returns filed for 1995 and 1996. Interest on long-term debt and other interest expense decreased during the third quarter and year to date 1997 compared to 1996. The decrease reflects a lower level of Medium-Term Notes outstanding than in the Srst nine months of 1996.
" Year 2000" Computer Issues - In the next two-and-one-half years, most large companies will face a potentially serious information systems (computer) problem because most software application and operational programs written in the past will not properly recognize calendar dates beginning in the year 2000. This could force computers to either shut down or lead to incorrect calculations. The Company began the process ofidentifying the changes required to their computer prog ams and hardware during the year 1996. The majority of the necessary modificatians to the Company's centralized financial, customer, and operational information systems are expected to be completed by the end of 1998. The Company believes it will incur approximately $3.0 million of costs between now and March 31,2000, associated with making the necessary modifications identified to date to the centralized systems. Noncentralized systems are currently being reviewed for Year 2000 problems. The Company is unable to predict the costs to be incurred for correction of such noncentralized systems, but expects the scope and schedule for such work to be less complex than for its centralized information systems.
Liquidity and Capital Resources Approximately $66.4 million of cash was provided during the first nine months of 1997 from net income before non-cash items, primarily depreciation and amortization. During that period, approximately $5.0 million of cash was generated from fluctuations in cettain assets and liabilities t.nd from uher operating activities. r:\quarterl\l0q\9-9710-q. doc 18
During the first nine months of 1997, dividends paid on common stock were $21.9 million, while
,, preferred-stock dividends utilized $6.6 million of cash.
Investing activities, primarily construction expenditures, utilized $39.3 million in cash during the first nine months of 1997 for generation, transmission, distribution, and general construction expenditures and includes $4.9 million the Company invested primarily in its associated companies, in order to accommodate existing and future loads on its electric tystem the Company is engaged in a continuing construction program. The Corapany's plans for improvements and expansions, its load forecast and its power-supply sources are under a process of continuing review. Actual construction expenditures depend upon the availability of capital and other resources, load forecasts, the timing ofits divestiture ofits generating assets, customer growth and general business conditions. The ultimate nature, timing and amount of financing for the Company's total construction programs, refinancing and energy-management capital requirements will be detennined in light of market conditions, earnings and other relevant factors. The total of cash on deposit with the trustee under the Company's General and Refunding Mortgage Indenture as of September 30,1997, was approximately $61.7 million. Under the Indenture such cash may be applied, at any time at the direction of the Company, to the redemption of bonds outstanding under the Indenture at a price equal to the principal amount of the bonds being redeemed, without premium, plus accrued interest to the date fixed for redemption on the principal amount of the bonds being redeemed. Such cash may also be withdrawn by the Company by substitution of allocated property additions or available bonds. At the annual meeting of the stockholders of the Company on May 15,1997, the holders of the Company's outstanding preferred stock consented to the issuance of $350 million in principal amount of the Company's Medium-Term Notes in addition to the $150 million in principal amount to which they had previously ecnsented. This expansion of the Medium-Term Note program is being implem,:nted to increase the Company's financing flexibility in anticipation of restructuring and increased competition. As of September 30,1997, $43 million of Medium-Term Notes were outstanding which, under the terms of the program, will permit issuance of an additional $457 million of such notes. To support its short term capital requirements, on October 23,1996, the Company entered into a
$125 million Credit Agreement with several banks, with BankBoston, N.A., and The Bank of New York acting as agents for the lenders. The arrangement has two credit facilities: a $75 million,364-day revolving credit facility that currently matures on October 21,1998, and a $50-million,3-year revolving credit facility that matures on October 22,1999. Both credit facilities require annual fees on the total credit lines. The fees are based on the Company's credit ratings and allow for various borrowing options including LIBOR-priced, base-rate-priced and competitive-bid-priced loans. Access to commercial paper markets has been substantially precluded, as a result of d wngrading of the Company's credit ratings. The amount of outstanding short-term borrowing will fluctuate with day-to-day operational needs, the timing of long-term financing, and market conditions. The Company had $50 million outstanding as of September 30,1997 under the 364-day revolving credit facility.
r:\quarterh10q\9-9710-q. doc 19
Rating Agency Actions r. On May 1,1997, Moody's Investor Service announced that it had downgraded the Company's credit ratings. The ratings downgraded were: General and Refunding Mortgage Bonds to "Baa3" from "Baa2"; unsecured medium-term notes, unsecured pollution-control revenues bonds, and counterparty rating to "Bal" from "Baa3"; and preferred stock to "bal" from "baa3." The Company's short-term rating for commercial paper was also downgraded to " Prime-?" from
" Prime-2." Moody's said the downgrades reflected " adverse financial pressures linked to prolonged nuclear plant outages, especially at the Maine Yankee plant as well as uncertainty surrounding the timing and extent of recovery of the Company's sizable potential stranded costs."
Industry Restructuring and Strandable Costs As discussed in the Management's Discursion and Analysis of Financial Condition and Results of Operations included in the Company's 19% Form 10-K, the enactment by Congress of the Energy Policy Act of 1992 accelerated p;anning by electric utilities, including the Company, for a transition to a more competitive industry. Significant legislative and regulatory steps have been taken toward competition in generation and non-discriminatory transmission access as discussed { below. A departure from traditional regulation, however, could have substantial impacts on the value of utility assets and on electric utilities' abilities 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. The Company has substantial exposure to cost stranding relative to its size. In its January 1996 filing, the Company estimated its net-present-value strandable costs could be approximately $2 billion as of January 1,1996. These costs represented the excess costs of purchased power obligations and the Company's own generating costs over the market value ot the power, and the costs of deferred charges and other regulatory assets. Of the $2 billion, approximately $1.3 billion was related to above-market costs of purchased-power obligations arising largely from the Company's long-term, noncancelable contracts for the purchase of capacity and energy from non-utility generators, approximately $200 million was related to estimated net above-market cost of the Company's own generation, and the remaining $500 million was related to deferred regulatory assets. The MPUC also provided estimates of strandable costs for the Company, which they found to be within a wide range of a negative $445 million to a positive $965 million. These estimates were prepared using assumptions that differ from those used by the Company, particularly a starting date for measurement of January 1,2000 versus the measurement starting date of January 1,1996 utilized by the Company. The MPUC concluded that there is a high degree of uncertainty that surrounds stranded costs estimates, resulting from having to rely on prajections and assumptions about future conditions. Given the inherent uncertainty and volatility of these projections, the Company believes that an annual estimation of stranded costs could serve to prevent significant over or under-collection beginning in the year 2000. For a discussion of an MPUC proceeding that will determine the Company's stranded costs, see " Restructuring Legislation", below. Estimated strandable costs are highly dependent on estimates of the future market for power. liigher market rates lower stranded cost exposure, while lower market rates increase it. In addition to market-related impacts, any estimate of the ultimate level of strandable costs depends r:\quarterlil0q\9-9710-q. doc 20 i
on state and federal reguhtions, the extent, timing and form that competition for electric service
,, will take; the cngoing level of the Company's costs of operations; regional and natimal 4
economic conditions; growth of the Company's sales; timing of any changes that may occur from state and federal initiatives on restructuring; and the extent to which regulatory policies and proceedings ultimately address recovery of strandable costs. The estimated market rate for power is based on anticipated regional market conditions and future costs of producing power. The present value of future purchased power obligations and the Company's generating costs refiects the underlying costs of those sources of generation in place today, with reductions for contract expirations and continuing depreciation. Deferred regulatory asset totals include the current uncollected balances and existing amortiza; ion schedules for purchased-power contract restructuring and buyouts negotiated by the Company to lessen the impact of these obligations, energy management costs, financing costs, and other regulatory promises. The Company expects its strandable-cost exposure to decline aver time as the market price of power increases, NUG contracts expire, and regulatory assets, including decommissioning at nuclear power plants, are recovered. Restructuring Legislation On May 29,1997, the Governor of Maine signed into law a bill enacted by the Maine Legislature that will restructure the electric utility industry in Maine by March 1,2000. With respect to the ability of the Company to recover stranded costs, the legislation requires the MPUC, when retail access begins, to provide a " reasonable opportunity" to recover stranded costs through the rates of the transmission-and-distribution company, comparable to the utility's opportunity to recover stranded costs before the implementation of retail access under the legislation. Stranded costs are defined as the legitimate, verifiable and unmitigatable costs made unrecoverable es a result of the restructuring required by the legislation and would be determined by the MPUC as provided in the legislation. The MPUC must conduct separate adjudicatory proceedings to determine the stranded costs for each utility and the corresponding revenue requirements and stranded-cost charges to be charged by each transmission and distrib.: tion utility. Those proceedings must be completed by July 1,1999. The MPUC has initiated the proceeding that will determine the Company's stranded costs, corresponding revenue requirements and stranded-cost charges to be charged by it when it becomes a transmission-and-distribution utility and has scheduled completion of the proceeding for the second half of 1998, in addition, the legislation requires utilities to use all reasonable means to reduce their potential stranded costs and to maximize the value from generation assets and contracts. The MPUC must consider a utility's efforts to mitigate its stranded costs in determining the amount of the utility's stranded costs. Stranded costs and the related rates charged to customers will be prospectively adjusted as necessary to correct substantial inaccuracies in the year 2003 and at least every three years thereafter. The principal restructuring provisions of the legislation provide for customers to have direct retail access to generation services and for deregulation of competitive electricity providers, commencing March 1,2000, with transmission and distribution companies continuing to be regulated by the MPUC. By that date, subject to possible extensions of time granted by the MPUC to improve the sale value of generation assets, investor-owned utilities are required to
, divest all generation assets and generation-related business activities, with two major exceptions:
r:\quarterl\l0q\9-9710-q. doc 21
(1) non-utility generator contracts with qualifying facilities and contracts with de:nand side management or conservation providers, brokers or hosts, and (2) ownership interests in nuclear power plants. Flowever, the MPUC can require the Company to divest its interest in Maine Yankee Atomic Power Company on or after January 1,2009. T'n Company has submitted its plan to divest its generation assets to the MPUC as required by the legislation and is proceeding with its previously reported plan to sell its generation assets in 1998. See " Divestiture of Generation Assets," below. The bill also requires investor-owned utilities, after February 28, 2000, to sell their rights to the capacity and energy from all generation assets, including the purchased-power contracts that had not previously been divested pursuant to the legislation, with certain minor exceptions. Upon the commencement of retail access on March 1,2000, the Company, as a tr,wsmission and distribution utility, will be prohibited from selling electric energy to retail custormrs. Any < competitive electricity provider that is affiliated with the Company would be allowed to sell electricity outside the Company's service territory without limitation as to amount, but within the Company's service territory the affiliate would be limited to providing not more than 33 percent of the total kilowatt hours sold within the Company's service territory, as determined by the MPUC. Other features of the legislation include the following: (a) After the effective date of the legislation, if an entity purchases 10 percent or more of the stock of a distribution utility, including the Company, the purchasir.g entity and any related entity would be prohibited from selling generation senice to any retail customer in Maine. (b) The legislation encourages the generation of electricity from renewable resources by requiring competitive providers, as a condition oflicensing, to demonstrate to the MPUC that no less than 30 percent of their portfolios of supply sources for retail sales in Maine are accounted for by renewable resources. (c) The legislation requires the MPUC to ensure that standard-offer senice is available to all consumers, but any competitive provider affiliated with the Company would be limited to providing such service fbr only up to 20 percent of the electric load in the Company's senice territory. (d) Beginning March 1,2002, or, by MPUC rule, as early as March 1,2000, the providing of billing and metering senices will be subject to competition. (e) A customer who significantly educes or eliminates consumption of electricity due to self-generation, conversion to an altenave fuel, or demand-side management may not be assessed an exit fee or re-entry fee in any form for such reduction or elimination of consumption or for the re-establishment of senice with a transmission and-distribution utility. (f) Finally, the legislation provides for programs for low-income assistence, energy conservation, research and development on renewable resources, assistance for utility employees laid off as a result of the legislation, and recovery of nuclear-plant decommissioning costs "[a]s required by federal law, rule or order", all funded through transmission-and-distibution utility rates and charges. The Company has stated that it supports the legislation ultimately enacted, which reflects protracted negotiations and compromises among the interested constituencies and is evaluating means of mitigating its strandable costs through the financing of stranded assets. The Company believes, however, that some of the limitations imposed on transmission-and-distribution utilities r:\quarterl\l0q\9-9710-q. doc 22 I
b in the legisl: tion are unnecessary Jnd inappropriate in the contemplated compeltive f, environment. Environrnental Matters The Company assesses on an ongoing basis, compliance with laws and regulations related to hazardous substance remediation. At September 30,1997, the Company had an accrued liability of $2.2 million for renvliation costs at various sites. The costs at identified sites may be significantly higher if, among other things, other potentially responsible parties are not financially able to contribute to these costs or identified possible outcomes change. See Note 3,
" Commitments and Contingencies." " Legal and Environmental Matters" for further discussion of this matter, a
Divestiture of Generation Assets On April 28,1997, the Company announced a plan to seek proposals to purchase its generation assets, beluding interests in nuclear plants and rights to power under NUG contracts. The Company believes that current market conditions m y offer advantages to seeking proposals before divestiture is required by legislation. Several other utilities, including New England Electric System ("NEES") in Massachusetts, are ir. the process of divestiture of their generation assets with a large number of prospective purchasers expressing interest in acquiring the facilities. On August 6,1997, NEES announced that it had agreed to sell its non nuclear generating ! .iness to an affiliate of PG&E Corp. (U.S. Generating Company). In'early June, the Company, working with its investment advisors, developed and contacted a . group of approximately 150 potential bidders that were believed to be interested in the Company's generation assets and financiaUy quaiified to bid. Non binding bids were submitted to the Company in early September and, based on those bids, the Company began a process of working with a smaller group of qualified buyers. On November 3,1997, the Company sent bid documents to the selected qualified buyers and requested final binding bids by December 10, 1997, Upon receipt of such bids the Company will evaluate the bids and negotiate a definitive purchase and sale agreement with the successful bidder or bidders. The consummation of a sale will extend into late 1998 and is subject to regulatory approvals and contractual consents. The Company does not intend to sell its generation assets if terms satisfactory to the Company cannot be arrenged. The Company cannot predict whether such a sale will occur, whether it will receive satisfactory proposals, or whether the necessary approvals and consents will be obtained. Other Activities On July 21,1997 the Company and New York State Electric and Gas Corp. signed a memorandum of understanding that could lead to formation of a new natural-gas distribution company to serve Maine customers. The Company has asked the MPUC for permission to offer natural gas distribution service to Maine customers in areas not currently served by a natural gas provider. Various regulatory approvals would be required before the Company or a jointly owned company could operate a new gas distribution service, r:\quarterl\l0 9\9 9710-q. doc 23 _ _ _ - l
O e Open Access Transmission Service Rule r' On April 24,1996, the Federal Energy Regulatory Commission (FERC) issued Order No. 888, which requires all public utilities that own, control or operate facilities used for transmitting ele:tric energy in interstate commerce to file open access non discriminatory transmission tariffs that offer both load based, network and contract based, point to point service, including ancillary service to eligible customers cont aing minimum terms and conditions of non-discriminatory service. This service must be comp,.able to the service they provide themselves at the wholesale level; in fact, these utilities must take wholesale transmisslon service they provide themselves under the filed tariffs. The order also permits public utilities and transmitting utilities the opportunity to recover legitimate, prudent and verifiable wholesale stranded costs associated with providing open access and certain other transmission services, it further requires public utilities to functionally separate transmission from generation marketing functions and communications. The intent of this order is to promote the transition of the electric utility industry to open competition. Order No. 888 also clarifies federal and statejurisdiction over transmission in interstate commerce and local distribution and provides for deference of certain issues to state recommendations. On July 9,1996, the Company anu MEPCO submitted compliance filings to meet the new pro forma tariff non price minimum terms and conditions of non-discriminatory transmission. Since Julv 4,1996, the Company and MEPCO have been transmitting energy pursuant to their filed tariffs, subject to refund. FERC subsequently issued Order No. 888-A, which generally reaffirmed Order No. 888 and clarified cenain terms. Also on April 24,1996, FERC issued Order No. 889, which r<x,uires public utilities to r,nctionally separate their wholesale power marketing and transmission operation functions and to obtain information about their transmission system for their own wholesale power transactions in the same way their competitors do through the Open Access Same-time Information System (" OASIS"). The rule also prescribed standards of conduct and protocols for obtaining the information. The ntandards of conduct are designed to prevent employees of a public utility engaged in marketing functions from obtaining preferential information. The Company participated in efforts to develop a regional OASIS, which was operational January 3,1997. FERC subsequently approved a New England Power Pool-wide Open Access Tariff, subject to refund and issuance of further orders. The Company also participated in revising the New England Power Pool Agreement. On April 23,1997, a representative of Kennebank Light and Power District and Fox Islands Electric Cooperative, two wholesale customers of the Company, notified the Company that the two customers were terminating their power supply contracts with the Company, effective May 1,1999, and would begin purchasing power from another supplier on that date. The two customers currently account for less than 0.5 percent of the Company's annual revenues. Impact of New Accounting Standards
-In February 1997, FASB issued SFAS No.128, " Earnings per Share." This statement, which is effective for fiscal years beginning after December 15,1997, establishes simplified standards for computing and presenting earnings per share ("EPS"). It requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and r:\quarterl\l0q\9 9710-q. doc 24
_ _ _. l
= - -_. . _ - - _ . . _ _ . _ . . .. ._ . _ - . . .. .- - ---
I disclosure of the calculation of each EPS amount. The Company anticipates that adoption of the
,, standard will not have a significant impact on reported EPS.
In June 1997, the FAS13 issued SFAS No.130, "A ,rting Comprehensive income." T his statement, which is effective for fiscal years bei ning after December 15,1997, est<blishes standards for the reporting and display of comprehensive income and its components (revenues, expenses, gains and losses)in a full set of general purpose financial statements. The Company anticipates that adoption of the standard will not have a significan; impact on its financial statements. W r:\quarterl\l0q\9-9710-q. doc 25
PART11 OTilERINFORMATION item 1. Lecal Proceedines Shareholder Suit. On September 25,1997, a lawsuit was filed in the United States District Court for the Southern District of New York by a New Jersey resident claiming to be a shareholder of the Company against the current members of the Company's Board of Directors, including the President and Chief Executive OHicer of the Company, and three fonner directors. The complaint contains a derivative claim that the defendants recklessly mismanaged the oversight and operation of the Maine Yankee Plant and an individual claim that the defendants failed to make timely and adequate disclosures ofinformation iii connection with issues surrounding the Plant. The complaint does not seek damages against the Company, but requests that the defendants disgorge the compensation they received during the period of alleged mismanagement, pay to the Company costs incurred allegedly as a result of the claimed actions, and cause the Company to take steps to prevent such actions. The Board and the Company believe the complaint is without merit. The Board will contest the complaint. Reculatory Matters. For a discussion of certain significant regulatory matters affecting the Company, including those leading to a decision by the Maine Yankee Board of Directors to permanently shut down the Maine Yankee Plant, electric utility restructuring, and stranded costs, including an MPUC proceeding that will determine the Company's stranded costs and an MPUC investigation of the prudence of the Maine Yankee shutdown decision and related matters, see Note 2 " Commitments and Contingencies" " Maine Yankee Atomic Power Company," and item 2 of Part I, " Management's Discussion and Analysis of Financial Condition and Results of Operation" " Industry Restructuring and Strandable Costs," which are incorporated herein by reference. Tax Appeal. For a discussion of the Company's appeal of two significant federal income tax adjustments proposed by the Internal Revenue Senice ("lRS") see Note 3, " Commitments and Contingencies" " Proposed Federalincome Tax Adjustments." Svironmental Matters. For a discussion of administrative and judicial proceedings concerning cleanup of hazardous waste sites see Note 2, " Commitments and Contingencies," " Legal and Environmental Matters," which is incorporated herein by reference. Item 2. Through item 5. Not applicable item 6. Fxhibits and Reoorts on Form 8-K (a) Exhibits. None. (b) Reports on Form 8 K. The Company filed the following reports on Form 8-K during the third quarter of 1997 and thereafter to date: Date of Report items Renorted August 1,1997 Item 5 r:\quarterl\10q\9-9710-q. doc 26
p' a) The 11oard of Directors of Maine Yankee voted to permanently cease power operations at the Plant and begin the process of decommissioning the Plant. Date of RenoJ1 Items Renorted September 2,1997 Item 5 a) The MPUC released the report of a consultant it had retained to perform a management audit of Maine Yankee for the period January 1,1994 to June 30,1997. b) 1he Company received from the IRS a Revenue Agent's Report summarizing all adjustments proposed by the IRS as a result ofits audit of the Company's federal income tax returns for the years 1992 through 1994. r:\quarterl\l0 9\9-9710-q. doc 27
f Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CENTRAL hiAINE POWER COh1PANY (Registrant) Date: November 14,1997 By ////,rg ((/ m , hiichae'l W. Caron, Comptroller (Chief
. Accounting Officer)
By b. h. m David E hiarsh, Chief Financial Officer (Principal Financial Officer and duly authorized officer) s
\\srv0900\comptrol\quarterl\10g\9 9710-q. doc 28
4 , , EXIIIBIT 1(c) e SECURITIES AND EXCilANGE COMMISSION Washington, D.C. 20549 e FORM 8 K 4 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of1934 Date ofReport (Date of earliest event reported): January 6,1998 CENTRAL MAINE POWER COMPANY (Exact name of registrant as specified in its charter) Maine - 1-5139 01 0042740 (State ofIncorporation) (Commission (IRS Employer File Number) Identification Number) 83 Edison Drive, Augusta, Maine 04336 (Address of principal executive offices) (zip code) Registrant's telephone number, including crea code: (207) 623-3521
Item 1 through item 4. Not applicable. Item 5. Other Events. Agreement for sale of Company's generating assets. As previously reported, on April 28,1997, the Company announced a plan to seek proposals to purchase its generating assets and, as part of an auction process, received fmal bids on December 10,1997. On January 6,1998, the Company announced that it had reached agreement to sell all ofits hydro, fossil and biomass power plans with a :ombined generating capacity of 1,185 megawatts for $846 million in cash to Florida based FPL Group, the winning bidder in the auction process. The hydropower assets to be included in the sale represent approximately 373 megawatts of generating capacity. The Company's interest in the William F. Wyman steam plant in Yarmouth, hiaine, the largest of the Company's three fossil-fueled generating assets included in the sale, is 594 megawatts, followed by Mason Station in Wiscasset, hiaine, at 145 megawatts, and Cape Station in South Portland, hiaine, at 42 megawatts. The sole biomass plant is the 31-megawatt unit in Fort Fairfield, hiaine, owned by a wholly-owned subsidiary of the Company. The Company's interests in the power entitlements from approximately 50 power-purchase agreements with non-utility generators representing approximately 488 megawatts, its 2.5-percent interest in the hiillstone III nuclear generating unit in Waterford, Connecticut, its 3.59-percent interest in the output of the Vermont Yankee nuclear generating plant in Vernon, Vermont, and its entitlement in the NEPOOL Phase II interconnection with Ilydro-Quebec all attracted insufficient interest to be included in the present sale. The Company will continue to seek buyers for those assets. The Company did not offer for sale its interests in the hiaine Yankee (Wiscasset, hiaine), Connecticut Yankee (11addam, Connecticut) and Yankee Atomic (Rowe, hiassachusetts) nuclear generating plants, all of which are in the process of being decommissioned. Tiie electric utility restructuring law passed by the hiaine Legit!sture in the spring of 1997 required the Company to divest its generating plants and power-purchase agreements by hiarch 1,2000, when its customers will be free to choose among competitive energy suppliers, but the Company elected to conduct an earlier sale. In addition, as part ofits agreement with FPL Group, the Company entered into energy buy-bvk agreements to assist in fulfilling its obligation to supply its customers with power um. hfarch 1,2000. Sul.stantially all of the generating assets included in the sale are subject to the lien of the Company's General and Refunding hiortgage Indenture dated as of April 15,1976, (the
" Indenture"). Therefore, substantially all of the proceeds from the sale must be deposited with the trustee under the Indenture at the closing of the sale to free the generating assets from the lien of the Intenture. Proceeds on deposit with the trustee may be used by the Company to redeem or repurchase bonds under the terms of the Indenture, including the possible discharge of the Indenture. In addition, the proceeds could provide the flexibility
to redeem or repurchase outstanding equity securities. The Company must also provide for payment of applicable taxes resulting from the sale. The manner and timing of the ultimate application of the saic proceeds aller closing are in any eve;nt subject to various factors, including Indenture provisions, market conditions and terms of outstanding securities. The bid value in excess of the remaining investment in the power plants will reduce the Company's stranded costs and other costs, which could lower the amount that would otherwi;c be collected from customers by nearly half a billion dollars liowever, the Company will incur incremental costs as a result of the power buy back arrangements in excess of the pre sale costs of capacity and energy from the plants being sold, which will effectively lower the amount of sale proceeds available to reduce stranded and other costs. The Company believes that the reduction in stranded and other costs could permit a reduction in rates for the Company's customers. The sale is subject to various closing conditions, including the approval of state and federal regulatory agencies, which approval process the Company expects could take approximately six to twelve months, and is subject to consents or covenant waivers from certain of the Company's lenders. .The Company cannot predict whether or in what form such approvals, consents or waivers will be obtained. This Report on Form 8-K contains stateme...s that may be considered " forward-looking statements" as defined in the federal Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially fiorn those projected. The Company believes that consummation of the asset sale described above would constitute significant progress in resolving some of the uncertainties regarding the efTects of electric-utility industry restructuring on the Company's investors; however, significant risks and uncertainties would remain. These include, in addition to those er,umerated in the Company's Report on Form 10-Q for the quarterly period ended September 30,1997, but are not limited to: (1) the possibility that a state or federal regulatory agency willimpose adverse conditions on its approval of the asset sale; (2) the possibility that new state or federal legislation will be implemented that will increase the risks to such investors from those contemplated by current legislation; and (3) the possibility oflegislative, regulatory or judicial decisions that would reduce the ability of the Company to recover its stranded costs from that contemplated by existing law. Item 6 through item 9. Not applicable.
SIGNATURE Pursuant to the requirernents of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duty authorized. CENTRAL MAINE POWER COMPANY By
- Y.
D. E. Marsh Chief Financial Officer Dated: January 12,1998 I c- c' ewirw w w-r'-my c-*s-- w--+- 4,- ---v---w-,
EXIIIBIT 2 h k CentralMaine Power !2071 623 3521 Y General Othce 83 f.ison Drwe Auwsts M3:ne 04336 December 8,1997 Dennis Kesch! Administrative Director Maine Public Utilities Commission State House Station 18 Augusta,ME 04333 RE: CENTRAL MAINE POWER COMPANY, Application for Approval of Reorganizations under Section 708, of Transactions with Affiliated Interests under Section 707, and of Transfers of Assets under Section 1101 of Title 35-A M.R.S.A. Docket No. 97
Dear Mr. Keschi:
Enclosed for filing in the above-captioned pneceding is Central Maine Power Company's Application for Approval of Reorganizations under Section 708, of Transactions with AfBliaind Interests under Section 707, and of Transfers of Assets under Section 1101 of Title 35-A M.R.S. A. Since:ciy, G ) Debra J. Mills Regulatory Senices Coordinator cc: Public Advocate 1
STATE OF MAINE PUBLIC UTILITIES COMMISSION Docket No. 97_ l Re: CENTRAL MAINE POWER COMPANY, ) Application for Approval of Reorganizations ) under Section 708, of Transactions with ) Affiliated Interests under Section 707, ) and of Transfers of Assets under Section 1101 ) of Titic 35 A M.R.S.A. )
*\
I. INTRODUCTION AND
SUMMARY
- 1. In this Application, Central Maine Power Company, a "public utility" as defined in 35 A M.R.S.A. Section 102 (" CMP" or the " Company"), requests approval by the Maine Public Utilities Commission (the " Commission") of the formation of a Maine-based holding company. Under a holding company structure, the Company and its non-utility subsidiaries c will each become subsidiaries of a new ordinary business corporation whose primary function will be to coordinate the policies and direction of the corporate group and provide capital for subsidiary operations. The Company believes that a holding company structure will provide long-term advantages through increased management and financial flexibility that will better position the Company to operate in a changing business environment, while maintaining the principal business focus on the Company's core tri.nsmission and distribution business. In addition, the clearer separation of the Company's core utility business from non-utility enterprises achieved by making the holding company, rather than CMP, the parent of the non-utility subsidiaries will better segregate the operations, risks and costs associated with these non-utility businesses from those involved in providing utility service and provide greater financial flexibility in pursuing non utility business opportunities.
- 2. This Application contains five additional sections, as follows:
Section II. Remens for and Benefits of Holdine Comoany Structure, describes
.- - - -__ _- ]
the impetus for the Company's holding company initiative and discusses the Company's strategic objectives and the benefits to customers and shareholders of a holding company structure. Section III. Descriotion of Proposed Transactions. describes the corporate mechanics and related approvals necessary to put the holding company organization in place. Section IV. The Orranintian, provides details concerr.ing the Company's business and the organizational relationships and businesses of existing and proposed new subsidiaries and other affiliates after the reorganization. Section V. Conditions of Reorganization, proposes a set of conditions to the reorganization to ensure the protection of ratepayer interests while providing opportunities for the creation of shareholder value. Section VI. Anorovals Reauettad, lists the specific transactions and arrangements for which approvals are requested in this proceeding. II. REASONS FOR AND BENEFITS OF HOLDING COMPANY STRUCTURE
- 3. Over the past several years, the electric utility industry has been affected by regulatory and market changes resulting from adoption of the Energy Policy Act of 1992; decisions of the Federal Energy Regulatory Commission including Orders 888 and 889 issued in April 1996 mandating open access to transmission services; and in Maine in particular, enactment of the new restructuring law, which will limit the Company primarily to the transmission ano distribution of electricity and require the creation of a separate entity to market energy and capacity to retail consumers. In addition, expanding energy options for consumers, due in part to the deregulation of the natural gas industry, have also created 2-
competitive challenges for electric utilities. The novel challenges and related opportunities presented by the new environment, u well as earnings pressure in the Company's core business, have cau ed the Company to assess comprehensively its business strategies, its direction and fccus, and its structure for continuing to provide regulated utility service in the most efficient and competitive fashion for Maine custe ners. At the same time, the Company 4 seeks to attain greater financial, managerial and organizational flexibility to adapt to and take advantage of the changing utility business and emerging business opportunities that, while related to the Company's core business, are non-utility in nature. That flexibility will facilitate initiatives into existing and new energy and telecommunications related businesses, which will create a broad but related base of income generation that could contribute to i corporate growth and buttress overall profitability. I
- 4. As a result of this assessment, the Company has identified a stronger need to
, increase its long-term growth potential through investment in related businesses while continuing to develop efficiencies and economics in its core business for the benefit of Maine consumers. The move to a competitive energy industry, together with the revolution in energy and telecommunications related technologies, have created significant new l l opportunities for energy and telecommunications service providers to participate in non-utility business ventures that are related to but separate from traditional regulated businesses. Although such non-utility investments will be a relatively small component of the entire system, pursuit of these business opportunities will play an important role in maintaining the long term financial viability necessary for the Company to continue to provide reliable i service to its customers as well as er. hance shareholder value. To respond timely, effectively
- and prudently to these business challenges and opportunities, the Company has concluded that 3-
\
it should reorganize the structure of its business. Therefore, the Company proposes to create a holding company structure as described in this Application.
- 5. Following the reorganization, the Company's core utility business will citinue to be the principal business focus of the combined enterprise and of efforts to operate a financially sound and growing builness whose objective will be to provide ses vice effectively and efficiently. Maintenance and improvement in the quality of the Company's service will continue to be top priorities. From a business standpoint, the focus must remain on CMP's business reputadon as a predominant component of the entire corporate group. In addition, ti,e overwhelming portion of invested capital will continue to be invested in assets in CMP's service area dedicated to providing service to its Maine customers. The Company will not compromise its ability to perform its public service obligation or its relationship with regulators or risk invested capital by retalning insufficient talent or resources to manage those assets effectively and efficiently.'
- 6. The holding company ("HoldCo") will continue to develop the non utility businesses that are now carried out by the Company's subsidiaries. It will also pursue the intended business activities of a new, wholly owned subsidiary of HoldCo in the business of selling energy and related unregulated products and services ("EnerMark", discussed in section IV.D below), and, to provide another energy option to Maine consumers who do not have access to gas service, a new gas distribution limited liability company (" CMP Gas 1
Similar considerations have led other utilities to form holding companies over the past few years. A partial listing of these companies is attached as Exhibit A. 2 For further discussion of the Company's business after the reorganization, see section IV. A below. i
, Company", discussed in section IV.D below) through a new wholly-owned corporate subsidiary of HoldCo ("Gasco", discussed in section IV.D below) that will hold a 50 percent membership interest in CMP Gas Company. In addition, HoldCo may participate in the local gas distribution business in New Hampshire through one or more additional entities (discussed in section IV.D below). HoldCo may also, through a different whollyowned subsidiary or other affiliate ('PipelineCo", discussed in section IV.D below), acquire an - equity interest in the pipeline proposed by Maritimes & Northeast Pipeline L.L.C. 7 To enhance the ability to market and furnish its services, a non utility subsidiary may explore opportunities for appropriate affiliations with one or more firms providing similar or complementary services in the targeted markets. While such affiliations may be in the nature of contracts or subcontracts, the subsidiary should have the option of entering into ore or more joint ventures, general partnerships, limited partnerships, membership interests in limited liability companies, or other affiliations (including without limitation stock ownership in corporations) with one or more such entities. 8. Although the Company has not at this point identified other investment opportunities for HoldCo, HoldCo may seek to develop or acquire other businesses that are related to energy and telecommunications services. The Company believes that it is desirable in the long run to pursue non utility business opportunities that build on core competencies, such as the management and operation of an extensive delivery infrastructure, and other relatid business opportunities that are complementary to the Company's core business or to these ax utility businesses. This approach creates a more cohesive, focused and efficient investment policy for the entire holding company system. Other criteria for investment in non utility businesses will be based on the assessment of opportunities and risks relating to l
prospects for earnings growth, competition, required capital outlays, avrilable resources, and I the ability of the enterprise to be self financing.
- 9. To ma'.ntain separation from the Company's core business and provide financing flexibility, when a new bu Nss opportunity arises, the new business will be operated through a subsidiary of HoldCo rather than the Company. The holding company structure will facilitate the analysis and evaluation of new as well as existing lines of business by the investment community.
- 10. Moreover, the use of a holding company structure will enhance legal protections against the imposition of liability on the Company for unregulated business activities since the Company will no longer be the parent of the non utility enterprises.
- 11. Such separation of business functions will facilitate the development of new I
non-utility business opportunities, as well as existing non utility businesses, while helping to insulate the Company from any risks associated with these activities and will also broaden access to available financing techniques.
- 12. The Company believes that diversified earnings from existing non utility businesses and proposed new business activities will mitigate the limitations inherent in engaging solely in the transmission and distribution business. By engaging in several coraplementary businesses with different, but acceptable, risk exposures and business cycles, the risks resulting from operating in a single regulated business will be reduced and opportunities for earnings growth will be created. A lower risk profile for the utility business and the potential fo'r improved and more stable earnings offered by an expanded business base could result in a better position in the capital markets and lower capital costs, enhancing the overall financial strength of the new organization. On the other hand, by
. - - - - - - - - - -- )
operating such businesses in the proposed holding company structure, the Company will be insulated from the performance of unregulated businesses, as discussed in the following paragraphs.
- 13. If the proposed reorganization is completed, investments in existing and any new subsidiaries of HoldCo, including EnerMark, GasCo and PipelineCo, will be made by HoldCo rather than the Company. HoldCo will make investments in its subsidiaries by using one or more of the following sources of funds, downstreamed as capital contributions: the proceeds of HoldCo equity issuance to the public, of borrowings under a bank credit facility at the HoldCo level or of other debt issuances by HoldCo, or through dividends from subsidiaries. In addition, HoldCo may guarantee borrowings by its non utility subsidiaries or enter into keepwell agreements to maintain a specified minimum subsidiary net worth.
Sources of financing of non utility subsidiary business ventures may also include non-recourse project financing, internally generated funds from those businesses, loans from sister companies other than the Compny, subsidiary securities issuances, or investments by third parties. Debt and equity issuances by HoldCo and its non-utility subsidiaries to finance non utility activities will be the obligation of the issuing entity and not the Company and therefore should generally not impact the Company's credit or affect its ratings. The Company will continue to be responsible for issuing its own debt and preferred equity securities. Its creditworthiness will be based on an evaluation of its earnings, property, interest coverage, capital stnicture and o ~ verall ability to meet its obligations. The proceeds of securities issuances by the Company will be used exclusively by the Company for its electric utility business.
- 14. By more clearly separating utility operations from non-utility enterprises, the i
new corporate structure will afford financial flexibility that will permit the use of financing techniques that are more directly suited to the requirements, characteristics and risks of particular non utility operations generally without affecting the creditworthiness of the Company. "he ability to access different capital markets quickly with a broad range of , financial instruments and maturities will allow a financing to be tailored to the type of investment being made on the most attractive possible terms, taking into account the appropriate capitalization ratio for a particular subsidiary. Financial flexibility is necessary_ to ensure that alternative financing strategies are available to HoldCo and its non-utility subsidiaries since different types of investments and their attendant ownership structures, cash flows, tax considerations and risks require different financing techniques to optimize the economic benefit o? the investment. 15. In contrast to a holding company structure, the Company's current corporate structure cannot accommodate the same degree of financial flexibility or separation because all business activities must be either part of the Company itself or conducted in entities downstream from the Company. As a result, under the present corporate organization, any debt financing by CMP's subsidiaries for diversification purposes is reflected, through consolidation, on the Company's balance sheet, and related income or loss is consolidated on the Company's income statement. Consequently, the financial structure of these non utility enterprises becomes commingled with the structure of the electric utility business. Existing covenants between CMP and its preferred shareholders and debt holders could restrict the Company from taking full advantage of the best financing techniques for non utility business ventures. Th holding company structure formally isolates the differing investment risks and avoids the restraints which normal utility covenants place on financing flexibility. 8-
i { 16. De holding company structure also provides better insulation for regulated i operations from the performance of unregulated businesses. Conducting non utility i businesses through wholly owned subsidiaries of HoldCo rather than through subsidiaries of ! the Company and the financing of their activities separately and independently from the Company will effectively insulate the Company from the potential earnings velatility of these e 2 businesses since their activities will not be reflected in the Company's financial statements and any unfavorable financial results of these non-utility enterprises will generally not 4 adversely affect the C- spany's credit and cost of capital.
- 17. De separate delineation of non utility operations in this manner helps to prevent cost of capital cross subsidies since the Company's balance sheet and income statement will be untifected by financings and financial results of other HoldCo subsidiaries. Other cross-a j
subsidization issues may be further diminished through the creation of a wholly-owned corporate subsidiary of HoldCo to provide support services to entities in the holding company group ("ServeCo"). Currently, the Company provides a variety of support services to its l utility and non utility subsidiaries and other affiliates under separate contracts with each such 1 entity. In the reorganized corporate structure, it may be in the Company's best interests for ServeCo rather than the Company to provide support services to HoldCo's direct and indirect 4 subsidiaries requesting such services. These services would be provided by ServeCo on an arms length, ordinary course of business basis under a written agreement between ServeCo
.4 and the requesting entity.3 By shifting the responsibility for providing support services to j ServeCo in this manner and as further described in section IV.D of this Application, the i
- 3 Additional information concerning ServeCo and its potential services and service
;. contract provisions is contained in section IV.D of this Application.
9 4-d
,-,,.-,an ,.,n,,-un.,,-.-..ew.-,,,-aranw..--..,,,,,,-n.n ,.. n,, ,---,,.,mw-n.- , . . , , . . , n--.- .,,,--,..,,,,,,,,,.e--,-a.-,m-, - - +, .mn-- -
frequency of transactions requiring the allocation of common costs between utility and non-utility activities may be significantly diminished. Finally, as discussed in this Application in section V, " CONDITIONS OF REORGANIZATION," the Commission will be entitled to receive the information it needs to monitor and address cost allocation and cross subsid issues. 4
- 18. De separation of utility and marketing functions into legally separate entitles will also facilitate compliance by the Company with the new standards of conduct imposed by 35 A M.R.S.A. I 3205.3. By the same token, by formalizing the lines of separation between these entities, it should make the Commission's job of monitoring compliance with those standards easier.
III. DESCRIFilON OF PROPOSED TRANSACTIONS
- 19. The first step in accomplishing the proposed reorganization will be the formation of two new corporations: a holding company ("HoldCo") that will ultimately become the parent company of CMP and of CMP's non-utility subsidiaries, ow/ng all the outstanding common stock of these companies, and another corporation whose sole purpose will be to serve as a vehicle in creating the holding company structure ("MergeCo") and which will no longer exist when it has accomplished its limited purpose. HoldCo and MergeCo will not be public utilities at any time before or after the reorganization. Both HoldCo and MergeCo will be Maine corpontions.
- 20. When HoldCo and MergeCo are formed, CMP will initially own all the outstanding common stock of HoldCo, and HoldCo will own all the outstanding common stock of MergeCo. At that time, the authorized capital stock of HoldCo will consist of 80 million shares of common stock, which is equal to the authorized number of shares of the
Company's common stock. HoldCo will issue 100 shares of its common stock to CMP when HoldCo is formed. MergeCo's authorized capital stock will be 1,000 shares of common stock, of which 100 shares will be issued to HoldCo at the time MergeCo is formed.
- 21. Next, the Company, HoldCo and MergeCo will enter into an Agreement and Plan of Merger, substantially in the form filed as Exhibit B to this Application (the " Merger Plan"). Under the Merger Plan, the Company will become a subsidiary of HoldCo.
- 22. The steps necessary to achieve this result are as follows:
a. MergeCo will merge into CMP, with CMP being the surviving corporation. On the filing of the Articles of Merger with the Maine Secretary of State or on the date specified in the Articles of Merger, MergeCo will cease to exist (the " Merger Date"),
- b. On the Merger Date, each outstanding share of CMP's common stock (excluding shares held by dissenting shareholders who have complied with the requirements of Maine corporate law') will be converted by operation of 5
law into one share of HoldCo common stock. Holders of Company common .;ock before the merger will automatically become holders of HoldCo common stock, holding the same number of shares, and will cease to be owners of the Company's stock. CMP's shareholders will not be required to exchange their stock certificates, but rather, their stock certificates will represent an identical numoer of iVgte f HoldCo common stock.
- See 13 A M.R.S.A. Il 908,909.
5 ( See 13-A M.R.S.A. Il 901,905. e
4
- c. - Also on the Merger Date, the outstandir3 shares of MergeCo common stock (that is, shares issued to HoldCo at the time MergeCo was formed) will, as a result of the merger of MergeCo into CMP with CMP as the surviving corporation, be converted by operation of law' into a number of shares of the common stock of the Company equal to the number of shares of the Company's common stock outstanding immediately prior to the share conversion described in part b. above, which will be deemed lasued by the Company for this purpose.
d. Each share of HoldCo common stock issued to CMP when HoldCo was formed will be cancelled by HoldCo. Because the MergeCo shares converted to CMP shares will be the shares originally issued to and owned by HoldCo, the merger of MergeCo into the Company will result in the Company becoming a subsidiary of HoldCo.'
- 23. Under the Merger Agreement, completion of the corporate reorganization is subject to shareholder and regulatory approvals, listing of HoldCo's common stock on the New York Stock Exchange, and a satisfactory tax ruling or opinion with respect to the tax consequences of the merger.
- 24. As of the Merger Date, the common stock of HoldCo will be listed on the New
- See note 5 above.
' The form of transaction involving the Company, HoldCo and MergeCo described in this Application to carry out the intended corporate reorganization is referred to as a " reverse phantom subsidiary merger" (also referred to as a " reverse triangular merger"). In states such as Maine where there is no mandatory share exchange statute, this form of transaction is necessary to avoid the potential for a minority common share interest remaining outstanding in the utility.
York Stock Exchange and the common stock of the Company will no longer be listed on an exchange since it will be owned entirely by HoldCo.
- 25. De proposed corporate reorganization will require the approval of the holders of the Company's common stock and 6% Preferred Stock outstanding, voting together as a l
single class, and of the holders of the Company's common stock, voting separately. De Company intends to present the proposed corporate reorganization to the shareholders at its i 1998 Annual Meeting of Shareholders, scheduled for May 21,1998. The reorganization also i requires approval by the Securities and Exchange Commission ("SEC") under the Public Utility Holding Company Act of 1935' and the Federal Energy Regulatory Commission l under the Federal Power Act.' In addition, approval or waiver by the Connecticut Department of Public Utility Control and approval by the Nuclear Regulatory Commission ! 8 Section 9(a)(2) of the Public Utility Holding Company Act of 1935 ("PUHCA") prohibits the acquisition of five percent or more of the securities of a public utility by any person or entity that already owns at least five percent of the securities of another public l utility and also prohibits the acquisition of five percent or more of two public utilities unless _ the SEC has approved the acquisition. Because CMP has at least one public utility l subsidiary, SEC approval of HoldCo's acquisition of CMP and its public utility affiliates and of an interest in a new gas distribution utility through a wholly owned subsidiary is required. He Company expects that, as is the case with the Company, HoldCo will qualify for an exemption from the provisions of PUHCA except those relating to the acquisition of the-securities of public utility companies. His exemption will be based on HoldCo and each of its utility subsidiaries from which it derives a material part of its income being predominantly intrastate and carrying on their utility business substantially in Maine. Section 203 of the Federal Power Act requires approval of the Federal Energy Regulatory Commission ("FERC") for the disposition or merger of jurisdictional facilities, which include facilities used in interstate commerce. In this case, the effective transfer of CMP's common r,tock to HoldCo in the conversion transaction described above triggers FERC jurisdiction. 8' Approval or waiver may be required due to the Company's ownership of a 2.5 percent interest in the Millstone No. 3 nuclear unit, j' - 13-r------m-%-- -r ---rve+r-... 4 % c-,---.r-r--,y +... mo.s,.. - -- -, - - - - ------.m--w,ym.--- - r~--, y- ---- ,w- ----r -- y g
may be required." The anticipated schedule for obtaining required approvals and for the closing of transactions to carry out the reorganization is attached to this Application as Exhibit C. IV. THE ORGAfIIZATION A. Ch2
- 26. As cf the Merger Date, the new corporate organization, which is illustrated on the chart attached to this Application as Exhibit D, will include HoldCo, a non-operating holding company of which CMP will be a subsidiary, with all of CMP's common stock outstanding being held by HoldCo.
- 27. The Company's debt securities, which include bontis issued under the Company's General and Refunding Mortgage Indenture, medium term notes, industrial revenue and pollution control notes and the note held by the Finance Authority of Maine in connection with the buyout of a non-utility generator contract, and all of its Preferred Stock will remain as outstanding securities of the Company. The terms thereof will not be sitered or othemise affected by the corporate reorganization. In addition, the terms and provisions of the indentures, credit agreements and other debt instruments and the authorized number of shares of Preferred Stock and related capital stock provisions in the Company's Articles of Incorporation (the " Charter") will also not be altered or affected by the reorganization. The reorganization will also not require any changes in the Company's Charter.
- 28. After the Merger Date, the Company will continue to finance its business operations by issuing its own debt, such as the medium term notes approved by the
" The effective transfer of CMP's common stock to HoldCo in the conversion transaction described above may require approval of the Nuclear Regulatory Commission.
-14
Comminion in Docket No. 97-493, and preferred equity securities. The proceeds of securities issuances by the Company will be used exclusively by the Company for its electric utility business. A:tual financings will depend on specific needs and will take into account capitalization ratios and market conditions. Commission approval will be sought for any other issuances of debt or equity securities by the Company. a
- 29. As of Sepumber 30,1997, the outstanding indebtedness of the Company was as follows:
DTE OUTSTANDING PRINCIPAL
- General and Refunding Mortgage Bonds:
Series U, due 4/15/98 $ 25,000,000 Series S, due 8/15/98 $ 60,000,000 Series T, due 11/1/98 $ 75,000,000 Series O, due 1/1/99 $ 50,000,000 Series P, due 1/15/2000 $ 75,000,000 Series N, due 9/15/2001 $ 11,000,000 Series Q, due 3/1/2008 $ 75,000,00 ' Series R, due 6/1/2023 $ 50.000.000
$421,000,000
- Medium-Term Notes $ 43,000,000
{ FAME Note $ 60,129,000 Long-Term Lease Obligations $ 34,985,000 Industrial Revenue and Pollution Control Notes $ 30,305,000 Short-Term Notes $ 50,000,000 1
- 30. As of the same date, equity balances for the Company were as follows:
SHARES ISSUED AND TYPE AUTHORIZED SHARFS OUTSTANDING Common Stock, $5 par 80,000,000 32,442,752 value Preferred Stock, $25 par 2,000,000 0
- value 6% Preferred Stock, $100 5,713 5,713 par value Dividend Series Preferred 2,300,000 220,000 Stock,5100 par value: 30,000 50,000 3.50% Series 50,000 4.60% Series 300,000 4.75% Series 70,000 5.25% Series 395,275 7 7/8% Series 8 7/8% Series Flexible Money Market 1,115,275 Pa.ferred Stock, Series A - 7.999%
- 31. Likewise, c,ther obligations of CMP relating to its electric utility business will be retained by the Company, unaffected by the teorganization. These obligations include the Company's share of decommissioning and other costs relating to nuclear units and potential liability in connection with contaminated sites, g 32. All transmission and distribution plant, including all real estate, fixtures and personal property owned, leased, operated or otherwise used by the Company in connection with the transmission and distribution of electricity prior to the Merger Date will remain assets of CMP and will not be affected by the reorganization.
- 33. On the Merger Date, which will occur shortly after the May 21,1998 Annual Meeting of the Company's shareholders if all necessary approvals have been obtained by that date, CMP will continue to hold all generation assets now owned by the Conipany, including (i) any assets that are the subject of a binding purchase and sale agreement between the Company and a third party," (ii) any asset for which the Company does not receive an acceptable bid in connection with its current solicitation of bids for the sale of its generation assets," (iii) interests in a nuclear electric generating plant and in companies owning such plants, and (iv) contracts with gralifying facilities" or demand-side management or conservation providers or brokers.
- 34. As of the Merger Date, the Company will continue providing electric service to its customers and all transmission services it now provides. To meet its service obligations to existing and new customers, the Company will procure its energy and capacity requirements from one or more of the following sources until the beginning of retail u CMP's application for approval of the plan for divestiture of generation assets and other generation interests is the subject of a separate proceeding before the Commission in Docket No. 97-253.
" These generating assets are subject to divestiture under the new restructuring law and will be transferred at a later date in accordance with the provisions of that law.
CMP owns a 38 percent equity interest in Maine Yankee Atomic Power Company, a 9.5 percent equity interest in Yankee Atomic Electric Company, a 6 percent equity interest in Connecticut Yankee Atomic Power Company, all of whose plants have been permanently shut down, and a 4 percent equity interest in Vermont Yankee Nuclear Power Corporation.
CMP also owns a 2.5 percent interest as a tenant in common in Millstone Unit No. 3, which has been off line for regulatory reasons since March 31,1996.
" The Company has offered for sale rights to capacity and energy under purchased power agreements, and the sale of such rights will be required after February 28,2000 as provided in the new restructuring law.
-17
competition: (i) Company-owned generation usets under contract to a prospective purchaser," (ii) contracts with any successful bidder or bidders to buy back all or a portion of the energy and capacity formerly provided by a purchased generating asset, (iii) Company-owned generation assets that are being retained by the Company as described in the preceding paragraph, and (iv) one or more contracts pursuant to a Request for Proposals for replacement power issued by the Company in November 1997. This energy portfolio will be managed for the sole benefit of the Company and its customers by a new wholly-owned non-utility energy and marketing rubsidiary of HoldCo that will, after the commencement of retail access, be an " affiliated competitive provider" as defmed in the new restructuring law ("EnerMark"). EnerMark's energy portfolio management group, which will include employees currently performing supply planning and procurement functions for the Company's Energy Services business unit who will be transferred to EnerMark after the reorganization, will be responsible for managing the Company's supply portfolio under a Management Services Agreement filed with this Application as Exhibit E.
- 35. Under the Management Services Agreement, EnerMark will provide supply planning services to the Company, manage its power supply portfolio, and procure for the Company's account alternate supplies that balance cost and risk, with the objective of optimizing the cost-effectiveness of resources for the benefit of the Company's franchise customers. Ener. Mark's services under the Agreement will be provided at EnerMark's cost, including a rate of return on invested capital equal to the Company's allowed return and
) performance-based incentive payments. Pricing of the contract services at cost is appropriate
" The Company will continue to operate all generating facilities from the execution of any purchase and sale agreement to the time of closing of any sale or sales of those facilities.
i
because it prevides a clear and readily measi ;able basis for setting prices, makes the ( functional separation betweer CV ~ and EnerMari cost neutral to the Company's ratepayers, and, by including a performance based incentive element, promotes efficiencies that may otherwise be discouraged by using a cost appresch to pricing. Any energy supply procured by EnerMark for the Company will also be provided at cost, as described. 4
- 36. In the event that the Company has available excess energy or capacity in its portfolic, EnerMark may sell such energy or capacity to a non-affiliated wholesale or retail customer for the Company's account.
- 37. Assets of the Company not directly used in its transmission and distribution business, other than generating assets proposed to be transferred or retained by the Company as described in paragraph 33, may be transferred to different entities in the holding company system at different times, depending on the nature and use of the asset and whether any such transfer is in the Company's be interests. By way ofillustration, such assets may include office equipment, furniture and materials currently used by various functions in the Company that the Company may determine, after careful consideration of economies, efficiencies, management and other factors, could be conducted independently of the Company's core business. Such transfers could further the objective of achieving a clearer separation between utility and non-utility businesses and assets used in conducting those businesses. The transfer i
of such assets to other entities and their administration and maintenance of those assets could also help to avoid ongoing cost allocation and cross-subsidization issues arising from transactions between the Company and non-utility subsidiaries of HoldCo. Any transfers of such Company assets would be at the higher of market value or book value, as approved in
- he Commission's Order dated December 12,1995 in Docket No. 95-251 (relating to
approval of the creation of TeleSmart, a wholly-owned non-utility subsidiary of the Company) and its Order dated August 1,1995 in Docket No. 95-092 (relating to approval of the creation of M: teCom Services, a telecommunications company wholly-owned by CMP).
- 38. Employees of the Company who are now Distribution Services business unit employees (currcuily approximately 1,100 in number) will be retained by the Company.
A Company employees who administer the Company's purchased power agreements also will remain Company employees. Company employees who now perform energy portfolio management (supply planning and procurement) and retail sales and marketing functions in the Company's Energy Services business unit, wil), after the reorganization, be employees of ' EnerMark. Energy Senices business unit employees in the Technical Services (formerly Engineering) and Environmental and Licensing departments will become employees of The Union Water-Power Company (" Union Water")" in its E/ PRO division, unless alternate employment arrangements are made for certain Technical Services employees in connection with any sale of generation assets by the Company. If the Company should determine, after consideration, that it is in the Company's best interests to centralize support services, employees performing support functions for the Company may become ServeCo employees in connection with the reorganization at a time that meets the business needs of the Company. t
- 39. As a transmission and distribution utility, the Company anticipates continuing to
" The Ui. ion Water-Power Company (" Union Water") is a wholly-owned non-utility subsidiary of the Company. See section IV.C below for a description ofits business activities. E/7 RO, currently a division of CMP International Consultants, another wholly-owned Company subsidiary, will be transferred to Union Water as part of the reorganization.
See section IV.C below for a discussion of the proposed transfer of E/ PRO to Union Water.
invest in and promote econunic development in Maine and will also seek to maximize the use of its delivery infrastructure through arrangements with affiliates or third parties. In this proceeding, the Company requests approval of the licensing, lease or other transfer of interests in its rights af way and transmission and distribution structures to entities involved in pipeline and gas distribution projects in the Company's service area" and other transfers of assets to such entities on the terms approved in Docket No. 95-092. Maine Electric Power Company, Inc. ("MEPCO"), a transmission utility in which the Company holds a 78.3 percent equity interest, joins in this request with respect to the use or transfer of interests in its transmission structures and rights-of-way."
- 40. In Docket No. 95-092, the Commission approvul a stipulation by Order dated July 13,1935 allowing the Company to transfer to a generation or telecommunications subsidiary or other affiliate assets with a value not exceeding $100,000 per transaction, up to an annual amount of $1,000,000, without further Commission approval. The Stipulation requires CMP to notify the parties in that Docket of the use or transfer of transmission or distribution structures or rights-of-way for telecommunications projects and the valuation method and value used for any transfer. The Company is required to obtain Commission approval for the transfer or beneficial use of an asset whose value is indeterminate or not susceptible to definitive calculation. The stipulation provides that the value of a transferred asset or of its beneficial use will be deemed to be readily determinable and susceptible to definitive calculation if any of the following exists: (i) an external market for similar uses of
" The Company's interest in such projects and proposed new entities to pursue such interests are discussed in section IV.D below.
" For additional information concerning MEPCO, see 148 below.
assets of that type, (ii) a competitive alternative that allows the accomplishment of a similar I l business purpose, or (iii) demonstrable present or deferred CMP customer service enhancements. The subsidiary or affiliate must pay the higher of market value or book value, with revenue from such transfers flowing to the benefit of ratepayers to the extent the asset has been depreciated.
- 41. Approval of the requests of the Company and MEPCO in this proceeding will permit each of them to transfer, lease or license assets, including rights-of-way and related structures, with a value of $100,000 or less per transaction up to an aggregate value of
$1,000,000 per year to pipeline and gas distribution entities, subject to terms identical to those in Docket No. 95-092. This additional capacity with respect to Company assets wiii facilitate business arrangements that will contribute value while safeguarding against ratepayer subsidization of those business arrangements as a result of inappropriate transfer pricing.
- 42. In addition, the Company may be presented with business opportunities allowing it to capitalize on its core competency of operating a large infrastructure business with highly-skilled employees and its reputation for quality service by making available to other non-affiliated utilities expertise in transmission and distribution matters in the form of technical services and advice. The Company anticipates that these services will be only an incidental part of its transmission and distribution business and will not be aggres:ively marketed.
- 43. Services provided to other utilities would be provided through Union Water under a Services Agreement between the Company and Union Water attached to this Application as Exhibit F. The Services Agreement is based on an existing services agreement between the two companies.2o It w 11 allow Union Water to supplement its expertise on transmission and distribution matters on an as'needed basis with CMP employees having the technical expertise required. Because of the proposed build-up of in-house engineering and related expertise at Union Water through the transfer of employees in the Technical Services department that is now part of the Energy Services business unit of the Company to Union Water as discussed below, it is anticipated that the need for additional expertise will be infrequent.
- 44. In the event that CMP staff expertise is required, the work will be structured to avoid any significant conflict with CMP work, and in all instances, priority will be given to CMP work. Time spent by CMP employees in furnishing services through Union Water will
{ be recorded separately, and Union Water will compensate the Company for such services at t the higher of the Company's fully allocated cost or the market rate for such services.
- 45. By making employees with specific expertise available on these terms, CMP's customers will be adequately protected from improper cost allocations and deficiencies in service while the Company's employees will have additional interesting and challenging work and professional development opportunities that may not only help CMP in retaining them but that may also benefit CMP by sharpening and expanding the skills used in their work for the Company.
- 46. After the Merger Date, the Company will continue to be regulated by the Commission. As an operating utility, the Company will be subject to regulation by the 2
The existing agreement, which was approved by the Commission in Docket No. 93-092, permits CMP to provide various support services to Union Water and allows Union Water to provide real estate management and development and recreational and river { facilities management and development sersices to CMP.
Commission with respect to its rates, securities issuances, transactions with affiliates, accounting, customer service, asset transfers (with the exception described in paragraphs 39 through 41 of this Ap *ication if approved by the Commission), and other matters. In addition, the Commission will continue to have the power to review and approve reorganizations, as defined in Section 708 of Title 35-A M.R.S.A., that propos - create e public utility affiliates of the Company or of HoldCo. The holding company structure proposed in this Application will not in any way impair the Commission's ability to protect the psac interest in connection with the Company's operations. To the contrary, by providing the maximum separation of utility and non-utility lines of business and related t investments, the proposed reorganization will enhance the Commission's ability to assure that there is no cross-subsidization of cost or transfer of business risk from the non-utility enterprises to the Company's utility business. It will also enhance the Commission's ability j to monitor the Company's compliance with the standards of conduct created by the restructuring law. M. Fwletine Utility Affiliates
- 47. - In the reorganization, CMP will continue to hold its existing equity interests in the following public utilities, each of which is and will remain a subsidiary of CMP. Maine Electric Power Company, Inc. ("MEPCO") and NORVARCO.2 A description of each of these compiunes follows.
25 The Company's voting stock in Aroostook Valley Electric Company ("AVEC"), a wholly-owned public utility subsidiary of the Company that owns and operates a 33 megawatt wood-fired generating plant in Fort Fairfield, Maine, has been offered for sale by the Company. The Company will retain its interest in AVEC, subject to later divestiture, if it does not receive an acceptable bid for the AVEC interest.
- 48. MEPCO. The Company owns a 78.3 percent equity interest in MEPCO, a Maine public utility organized on January 3,1966, in which Bangor Hydro-Electric Company and Maine Public Service Company hold the remaining voting stock. MEPCO owns and operates a 345 kV transmission interconnection between Wiscasset and the Maine-New Brunswick bord:r at Orient, Maine, where its line connects with the portion of the e
interconnection constructed in New Brunswick by The New Brunswick Power Corporation. MEPCO also owns and operaes certain equipment, including microwave communication facilities, in connection with the Hydro-Quebec Phase II (" Phase II") project described in the next paragraph. I
- 49. NORVARCO-Chester SVC Partnership. NORVARCO, a wholly-ownw!
subsidiary of the Company incorporated in Maine on April 12,1990, is one of two general partners with 50 percent interests in Chester SVC Partnership, a general partnership that owns a static var compensator facility ("SVC") located in Chester, Maine, adjacent to mEPCO's 345 kV transmission line. The SVC provides necessary transmission system reinforcements that support the Phase II transmission line expansion constructed in New Hampshire and that allow the Phase 11 facilities and the MEPCO transmission line to operate at their maximum capabilities simultaneously. The Commission approved the creation of NORVARCO and Chester SVC Partnership on July 31,1990 in Docket No. 90-100,
- 50. After the Merger Date, each of the public utility affiliates of the Company will continue to be regulated to the same extent as currently regulated by the Commission and by any federal regulatory agency.
C. Frieelne Non-Utility Amilates
- 51. To carry out the proposed corporate reorganization, CMP proposes to transfer
its equity interests in all but one of its wholly-owned non-utility subsidiaries by dividending the stock of those entities to HoldCo. CMP's indirect affiliates will maintain their existing relationships with the companies that are now wholly-owned subsidiaries of CMP." CMP's wholly-owned subsidiaries are as follows:
- a. CMP International Consultants ("CMPI"), which was incorporated in Maine 4
on August 27,1992, provides consulting, planning, training and project management services to foreign and domestic utilities and government agencies in various aspects of utility operations and utility support services. CMPI's Center for Energy Information division provides information and research services and related consulting. FJPRO, also a division of CMPI, provides engineering, environmental, licensing and other technical services. The Commission approved the creation of CMPI (formerly named Integrated Resource Management Services) by Order dated August 6,1992 in Docket No. 92-104. The Commission's November 1994 Order in Docket No. 94-147 authorized the Company to invest up to $1.5 million in CMPI for expanded business activities and required that any profits or losses be reported above the line.
- b. Central Securities Corporation (" Central"), a Maine corporation organized on June 23,1919, owns real estate located in the Company's service area.
- c. Cumberland Securities Corporation ("Cumberland") also owns real estate in
" For example, FiveCom, Inc., in which MaineCom Services, a wholly-owned subsidiary of CMP, holds a majority interest, will maintain its current relationship with MaineCom.
the Company's service area. Cumberland is a Maine corporation, existing since September 23,1929. d. Kennebec Hydro Resources, Inc. ("Kennebec Hydro") is the general partner with a 50 percent interest in The Merimil Limited Partnership ("Merimil"), which owns the 1.ockwood Hydroelectric Project, a qualifying facility located in Waterville. The limited partners in Merimil are not affiliates of the Company. Kennebec Hydro's participation in Merimil was authorized by the Commission by Order dated May 7,1985 in Docket No. 84-226. It is a Maine corporation that has existed since August 17, 1983." e. MaineCom Services ("MaineCom"), a Maine corporation organized or. July 25,1995, develops telecommunications projects and provides telecommunications services. MaineCom holds direct and indirect voting s interests (approximate) in various entities that are in the business of developing a fiber optics network in New England, as ft .iows: FiveCom, Inc. 85 % FiveCom Maine LLC 66 % New England Fiber Communicstions LLC 40 % In turn, these MaineCom affiliates hold voting interests (approximate) as follows: FiveCom, Inc. 88% in FiveCom LLC FiveCom LLC 33% in FiveCom Maine LLC ' 60% in NECOM LLC MaineCom was created pursuant to a July 1995 Commission Order in Docket
" The Company has offered its interest in Kennebec Hydro for sale. If the Company does not receive an acceptable bid, it will retain the Kennebec Hydro interest subject to later divestiture.
-27
- _ _ _ _ _ _ _ _ _ _ _ _ . I
No. 95-092 authorizinr, the creation of subsidiaries and other affiliates to participate in telecomraunications business ventures in the New England states and the Canadian provir.ces of New Brunswick, Nova Scotia and Quebec, ar.d in generation and generation marketing projects and activities outside New England and New York, and related consulting. The 1995 Order authorized the Company to invest up to an aggregate amount of $30 million, provided that each proposed investment in a specific business activity was reviewed in advance by the Commission.2' An August 28,1997 Order issued by the Commission in Docket No. 97-410 approved an increase in the authorized aggregate investment to $50 million, with an automatic decrease to $30 million as of April 1 1999, and a loan by CMP of $30 million to FiveCom LLC for completion of a New England fiber optics network. The stipulations approved in both dockets regt.- e that profits and losses from telecommunications and generation ventures be reported below the line and include a ratepayer " hold harmless" provision. f. TeleSmart, a Maine corporation organized on September 12,1995, provides collections and related accounts receivable management services. Its division Teltech Resource Group collects charged-off accounts. The creation of TeleSmart was approved by the Commission on September 9,1995 in Docket No. 95-251. By Order dated March 4,1997 in Docket No. 97-025, the Commission authorized the Company to invest up to $2,500,000 in 2' No application :s required for generation investments if the Company's senior secured debt is rated at investment grade by ti e three rating agencies that rate Company securities.
TeleSmart. The stipuladon approved by the Commission in Docket No. 95-M1 provides for above-the-line reporting of profits and losses, with any losses excluded from earnings sharing under paragraph number 7 of the Alternative Rate Plan Stipulation in Docket No. 92-345(11). Under the Commission's Order in Docket No. 95-251, creation of a TeleSmart affiliated interest (as defined in Section 70 of Title 35-A M.R.S.A.) requires prior Commission review. g. Union Water, which was incorporated in Maine on January 1,1879, provides river facilities management, including the management of dams, reservoirs, fishways and oxygenation facilities; utility support services such as underground facility locating, infrared photography to detect excess heat in electrical equipment and motors, and woWorder ticket management; and, through its UnionLand Services division, real estate management, development and leasing, and land and modular housing sales. ' Union Water also owns 25 percent of the voting stock of Androscoggin Reservoir Company (" ARCO"), which owns a storage reservoir and dam on the Androscoggin River. ARCO, whose other owners are Public Service Company of New Hampshire and three paper companies, also owns real estate and other facilities at Aziscohos Dam that it 'eaA to a qualifying facility.
- 52. To carry out the corporate reorganization, CMP will transfer its existing equity interests in all of these wholly-owned subsidiaries except Kennebec Hydro by dividending the stock it holds in those entities to HoldCo. CMPI, Central, Cumberland, MaineCom, i
TeleSmart and Union Water will, after such transfer, be wholly-owned subsidiaries of HoldCo.
- 53. In addition, as part of the proposed reorganization, the PJPRO division of CMPI will be transferred to and established as a divit'x of Union Water. E/ PRO now provides and will continue to provide energy engineering services such as the design, construction and a
construction management, maintenance, repaL and performance-testing of various aspects of transmission lines and substations, power and lighting systems, hydroelectric generating stations, and river recreation facilities. It will also continue to provide environmental services including training and compliance, site evaluation and management, regulatory reporting and filings, environmental impact studies, and licensing. E/ PRO currently has approximately 20 full-time and part-time employees." In connection with the reorganization, the 36 employees who now work in the Company's Technical Services group will become Union Water employees, working in the FJPRO division." In addition, most of the 15 employees currently with the Company's Environmental and Licensing group will also be employed in the FJPRO division, with the remainder being retained by the Company.
- These totals do not ir.clude Company employees in the Technical Services group who were previously transferred to the Company's Distribution Services business unit and who will continue as Company employees after the reorganization. These Distribution Services .
" This number excludes CMP retirees hired by FJPRO for start-up and maintenance of the Company's Mason Station to meet capacity requirements in New England during
, extended nuclear plant outages.
- Some of these employees may be offered employment by a purchaser of the Company's generation assets. If such employment is accepted, fewer than 36 Company employees in the Technical Services group will become E/ PRO employees.
employees include transmission and distribution system engineers and designers.
- 54. In connection with the solicitation of bids for its hydroelectric generating stations, the Company has also offered for sale its 24.8 percent equity interest in Kennebec Water Power Company, a Maine corporation whose business is to regulate the flow of the Kennebec River, and its 14 percent partnership interest in the Gulf Island Pond Oxygenation Project, a Maine general partnership with CMP and three paper companies as partners. The partnership owns and operates an oxygenation facility at GulfIsland Pond on the i
] Androscoggin River at Greene. These interests will be retained by the Company if the 1 Company does not receive an acceptable bid for its hydro stations. D. New Aff111ates A 55. This Application also proposes the creation of several possible new entities. These entities are (i) EnerMark, which will be a wholly-owned non-utility subsidiary of HoldCo, (ii) a limited liability company that will be owned equally by a new HoldCo wholly-owned subsidiary and New York State Electric & Gas Corpora' ion or its affiliate for the purpose of providing gas service in Maine (" CMP Gas Company"), (iii) a wholly-owned corporate subsidiary of HoldCo ("GasCo") created to hold a membership interest in CMP Gas Company, (iv) a wholly-owned subsidiary of HoldCo ("PipelineCo") that will hold an equity interest in a pipeline project that may be constructed from Nova Scotia through Maine, and (v) a service company to provide support services to entities in the reorganized corporate structure that would, if created, be wholly-owned by HoldCo ("ServeCo"). Each of these entities is discussed in turn.
- 56. EnerMark. EnerMark's two focuses will be supply planning and procurement through its energy portfolio management group, and retail sales and marketing through its
existing Combined Energies unit, which serves industrial and medium and large commercial customers, and its small commercial and residential unit.
- 57. During the transition to retail competition, the role of the energy portfolio management group will be to build and manage a replacement power portfolio to serve the Company's franchise customers, as previously described." The objective will be to conven CMP's existing portfolio of Company generation assets to a portfolio based on contracts that balance price and risk. Meeting this objective is important not only in optimizing the cost-effectiveness of resources for CMP until March 1, 2000, but t.lso in creating a separate supply ponfolio for EnerMark's own account to serve customers reliably and at competitive prices in northeastern states with retail access, including Maine, as soon as permitted. After the commencement of retail access, sales by the energy ponfolio management group may be made to the retail sales and marketing group to supply retail customers or directly to large sophisticated customers. In addition, the energy ponfolio management group may sell at wholesale in other markets.2:
- 58. To retain and build its customer base, the retail sales and marketing group, through its Combined Energies and small commercial and residential units, will market energy and related services and products to targeted customers in Maine after the A two-prorod approach will be used to rebuild the Company's supply portfolio.
First, the Company has requested that each entity bidding on its generation assets also submit a propo',al for replacing the power that would have been available from the purchased asset. Second, the Company has issued a general replacement power request for proposals. The propotals received through both avenues w ?! be used to build a portfolio meeting price and risk objectives. 2' Creation of a power marketer will require FERC approval to charge market-based rates under Section 205 of the Federal Power Act.
commencement of retail access and in other selected areas where retail access is in effect. To meet customer needs, Combined Energies will use a "whole energy" approach, offering energy management services ranging from energy audits and energy supply planning through prcject and construction management and follow-up training and monitoring. Some of these services will be provided directly by Combined Energies, while others will be subcontracted. A The small commercial and residential unit will sell ready-made energy-related products and services that are available from recognized vendors. Both units will offer unbundled energy and energy-related, unregulated products and services as well as energy bundled with such products and services. EnerMark will not engage in any joint advertising or marketing with, advertise or market on behalf of, or provide marketing or advertising services to the Company at any time.
- 59. CMP Gn Comnanv. On November 12,1997, the Company and New York
' State Electric & Gas Corporation ("NYSEG") entered into an agreement to form a Maine limited liability company called " CMP Gas Company, L.L.C.," subject to receiving necessary regulatory approvals. With respect to its proposed operations in Maine, CMP Gas Company will be a regulated " gas utility" as defined in section 102 of Title 35-A M.R.S.A.
The agreement between CMP and NYSEG for CMP Gas Company, including its appendices, which contain a form of promissory note and proposed support services agreements between the Company wi CMP Gas Company and also between NYSEG and CMP Gas Company, are attached to tW Application as Exhibit G. CMP will not participate in CMP Gas Company directly. Rather, as proposed in this Application, a new wholly-owned subsidiary of HoldCo ("GasCo") will be created to hold a 50 percent membership interest in CMP Gas Company. The remaining 50 percent membership interest will be held by NYSEG or a q ____ _ _ _
NYSEG affiliate.
- 60. CMP Gas Company will be formed for the purpose of constructing, owning and operating a natural gas distribution company to provide gas distribution and related services to Maine customers who do not currently have access to natural gas as an energy option and to New Hampshire customers in the proximity of the proposed pipeline of the Portland Natural Gas Transmission System or of Maritimes & Northeast Pipeline or both. The New Hampshire pordon of the gas distribution business may be conducted in one or more different entities in which either Gasco or another HoldCo affiliate may hold an interest." CMP Gas Company may also engage in other businesses, as determined by its four-member Management Committee.
- 61. Participation in the gas distribution business will not only provide an additional energy option to Maine and possibly New Hampshire consumers, but is also functionally related to the core strength of distributing energy. This strategic fit will be enhanced through the alliance with NYSEG, which serves more than 280,000 natural gas customers in central and upstate New York, where the terrain, climate and population densities resemble those in Maine.
- 62. PinelineCo. In addition to participating in the natural gas distribution business through entities described in the preceding paragraphs concerning CMP Gas Company, CMP has entered into an agreement with Maritimes & Northeast Pipeline, L.L.C. ("Maritimes") to explore up to a 10 percent equity participation by the Company or an affiliate in a possible new pipeline company that would construct, own and operate the United States portion of
" SEC approval of HoldCo's acquisition of one or more gas distribution utilities will be required under section 9(a)(2) of PUHCA, whose provisions are discussed in note 8 above.
____~ Maritimes' proposed natural gas pipeline. That pipeline would stretch from off-shore fields in Nova Scotia across Maine. CMP's agreement with Maritimes also provides for possible equity participation up to the same level in a Canadian entity that would construct, own and operate the Canadian portion of the pipeline from the U.S.-Canadian border across Nova Scotia. As proposed, the two pipeline companies will be structured as limited liability a companies in which a new HoldCo wholly-owned subsidiary ("PipelineCo'), rather than the Company, will be the equity participant through membership interests in these entities. Because no gas distribution is intended from the pipeline, PipelineCo and the two limited liability pipeline companies will not be public utilities.
- 63. ServeCo. The Company may determine, after considering various factors, including cost-effectiveness, personnel and management, that it is in the Company's best interests to centralize the support services provided by various functional areas of the Company and certain other functions by shifting these functions along with Company employees who perform them and related assets to a new wholly-owned subsidiary of c
HoldCo that would be created to provide support and possible other services to HoldCo and its subsidiaries and other affiliates, incleding the Company ("ServeCo"). By way of illustration, services offered by ServeCo to these entities could possibly include advertising, accounting, transportation, purchasing, inventory management, human resources, facilities and real estate management, payment processing, finance and treasury, legal, audit, public relations, budgeting, investor relations, information systems, and governmental affairs, and planning services. These and any other services would be offered under a standardio Services Agreement between ServeCo and any entity in the holding company system requesting services. The form of Services Agreement is attached to this Application as
i Exhibit H. It is modeled on the standard form of support services agreement between the Company and its affiliates previously approved by the Commission, which provides for pricing at cost." In the event that ServeCo is not created or is created at a later date, CMP may provide support services to HoldCo and its affiliates under this standard form of support servicet agreement, if any of these entities requests such services. The standard form of Support Services Agreement is attached to this Application as Exhibit I. HoldCo and each of ' its affiliates will be free to obtain any service offered by ServeCo or the Company from asffiliated sources.
- 64. 'Ihe pricing of any services provided by ServeCo under the Services Agreement would be at ServeCo's cost, including a return on capital invested or funds used in rendering -
the services, which in the case of a Services Agreement between the Company and ServeCo, would be no greater than the Company's allowed return. Cost-basis pricing would include all 4.:.t and indirect costs that could reasonably be identified and related to particular services performed by ServeCo. If a service were performed by ServeCo for the benefit of more than one entity, common costs would be equitably allocated to the entities benefiting from the service. In this way, costs not attributable solely to one entity would be apportioned on a cost-causative basis and, if the cause of a cost could not be identified, it would be allocated generally, based on equally weighted ratios of revenues, expenses and assets, consistent with the Federal Communications Commission model for telecommunications carriers favored by the Commission in its Order dated January 28,1997
" See, e.g., Order dated May 4,1993 in Docket No. 93-092 (including approval of CMP and Union Water support services agreement), and Order dated November 23,1994 in Docket No. 94-147 Niuding approval of CMP-CMPI support servic:s agreement).
~
in Docket No. 96-053. The Commission has issued a proposed rule on " Requirements for Non-Core Utility Activities and Transactions Between Affiliates," which the Company is in the process of reviewing and which may affect this approach.
- 65. By shifting the responsibility for providing support services to ServeCo in this manner, the frequency of transactions requiring the allocation of costs between utility and non-utility activities that results from the Company acting as the service provider may be significantly diminished.
V. CONDITIONS OF nrnRGANI7 ATION
- 66. As discussed in Section II of this Application, the proposed separation of regulated
..d unregulated businesses through the use of a holding company structure will protect the Company's ratepayers in several respects.
- 67. Notwithstanding the protections inherent in the holding company form of organization, the Company is proposing a set of conditions to the reorganization, consistent with 35-A M.R.S.A. section 708. The Company believes that the long-term advantages of the reorganization can be achieved to a significant degree within the terms of these conditions. These conditions will protect the Company's customers and will not unnecessarily burden the operations or hinder the business prospects of HoldCo and its non-utility subsidiaries in an increasingly competitive business environment. In addition, the Commission already possesses a broad array of regulatory mechanisms to ensure that ratepayers are adequately protected through its continued statutory authority to regulate the Company. These conditions are as follows:
(1) Access to books and records. The Commission will have
-access to books, records and documents of all public utilities i
in the holding company system, of HoldCo, and of non-utility affiliates in which HoldCo directly or indirectly holds a majority interest. HoldCo will use its best efforts to produce such books, records and documents. (2) Financial etniaments. HoldCo will provide to the Commission 4 quarterly and annual financial statements, including annual consolidated balance sheets of HoldCo and its subsidiaries, certified by an independent public accountant. > (3) Affiliated transactions. HoldCo will provide to the Commission an annual statement describing the nature of and basis of allocations for any transactions and other arrangements between any public utility company in the holding company system and HoldCo or any non-utility affiliate of HoldCo. The Commission will have the right to investigate any such transaction or arrangement. (4) SEC filings. HoldCo will provide to the Commis' ion copies of all periodic reports filed by HoldCo with the SEC. (5) Confidentiality. The Commission will afford all appropriate protections, including the issuance of protective orders, for the business, financial and proprietary information designated by HoldCo or any cf its affiliates as confidential. (6) Transfers of n"ets. Assets may be transferred by the Company ir. accordance with the terms of the stipulation 1 I
approved by the Commission in Docket No. 95-092 and the terms proposed in paragraphs 39 through 41 of this Application. Assets transferred to carry out the reorganization as described in this Application will not be subject to the limitations set forth in Docket No. 95-092 or in said a paragraphs 39 through 41. (7) Inans and linhilities. No public utility affiliate of HoldCo will make any loan to or guarantee or assume any obligation of HoldCo or any of its affiliates without prior Commission approval. (8) Ownershio of the Comoany. Without prior Commission approval, HoldCo will not sell, pledge or otherwise transfer any common stock of the Company. (9) Total investment. Total investment in non-utility subsidiaries and other non-utility affiliates of HoldCo will be limited to 20 percent of total assets of HoldCo and all of its subsidiaries and other affiliates on a consolidated basis.- (10) Reorganintion costs. All casts arising from the reorganization of the Company to a holding company system will be borne by shareholders. (11) Dividend nolicy. The Board of Directors of the Company must set dividend policy for the Company based solely on the financial performance, needs and health of the Company
(. without regard to the rest of the holding company system. (12) Utilitv *=ritia* ineumar**. Securities issuances by the Company will be done independently of HoldCo. The proceeds of any securities issued by the Company will be used exclusively by the Company for its business. e (13) Subsequent 1eorganizations. HoldCo and non utility subsidiaries or other non-utility afniiates of HoldCo will be allowed to create or participate in joint ventures, general partnerships, limited partnerships, limited liability cor J. lies or other affiliations (including without limitation stock ownership in corporations), without the need for Commission review or approval. (14) Prior Commincion Orders. As a result of the protections ' inherent in the holding company structure and th; conditions set forth herein, ratepayca will be adequately protected from the financial and business risks and costs of non-utility activities; therefore, conditions contained in previous Commission orders (including orders approving stipulations) limiting amounts of investments in non-utility business activities or projects, imposing geographic restrictions, requiring above-the-line treatment, and requiring review of specific projects or activities prior to investing in that project or activity or creating an indirect affiliate of the Company will
have no further force and effect from and after the Merger Date (as defined herein). VI. APPROVAIR REOUiDs1m
- 68. This section lists the specific transactions and arrangements for which Commission approval is requested in this proceeding, with references to the sections of the a
Application in which the particular transaction or arrangement is discussed. These transactions and arrangements are as follows: a, the creation of a corporation that will become the parent company of CMP through its ownership of all the outstanding common stock of the Company ("HoldCo") (Sections II and III);
- b. the creation of a corporation v 'sose only purpose will be to facilitate the corporate reorganization and which, when organized, will be a wholly-owned subsidiary of HoldCo and will cease to exist once it has served its purpose ("MergeCo")
(Section III);
- c. the conversion and exchange of all the outstanding shares of the Company's common stock into an equal number of sha es of HoldCo's common stock (Section III);
- d. the merger of MergeCo into the Company, with the Company as the surviving corporation, and the resulting conversion of the outstanding shares of MergeCo common stock into a number of shares of the common stock of the Company equal ;
to the number of shares of the Company's common stock ' outstanding immediately prior to the share conversion described in item c. above, which will be deemed issued by the Company for this purpose (Secdon III);
- e. the creation of a new energy and marketing affiliate, which will be a whollymwned corporate subsidiary of HoldCo
("EnerMark") (Sections IV. A and IV.D);
- f. a Management Services Agreement between the Company and EnerMark (Exhibit E) for supply planning and procurement and energy portfolio management services for the period until
retail access (Section IV.A);
- g. the transfer by CMP of assets (other than generating assets) not directly used in its transmission and distribution operations, if the Company determines that such transfer is in its best interests, to entities in the holding company system, as described in this Application, to carry out the reorganization (Section IV.A); '
- h. the transfer, lease or license by CMP of interests in its rights-
- of-way and transmission and distribution structures to entities involved in pipeline and gas distribution pmjectr on the terms described in this Application (Sections IV.A and IV.D);
- i. the transfer, lease or license by MEPCO of interests in its transmission structures and rights-of-way to entities involved in pipeline and gas distribution projects on the terms described in this Application (Sections IV.A and IV.D);
- j. a Services Agreement between the Company and Union Water (Exhibit F) under which Company employees could provide technical services to other unaffiliated utilities (Section IV.A);
- k. the dividend by CMP to HoldCo of the stock of specified non-utility wholly-owned subsidiaries of CMP to carry out the reorgamzation (Section IV.C);
1. the transactions and arrangements described in the CMP Gts Company, L.L.C. Joint Venture Agreement, including its Appendices (Exhibit G) (Section IV.C);
- m. the creation of a limited liability company to develop, own and operate a natural gas distribution business in Maine in which a new wholly-owned subsidiary of HoldCo will have a 50 percent membership interest and New York State Electric
& Gas Corporation or its affiliate will have the other 50 p:rcent membership interest (" CMP Gas Company") (Section IV.D);
=
- n. the creation of the new wholly-owned subsidiary of HoldCo
("GasCo") that will hold a 50 percent membership interest in CMP Gas Company (Section IV.D);
- o. the creation of one or more entities, one of which may be a wholly-owned subsidiary of HoldCo, to participate in the gas I
distribution business in New Hampshire (Section IV.D);
- p. the creation of a wholly-owned subsidiary of HoldCo
("PipelineCo") that may participate in a natural gas pipeline project (Section IV.D);
- q. the creation of one or more limited liability companies or other entities through which PipelineCo may participate in a natural gas pipeline project (Section IV.D);
) r. the creation of a 'vholly-owned subsidiary of HoldCo, if the Company determines that such action is in the Company's best interests, to provide centralized support and other services to entities in the holding company group as may be requested by any such entity ("ServeCo") (Section IV.D);
- s. A form of Services Agreement (Exhibit H) for ServeCo, if '
created, to provi1: support services to entities in the holding company group (Section IV.D);
- t. a form of Support Services Agreement (Exhibit I) for CMP to provide support services to entities in the holding company group if ServeCo is not created or otherwise (Section IV.C);
and u. the creation of one or more affiliated interests of HoldCo and non-uulity subsidiaries or other non-utility affiliates of HoldCo, including joint ventures, general partnerships, limited partnerships, linuted liability companies and corporations, to enhance the ability of these entities to market and furnish their services (Section II).
- 69. The proposed reorganization will allow the Company to continue efficient operations of its utility business while enabling HoldCo and its non-utility subsidiaries to respond more flexibly to new business opportunities for the benefit of the Company's customers and shareholders. The Company respectfully requests that the Commission approve the reorganization described in this Application and the specific transactions and arrangements listed in this section VI on the terms set forth in this Application.
- 70. INTERai APPROVAL REOUESTED. As indicated in Exhibit C, the
Company must make various applications and filings in connection with the reorganization, including an application under the Public Utility Holding Company Act as well as the filing of a registration statemer.t under the federal securities laws and a listing application with the New York Stock Exchange. To meet planned timetables, the Company must begin making these applications and filings by late Janua.y 1998. nese applications and filings must be a signed by HoldCo. For this reason, the Company requests that the Commission authorize the Company to create HoldCo by January 12, 1998. This interim authorization will be for the limited purpose of making these applications and filings, and neither the Company nor HoldCo will take any further action pending the Commission's final order in this proceeding. Dated: December 8,1997 hY MmbM. Pard Arthur W. Adelberg Central Maine Power Company 83 Edison Drive Augusta, ME 04336 207 621-4795 Attorney for Central Maine Power Company and Maine Electric Power Company, Inc. LIST OF EXHIBITS ' Exhibit A Recent Public Utility Holding Company Organizations Exhibit B Agreement and Plan of Merger Exhibit C List and Schedule of Required Approvals and Closing Exhibit D Organizational chart after reorganization Exhibit E Management Services Agreement between Central Maine Power Company and EnerMark Exhibit F Services Agreement between The Union Water-Power Company and Central Mai' e Power Company Exhibit G CMP Gas Company, L.L.C. Joint Venture Agreement Exhibit H Form of Services Agreement (for use by ServeCo in providing services) - Exhibit I Standard Support Services Agreement between CMP and Affiliates
EXHIBIT A RECENT UTILITY HOLDING COMPANY FORMATIONS a Pacific Gas & Electric 1996 San Diego Gas & Electric 1995 Southern Indiana Gas & Electric 1995 Detroit Edison 1995 Pennsylvania Power & Light 1995 Wisconsin Public Service 1994 Commonwealth Edison 1994 Illinois Power 1994 c t
EXHIB1T B (Draft -- 11/21/97) AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (" Agreement") is made as of , 1998, Maine corp _orat'on (" Central Maine"),byCMP andMERGER among CENTRAL Co., a MaineKAINE POWER COM corporation ("Margocc') , and (HOLDING COMPANY), a Maine earporation ("Hcidco") .
- WHEREAS, Central Maine has authorized capital consisting of (i) 80,000,000 shares of Common Stock, with a par value of $5 per share (" Central Maine Common Stock"), of which (32,442,752) sh%res are issued and outstanding as of the date hereof; (ii) 2,000,000 shares of Preferred Stock, with a par value of $25 per share (" Central Maine $25 Preferred Stock"), no shares of which are issued and outstanding as of the date hereof; (iii) 5,713 shares of 6% Preferred Stock, with a par value of
$100 per share
" Central Maine 6% Preferred Stock"), all of which shares are issue (d and outstanding as of the date hereof; and (iv) 2,300,000 shares of Dividend Series Preferred Stock, with a par value of $100 per shara (" Central Maine Dividend Series Preferred Stock"), of which (1,115,275) shares are issued and outstanding as of the date hereof; the number of shares of outstanding Central Maine Common Stock being subject to increase to the extent shares may be issued pursuant to Central Maine's Dividend Reinvestment Date and Common Stock Purchase Plan prior to the Merger (as defined below), and the number of shares of outstanding Central Maine Dividend Series Preferred Stock being subject to decrease to the extent shares are redeemed or purchased and retired by Central Maine prior to said Merger Date; and WHEREAS, MergeCo has authorized capital consisting of 1,000 shares of Common Stock, with a par value of $5 per share
("MergeCa Common Stock"), of which 100 shares are issued and outstanding and and are owned beneficially and of record by HoldCo; WHEREAS, HoldCo has authorized capital consisting of 80,000,000 shares of Common Stock, with a par value of $5 per share ("HoldCo common Stock"), of which ico shares are issued and Maine; and and are owned beneficiall,y and of record by Central outstanding WHEREAS, the Boards of Directors of the respective parties hereto deem it advisable to merge MergeCo with and into Central Maine (the " Merger") in accordance with the Maine Business Corporation Abt (" Maine BCA"), this Agreamsnt and the Articles of Merger attached hereto as Exhibit A (the " Articles"),
i c for the purpose and with the effect of establishing HoldCo as the parent corporation of Central Maine in a transaction intended to qualify for tax-free treatment; NOW, THEREFORE, in consideration of the premises and agreements contained herein, the parties agree that (i) MergeCo shall be merged with and into Central Maine, said action constituting the "Mergor", (ii) Central Maine- shall be the corporation surviving the-Merger, and (iii) the terms and 4 conditions of the Merger, the means of carrying it into effect and the manner of cs '.verting and exchanging shares of capital stock shell be as follows: ARTICLE 1 THE MERGER 1.1 Plan of Maesar. This Agreement shall constitute a plan of merger between Central Maine and Mergeco (Central Maine and MergeCo esing sometimes referred to herein as the
" Participating Corporations") in accordance with Section 901 of the Maine BCA.
1.2 Artielas of Marnar. Subject to and in accordance with the provisions of this Agreement, the Articles shall be executed by tne Participating Corporations and delivered to the Secretary of State of the State of Maine for filing, as provided in Section 903 of the Maine BCA. 1.3 Margar Data. The Merger shall become effective upon the filing of the Articles with the Secretary of State of the State of Maine or on such latte ;e not more than 60 days after such filing as may be specif1.a in the Articles (such effective date being herein called the " Merger Date"). On the Merger Date, the separate existence of Mergeco shall cease and MergeCo shall be merged with and into Central Maine, which shall continue its corporate existence as the surviving corporation (Central Maine, as the surviving corporation, being sometimes referred to herein as the " Surviving Corporation"). Central Maina. as the Surviving Corporation, shall succeed, without other transim , to all the rights and property of MergeCo and shall be subject to all the debts and liabilities of MergeCo in the same manner as if Central Maine had itself incurred them. All rights of creditors and all liens upon the property of each of Central Mains and Mergeco shall be preserved unimpaired. 1.4 Annroerimta Actions. Prior to, at and after the Merger Date, HoldCo, Central Maine and MergeCo, respectively, shall take all such actions as may be necessary or appropriate in order to effectuate the Merger. In this connection, HoldCo shall issue the shares of HoldCo Common Stock for which outstanding
shares of Central Maine Common Stock will be oxchanged and surrendered on a share-for-2 hare basis to the extent provided in Article 2 of this Agreement. In case at any time after the Merger Date any further action is necessary or desirable to carry out the purposes of this Agreement and to vest the Surviving Corporation with full title to all properties, assets, privileges, rights, immunities and franchises of either of the Participating Corporations, the officers and directors of each of the Participating Corporations as of the Merger Data shall take all such further action. , ARTICLE 2 TERMS OF CONVERSION AND EXCHANGE OF SHARES On the Merger Date: 2.1 central Maine common Sharea. Each share of Central Maine Common Stock issued and outstanding immediately prior to the Merger shall be automaticelly changed and converted into and exchanged for one share of HoldCo Common Stock, which shall thereupon be issued and fully-paid and non-assassable; pro'ridad, however, that such conversion and exchange shall not affect shares of holders, if any, who perfect their rights as dissenting shareholders under S6ctions 908 and 909 of the Maine BCA. 2.2 central Maine preferred Sharen. Shares of Central Maine $25 Preferred Stock, Central Maine 6% Preferred Stock and Central Maine Dividend Series Preferred Stock issued and outstanding immediately prior to the Merger shall not be converted or otherwise affected by the Merger. Each such share shall continue to be (1) issued and outstanding and (ii) a fully-paid and non-assessable share of Central Maine S25 Preferred Stock, Central Maine 6% Preferred Stock or Central Maine Dividend Series Preferred Stock, as the case may be, of the Surviving Corporation. 2.3 Merceco Sharea. The shares of MergeCo Common Stock issued and outstanding immcdiately prior to the Merger shall be automatically changed and converted into a number of shares of common stock, par value $5.00 per share, of the Surviving Corporation (which shall thereupon be issued and fully-paid and non-assessable), equal to the number of shares of Central Maine Common Stock ac are issued and outstanding immediately prior to the Merger Date.- 2.4 Holdco sharen. Each share of HoldCo common Stock issued and outstanding and held by Central Maine immediately prior to the Merger shall be cancelled.
2.5 central Maina stock ootiona. Each outstanding option to purchase shares of Central Maine common Stock will be assumed by HoldCo. Each such option will be exercisable in i accordance with its existing terms for the game number of shares of HoldCoStock Common Commonsubject Stock as theoption. to such number of shares of Central Maine ARTICLE 3
- ARTICLES OF INCORPORATION AND BYLAWS 3.1 central Maine's Articlea of incornoration. From and after the Merger Date, and until thereafter amended as provided by law, the Articles of Incorporation of central Maine as in effect immediately prior to the Merger shall be and continue to be the Articles of Incorporation of the Surviving Corporation.
3.2 central Maine's Bylawn. From and after the Merger Date, and until thereafter amended as provided by law, the Bylaws of Central Maine as in effect immediately prior to the Merger shall be and continue to be the Bylaws of the Surviving Corporation. ARTICLE 4 DIRECTORS AND OFFICERS 4.1 central Maine's Directors and officara. The persons who are directors and officers of Central Maine immediatel officers, yrespectively, prior to the Merger shall continue of the Surviving as directors Corporation and and shall continue to hold office as provided in the Bylaws of the Surviving Corporation. If, at or following the Merger Date, a vacancy shall exist in the Board of Directors or in the position of any officer of the Surviving Corporation, such vacancy may be filled in the manner provided in the Bylaws of the Surviving Corporation. ARTICLE 5 STOCK CERTIFICATES 5.1 Pre-Marger central Maine common Stock. Following the Merger Date, each holder of an outstanding certificate or certificates that, prior to the Merger Date, represented shares of Central Maine Common Stock may, but shall not be required to, surrender the same to HoldCo for cancellation or registration of transfer, and each such holder or transferee will be entitled to receive in exchange a certificate or certificates representing
i l the same number of shares of HoldCo Common Stock as the shares of Central Maine Common Etock previously represented by the stock certificate (s) surrendered. ' 5.2 outstandina cartificates. Until surrendered or presented for registration of transfer in accordance with Section 5.1 above, each outstanding certificate that, prior to the Merger Date, represented Central Maine Common Stock shall be deemed and treated for all corporate purposes to represent the ownership of
- the same number of shares of HoldCo Common Stock as though such surrender and exchange had taken place.
5.3 Post-Marnar Riehts of Moldern. Following the Merger Date, the holders of certificates representing Central Maine Common Stock outstanding immediatel, prior to the Merger Data shall cease to have any rights with respect to stock of the Surviving Corporation and their sole rights shall be with respect to the HoldCo common Stock into and for which their shares of Central Maine Common Stock shall have been converted and exchanged in the Merger, subject to the rights of any dissenting shareholders under Section 909 of the Maine BCA. ARTICLE 6 CONDITIONS TO THE MERGER Completion of the Merger is subject to the satisfaction of the following conditions: 6.1 Shareholder Annroval. The principal terms of this Agreement and the transactions provided for herein shall have been approved by holders of capital stock of each of the participating Corporations as and to the extent required by their respective Articles of Incorporation and the Maine BCA. 6.2 Holdco common Stock Listad. The HoldCo Common Stock to be issued and to be reserved for issuance pursuant to the Merger notice shall have been approved for listing, upon official of issuance, by the New York Stock Exchange. 6.3 Tar Rulina or oninion. There shall have been obtained a ruling or rulings of the Internal Revenue Service, or an opinion of tax counsel, in form and substance satisfactory to the Board of Directors of Central Maine and its cwunsel, with respect to certain tax consequences of the Merger and related matters. '.- 6.4 Raoulatory Annrovals. All authoritations by and approvals of any governmental or public authority or agency deemed necessary or advisable by the Board of Directors of t 1
central Maine in connection with the Merger and other related transactions shall have been obtained, shall be in full force and effect, shall not have been revoked and shall be legally sufficient to authorize the transactions contemplated by this Agreement. ARTICLE 7 AMENDMENT AND TERMINATION 4 7.1 Amendment. The partiew to this Agreement, by mutual consent of their respective Boards of Directors, may amend, modify or supplement this Agreement in such manner as may be agreed upon by them in writing at any time before or after approval of this Agreement by the pre-Merger shareholders of Central Maine (as provided in Section 6.1 above); provided, however, that no such amendment, modification or supplement shall, if agreed to after such approval by the pre-Merger shareholders of Central Maine, change any of the principal terms of this Agreement. 7.2 Tarmination. This Agreement may be ter minated and the Merger and other transactions provided for by this Agreement may be abandoned at any time, whether before or after approval of this Agreement by the pre-Merger shareholders of Central Maine, by action of the Board of Directors of Central Maine if such Board of Directors determines for any reason that the completion of the transactions provided for herein would for any reason be inadvisable or not in the best interests of Central Maine or its shareholders. The parties hereto, and any officers or directors thereof, shall not have liability to any person, including, without limitation, any shareholder of Central Maine, in the event of such termination. ARTICLE 8 ASSUMPTION OF OBLIGATIONS UNDER CENTRAL MAINE STOCK PLANS 8.1 Ammumntion of Plans. HoldCo shall take all required corporate action to assume as of the Merg,r Date the obligations of Central Maine under the Central Maine 1987 Executive Incentive Plan and the Central Maine Long-Term Incentive Plan. ARTICLE 9 MISCELLANE0"US 9.1 Annroval of Moldco shareholder. By its execution and delivery of this Agreement, Central Maine, as the sole pre-Merger shareholder of HoldCo, consents to, approves and adopts
! this Agreement and approves the Merger, subject to approval of this Agreement by pre-Merger shareholders of Central Maine (as provided in Section 6.1 above). 9.2 Annroval of Marcaco shareholder. By its execution and delivery of this Agreement, HoldCo, as the sole pre-Merger shareholder of MergeCo, consents to, approves and adopts this Agreement and approves the Merger, subject to approval of this Agreement by pre-Merger shareholders of Central Maine (as } provided in Section 6.1 above). . 9.3 covernino Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Maine. IN WITNESS WHEREOF, Central Maine, HoldCo and MergeCo, pursuant to approval and authorization duly given by resolutions adopted by their respective Boards of Directors, havs each caused this Agreement to be executed by its President or one of its Vice Presidents and its corporate seal affixed hereto and attested by its Secretary or one of its Assistant Secretaries. Central Maine: CENTRAL MAINE POWER COMPANY, (Corporate Seal) a Maine corporation By: Attest: Name: Its:
Title:
HoldCo: (Corporate Seal] (HOLDING COMPANY), a Maine corporation By: Attest: Name Its:
Title:
Mergeco: (Corporate Seal) CMP MERGER CO., a Maine corporation '- Attest: By: Name:
Title:
Its:_.
EERIBIT A STATE OF MAINE ARTICLES OF MERGER OF CMP MERGER CO. A Maine Corporaticn , INTO CENTRAL MAINE POWER COMPANY
- A Maine Corporation
*A QUA8I-PUBLIC CORPORATION HAVING THE RIGHT TO ENGAGE IN BUSINESS A8 AN ELECTRIC COMPANY Pursuant to Title 13-A M.R.S.A. 5903, the undersigned corporations adopt the following Articles of Merger:
FIRST: The plan of merger is set forth in Exhibit A attached hereto and made a part hereof. Secono: As to each participt_ ting corporation, the number of sheres outstanding and the number of shares entitled to vote on such plan, and the number of such shares voted for and against the plan, are as follows: l Mme of
% .eie.
CMP Merger 03. aw% Shares 100 shs. of to w,ee 100 Y 100 M wm 0 Carmtri Stock Central Maine Power (32,442,752) (32,442,752) Ompany shs. of 0:mnon Stock 5,713 shs. 5,713 of 6% Preferred Stock THIRD: Holders of Central Maine Common Stock and 6% Preferred Stock were entitled to vote together as a single class, ante holders of Central daine Common Stock were entitled to vote as a separate class. l l l
1 FOURTH: The address of the registered office in Maine of CMP Merger Co . herein designated as the merged corporation, is c/o Secretary and Clark, Central Maine Power Company, 83 Edison Driva, Kennebec County, Augusta, Maine 04336. The address of the registered office in Maine of Central Maine Power Company, herein designated as the surviving corporation, is 83 Edison Drive, Kennebec County, Augusta, Maine 04336. 4 Dated CENTRAL MAINE POWER COMPANY * (surviving corporation) I certify that I have custody of the minutes showing the By above action by the shareholders of Central Maine Power Company (type or print name and capacity) By (clerk, secretary or Asst. Secretary) I certify that I have custody ' of the minutes showing the CMP MERGER Co. above action by the (Merged corporation) shareholders of CMP Merger Co. By (clerk, secretary or Asst. _ (type or print name and capacity) Secretary) By (type or print name and capacity)
~.
- i The name of the corporation should be typed, and the document must be signed Sy (1) the Clerk cr. (2) the President or a Vice-President and ue Secretary or an Assistant Secretary or such other officer as the bylaws may designate as a second certifying officer.
_ _ ____ l
EXHIBIT C HOLDING COMPANY FORMATION TIMETABLE File with MPUC December File with SEC, FERC, NRC, Ct.DPUC January 1998 File preliminary proxy statement January / February FERC order issued March Begin proxy solicitation April NRC, Ct.DPUC approval / waiver April PUC orP issued April SEC order issued April Shareholder meeting May Closing May
PMEo$4d o- t c- 9C
~e
~
~
~
s ((
. ~g e ~e r
- m. s e s
.r osu
~
~
k_ _ s
. ~ g_ s 2
~
j
, ~
N ~ O I _ T . ~ k_ A Z - j I e, N _ A G ,
~
C R _ T O s. C_ E .e 1 R _ y R. t n l a _ p n m e e A C o = d Y T g s. V a R in A d l H l o t C l I l e L A a N d O Y I s. e C T . A m_. l Z I l . y N cn n a A e m p G A k n s R I j o O _ . d a C ht e
<m l i
y b l le s a e e r f o d Y d a er s s a f e s
. M f
o l s t s e r l l te _ i n U ( e F t a A V r e k S se d r n a M O s w e l l n h n l e k o r p u : t e t e s o
- m. u l
N
I h central Maine Power 4 W C*neral Offee 53 Ei=n Dme Aucum h%.ne C4335 COD 623 3521 December 10,1997 Dennis Keschl Administrative Director hiaine Public Utilities Commission State flouse Station 18 Augusta, hiaine 04333 , RE: CENTRAL StAINE POWER COhtPANY, Application for Approvals of Reorganizations under Section 708, of Transactions with Affiliated Interests under Section 707, and of Transfers of Assets under Section 1101 of Title 35-A 51.R.S. A., Docket No. 97 930
Dear hir. Keschi:
In the Application referenced above filed by Central biaine Power Company (the
Company") in Docket No. 97 930, the Company referred to its wholly-owned subsidiary hiaineCom Services ("htaineCom") as a non-utility affiliate (Appli:ation at 151 and 151.e).
The Company wishes to correct this statement by noting that the Commission, in its Order on Reconsideration dated February 19, 1997 in Docket No. 96-421, determined that it "will treat hiaineCom as fully subject to Title 35 A. including Section 2102." We apologize for this error in our Application. The Company would still propose to treat hiaineCom in the reorganization as described in paragraph 52 of the Application. We request that this letter be included with any service or other transmittal of our Application. Thank you for your attention to this matter. Sincerely, Anne ht. Par Corporate Counsel ec. Public Advocate
4
,. EX11IBIT 3 Facssmile of the original bill approved by the Governor on hiay 29.1997.
Contact the biaine Public Utilities Commission for a copy of the original bill. CHAPTER 316 H.P.1274 LD.1804 4 An Act to Restructur the State's Electric Industry Be it enacted by the People of the State of Maine as folicws: Sec.1. 35 A MRSA 53139, as enacted by PL 1987, c.141, Pt. A, i6, is repealed Sec. 2. 35 A MRSA 53140, sub-ill,3 and 4, as enacted by PL 1987, c.141, Pt. A,66, are amended to read:
- 1. Foreign electric utility to notify commission before acting within this State A foreign electric utility eeteg
;_ni; m..;;. 3 :39 shall, betore constructing, purchasing, owning, controlling, operating, managing or otherwise participatin in ajoint or common interest in a utility facility within this State:
A. Notify the commission in writing of the action to be taken by the utility; and , B. Provide any information reasonably required by the commission under section 3132.
- 3. Registered omce and agent; service cf process. A foreign electric utility ni;g ;.nir :.;;;;;a 2130 d:.!:-
A. Od;;;..; $ ball desienate and continuously maintain in this State a registered office and a registered agent in accordance with Title 13 A, section 1212; and 4 F i
. _ , . , . . - _ , _ _ - _ _ _ _ _ _ . . _ _ ..,__ . .--__ _ . 1 --,- _ _
T. . L 4
)
l B. Be h subject to service of process, notice or dern nd as provided in Title 13 A, section 1212.
- 4. Certificate of agency with regulatoryJu. 4dktion over foreign electric utility. Upon the filing with the commission of a certificate of the appropriate regulatory ;;ency of the state of domicile or principal locus of a foreign electric utility, or of the United States, stating either that the agency has regulatoryjurisdiction over the issuance of stocks, bonds or other evidences of indebtedness payable more than 12 months from date of issue by that foreign electric utility to finance a utility facility in this Sttte or that the agency has general supervision of that foreign electric utility in the conduct ofits electric utility business, that foreign electric utility dmH mg not be deemed an " electric ut ility" as defined in section 102, subsection 5, merely by reason of the exercise by it of the authority granted in former section 3139.
Sec. 3. 35 A MRSA c. 32 is enacted to read: CH APTER 32 ELECTRIC INDUSTRY P.ESTRUCTURD1Q 13101. Definhlgm As used in this chanter. unless the context otherwise indicates. the followine terms have the followine meanines.
- 1. Affiliated interest. "AfYiliated interest" has the same meanine as provided in section 707. subsection 1. caragraoh L
- 2. Aseregate. "Ancremate" means to organize individual electricity consumers into a aroup or entity for the ourpose of ourchasine electricity on a troun basis.
- 3. Aserestator. "Accrecator" means an entity that cathers individual customers tocether for the ourpose of purchasinn electricity.
- 4. Broker. Broker" means an entity that acts as an acent or intermediarv in the sale and ourchase of electricity but that does not take title to electricity.
- 5. Comnetitive electricity provider. "Comeetitive electricity provider" means a marketer. broker. accrecator or any other entity selline electricity to the oublie at retail.
A
- p. Consumer owned tr==l*< tan and distribution utilltv. " Consumer-owned transmission and distribution utility" means any transmission and distribution utility wholly owned by its consumers. includine. but not limited to:
A. The transmission and distribution cortion of a rural electrincation cooperative orcanized under chaoter 37: B. The transmission and distribution nortion of an electrincation cocoerative orcanized on a coc.nerative clan undn the laws of the Stut C. A municioal or auasi-municinal transmission and distribution utility: D. The transmission and distribution oortion of a municinal or auasi-municinal entity orovidinc ceneration and other services: and _ E. A transmission and distribution utility wholly owned by a municioality.
- 7. Divest. " Divest" means to lecally transfer ownershio and control to an entity that is not an affiliated interest.
- 8. Electric billina and meterina services. " Electric billine and meterin.t services" means the followine services:
A. Billine and collection: B. Provision of a meter: C. Meter maintenance and testine: and D. Meter readine.
- 9. Entity. " Entity" means a person or orcanization. includine but not limited to any political. covernmental.
auasi-covernmental. corocrate. business. orofessional. trade. acricultural. cooperative. for-orofit or nonpront orcanization.
- 10. Generation assets. " Generation assets" includes all real estate. 6xtures and oersonal orocerty owned. controlled.
operated or mananed in connection with. or to facilitate. the ceneration of electric cower.
- 11. Generation service. " Generation service" means the provision of electric power to a consumer throuch a EAasmission and distribution utility but does not encomcass any activity related to the transmission or distribution of that power.
5
_ _ _____ _ . . _ . ~ _ O
\
. Q.
- 12. Larne. Invester owned transmission and distribution utility. "Larce. investor-owaed *ransmission and distribution utility" means an investor-owned transmission and distribution utility servine tr. ore than 50.000 retail customers.
- 13. Marketer. " Marketer" means an entity that as an intermediary ourchases electricity and takes title to electricity for !
, sale to retail customers. l IL Pgblic entity. "Public entity" includes the State. any political subdivision of the State. a municipality and any 1 guasi municioal entity.
- 15. Oualifyinn facilltv. "Oualifyine facility" has the same meanine as provided in section 3303.
2
- 16. Small. Investor-owt.ed transmission and distribution utility. "Small. investor-owned transmission and
! distribution utility" means an investor-owned transmission and distribution utility rervine 50.000 or fewer retail customers.
- 17. Retail access. " Retail access" means the richt of a retail consumer of electricity to ourchase ceneration service from a competitive electricity orovider.
- 18. Transmission and distribution olant. " Transmission and distribution olant" means all real estate. fhtures and pusonal oronerty owned. controlled. operated or manneed in connection with. or to facilitate. the transmission. distribution or 4
delivery of electricity for licht. heat or power for oublic use and includes all conduits. ducts or other devices. materials.
- accaratus or oronerty for containine. holdine or carrvine conductors used. or to be used. for the trans@.ssion or distribution of electricity for lieht. heat or onwer for oublic use.
- 19. Trans=ls=le" BDd distribution utility. " Transmission and distribution utility" means a person. its lessees.
trustees. receivers or trustees anoointed by a court. ownine. controlline. operatine or mananine a transmissign and distribution olant for compensation within the State.
)
l l 1H02. Retail access: deremulation ] l
- 1. Rigb11esurshnu.atneration. Becinnine on March 1. 2000. all consumers of electricity have the richt to ourchase eeneration services directly from competitive electricity oroviders.
1 k
. , - . - ~ -- , - - ~ - - , , , , - , - - .
g 9,
- 2. Deregulation of generation services Except as otherwise orovided in this charter. comoetitive electricity providers are not subiect to regulation under this Title on or after March 1. 2000
- 3. Agfr*= melan oermitted: Ilmi tation. When retail access becins. consumers of electricity may accrecate their 4 ourchases of neneration service in any manner they choose. If a oublic entity serves as an narrecator. it may not reauire consumers of electricity within its iurisdiction to ourchase cencration service from that entity.
- 4. Electric billina and meterina services. Beginnine March 1. 2002. oursuant to rules adooted by the commission.
the orovision of electric billine and metering services is subiect to comnetition. The commission by rule may establish an earlier dea for the beninnine of competition for the orovision of billine or metering services. except that the commission may not set a beninnina date that is orior to March 1. 2000. The commission by rule shall establish minimum standards necessary to orotect consumers of these services and codes of conduct noverning the relationshin among transmission and distribution utilities orovidine electric billine and meterine services. any afliliates of transmission and distribution utilities orovidine such services and oroviders of such services that are not affiliated with a transmission and distribution utility. The commission shall determine each transmission and distribution utility's costs of orovidine electric billine and meterine services that are reflected in consumer rates. including capital costs. deorechtion. ooeratine exoenses and taxes. and shall seoarate this portion of the consumer rate into a separate charce. Rules adooted under tnis subsection are maior substantive rules as defined in Title 5. chanter 375. subchaoter ll A and must be p.tovisionally adooted by March 1. M99. H203 . Licensina of comnetitive electricity oroviders: consumer orotections: enforcemtal
- 1. Authority. In o+ to provide effective competition in the market for the eeneration and sale of electricity in the State and to provide an orderly transition from the current form of reculation to retail access. the commission shall license comnetitive electricity orovide+s in accordance with this section.
- 2. Renutrements. A competitive electricity provider may not undertake the sale of electricity at retail in this State without first receivine a license from the commissinn. Before
1*.
\
I,* anoroving a license aoolication. the commission must receive from the anolicant: 1 A. Evidence of financial canability sufncient to refund deoosits to retail customers in the case of bankruotev or
, noncerformance or for any other reason:
} B. Evidence of the ability to enter into bindinn Interconnection arrannements with transmission and distribution d utilities: C. Disclosure of all pending leeni actions and customer comolaints filed anainst the competitive electricity orovider at a renulatory body other than the commission in the 12 months crior to the date oflicense acolication: i D. Evidence of the ability to satisfy the renewable resource nortfolio reauirement established under section 3210: and E. Disclosure of the names and coroorate addresses of all affiliates of the anolicant. ; 4 The commission shall consider the need for reauiring and. Ifit determines there is a need. may reat; ire a comoetitive electricity orovider to file a bond wl'h the commission as evidence of financial ability to withstand market disturbances or other events that may increase the cos: of providinn service or to orovide for uninterruoted service to its custorners if a comnetitive
- glectricity orovider stons service.
l
- 3. Informational fHinme! Dublic Informatj0n. The commission shall establish by rule information disclosure and niina reauirements for comoetitive electricity oroviders. He rules must reauire rencration oroviders to file their eenerally 1
available rates. terms and conditions with the commission. The commission. subiect to anoropriate orotective orders. may i reauire the subm'~ ion ofindividual service contracts or any other confidential information from a comoetitive electricity orovider. pc commission by rule shall establish standards for oublishinn and disseminatina. through any means considered anorceriate. information that enhances consumers' ability to effectively make choices in a competitive electricity market. Rules adooted under this subsection are maior substantive rules as dcfined in Title 5. chanter 375. subcharter ll A and must be
- crovisionally adooted by March 1.1999.
- 4. Stand 8Id consumer protection provisions. As a condition i
l
y .' ? oflicensine. s competitive electricity provider that provides or nronoses to nrovide ceneration service to a cuetomer. wherever located. with a demand of 100 kilowatts or less: A. May not terminate ceneration service without at lgast 30 day orior notice to the customer: IL Must offer servhc to the customer for a minimum period of 30 days: C. Must allow the customer to rescind selection of the comnetitive electricity nrovider orally or in writine within 5 j days of initial selection: D. May not telemarket services to the customer if the customer has filed with the commission a written reauest not to receive telemarketine from comnetitive electricity nroviders: E. Must nrovide to the customer within 30 days of contractine for retail service a disclosure ofinformation nrovided to the commission nursuant to rules adonted under subsection 3 in a standard written format estabilshed by the commission: and F. Must comnly with any other orovisions adopted by the comminion by rule or oider.
- 5. LicenslDgitnewal53Ad revocations. Consistern with all annlicable reauirements of Title 5. chapter 375. the E0mmission may limit the duration and efTectiveness of a license to a specified term. may conduct proceedines for the renewal oflicenses and may conduct proceedines for the revocation of a license w hen a reauirement of this section has not been (omnlied with by a comnetitive electricity nrovider. The commission shall adont rules covernine the nrocedures for ismine or revokinc a license under this section and related matters.
- 6. Consumer protection standards: rules. The commission shall establish by rule consumer orotection standards and standards to nrotect and otomote market comnetition in order to orotect retail consumers of electricity from fraud and other unfair and decentive business ornetices.
- 7. Penalties. In an adiudicatory oroceedine. the commission may impose a cenalty of un to $5.000 for each violation of this section or any consumer orotection rule adonted under this section Each day a violation continues constitutes a gparate offense. Penalties collected by the commission under
4 e this section must be deposited in the Public Utilities Commission Reimbursement Fund under section i17.
- 8. Dispute resolution. The commission shall resolve disnutes between comnetitive electricity providers and retail consumers of electricity eencernine standards established nursuant to subsection 6.
- 9. Addjdpnal a.tugas. He commission may impose by rule any additional reauirements necessary to carry out the nurnoses of this chanter. excent that this section may not be construed to nermit the commission to reculate the rates of any pompetitive electricity nrovider.
- 10. Ceaw and desist orders. %e commission may issue a cease and desist order:
_ A. Followine an adiudicatory hearine held in conformance with Title 5. chanter 373. subchanter IV. If the commission finds that any competitive electricity provider or transmission and distribution utility has encaced or is encacine in any act or practice in violation of any law or rule administered or enforcidhv the commission or any lawful order issued by the commission. A cease and desist order is effective when issued unless the order specifies a later efTective due or is staved nursuant to Title 5. section 11004: or B. In an emercenev. without hearine or notice. if the commission receives a written. verified comnlaint or afndavit showine that a competitive electricity provider or a transmission and distribution utility is selline electricity to retad consumers without beine dulv licensed or is encacine in conduct that creates an immediate dancer to the public safety or is reasonably expected to cause sienificant. imminent and irrenarable public iniury. An emercency cease and desist order is effective immediately and continues in force and efTect until further order of the commission or uritil staved by a court of comnetent lurisdiction. In a subseauent hearine the commission shall in a final order afrirm. modify or set aside the ernercency cease and desist order and may emolov simultaneously or senarately any other enforcement or nenalty orovisions available to the commission.
- 11. Resutution. %e commission may order restitution for any narty iniured by a violation for which a nenalty may be asst 55td nursuant to this section.
- 12. Enforcement. The commission throuch its own counsel or
, _ -x---
2.. 4 through the Attorney General may acolv to the Superior Court of any county of the State to enforce any law ful order made or action taken by the commission oursuant to this section. The court miv issue such orders. oreliminary or final. as it considers proper under the facts estabbshed before it.
- 13. Notice to Attorney General. If the commission has reason to believe that snv comoetitive electricity provider or transmission and distribution utility has violated any orovision oflaw for which criminal orosecution is orovided and would be in order or any antitrust law of this State or the United States. the commission shall notify the Attorney General. The Attorney General shall oromotly institute any actions or proceedings the Attorney General considers acorooriate.
- 14. Disconnection restricted. A transmission and distribution utility may not disconnect service to a consumer due to nonnavment of neneration charnes or any other discute with a comnetitive electricity orovider. exceot that the commission may permit disconnection of electric service to consumers of electricity based on nonoavment orcharces for standard-offer service provided under section 3212.
- 15. Standard billina. The commission shall consider reauirine standard billine information on bills for electric power service. If standard billine information is reauired. the commission shallinvestinate the nossibility of adoptine standards consistent with other New Erciand states. The commission may not crohibit transmission and distribution utilities from contractine with neneration service providers to include both entities' charees on a sinele bill. The commission may not preclude the inclusion of other information on bills for electric power service.
- 16. Access to load data. Upon reauest from a comoetitive electricity orovider. the commission shall orovide load data on a class besis that is in the nossession of a transmisil0D.and distribution utility. subiect to reasonable orotective orders to protect confidentiality. if considered necessary by the comn h.g a
! 17. Rules. Except as otherwise orovided in this section. rules adopted oursuant to this section are routine technical rules as defined by Title 5. chapter 375. subchanter ll A. 1804. Divestiture of eeneration , 1. Divestiture required: egtpflons. Except as orovided in subsection 3. on or before March 1. 2000. each investor-owned i i l l m- . . . - - - - . + - , . . - -.- . - . . . - , , , - . , _ , , . . , . , , , , , , , - - - - , - _. w. . - . . _ . . - . - .
electric utility shall divest all neneration assets and ceneration-related business activities other than any: A. Contract with a aunlifyine facility or with a demand-side management or conservation orovider. broker or host: B. Ownershin interest in a nuclear power olant: C. Ownershio interest in a facility located outside the United States: or D. Ownershio interest in a generation asset that the commission determines is necessary for the utility to perform its oblications as a transmission and distributlpn utility in an efficient manner. No later than January 1.1999. each investor owned electric utility shall submit to the commission a clan to accomolish the divestiture reauired under this subsection. In an adiudicatory oroceedine. the commission shall review the olans for consistency ydb,this chanter. By July 1.1999. the commission shall issue an order anorovina the olan or modifying the olan to make it consistent with the reauirements of this chanter. An investor-owned electric utility shall divest its neneration assets in accordance with the commission's order.
- 2. Commission may riguirs divestiture of Maine Yankee interests. Notwithstandine any other orovision of this chanter. the commission. If necessarv to achieve the purposes of this chanter, may. in an adiudicatorv oroceedine. reauire any investor-owned transmission and distribution utility to divest its ownershio interests in the Maine Yankee Atomic Power Comoany on or after January 1. 2009. The commission may order divestiture under this subsection only after notice to all interested earties and an cooortunity for those carties to be heard.
- 3. Extension: separation reautred. An im estor owned electric utility may apolv to the commission for an extension to oermit the utility to divest one or more neneratiouycts after March I 2000. He commission shall crant an extension if the sommission finds that an extension would be likely to .Wrove the sale value of those assets on the market. If the commission grants an extension. the utility shall transfer to a distinct corporate entity by March 1. 2000 the neneration assets to which thg extension anolies. Conduct of the utility and any affiliated cornorate entity receiving the generation assets is covemed by section 3205.
The commission by rule shall establish the procedure for crantine l e r . A .
extensions. By March 1.1999. the commission shall orovisionally adoot all rules reautred under this subsection. Rulet adooted under this subsection are maior substantive rules oursuant to Title 5. chanter 375. subchanter Il A.
- 4. sale of canacity and enerav reauired. The commission by rule shall reauire each investor-owned electric utility after February 28. 2000 to sell richts to capacity and enercy from all ceneration assets and ceneration related business.
includina ourchased power contracts that are not divested oursuant te subsection 1. except those richts to caoacity and enernv that the commission determines are necessary for the utility to oerform its obtinations as a transmission aDidistribution utility in an efficient manner. In the rules adooted under this subsection. the commission shall establish procedures to oromote the maximum market value for these rinhts. Nothine in this subsection orohibits a utility from re nerotiatine. buying out or buyinn down a contract with a cualifyinn facility in accordance with anolicable laws. By March 1.1999. the commission shall orovisionally adoot all rules Igguired under this subsection. Rules adopted under this subsection are maior substantive rules oursuant to Title 5. chanter 375. subchanter Il A.
- 5. Ownershin of meneration orchibited. Except as otherwise permitted under this chanter. on or after March 1.
2000. an investor owned transmission and distribution utility may not own. have a financial interest in or otherwise control neneration or nencration-related assets.
- 6. Generation assets nermitted. On or after March 1. 2000. notwithstandine any other orovision in this chapter. the commission may allow an investor-owned transmission and distribution utility to own. have a financial interest in or otherwise control reneration and neneration-related assess to the extent that the commission finds that ownershio. interest or control is necessarv for the utility to t.crform its oblications as a transmission and distribution utility in an eflicient manner.
- 7. Cornorate law: exemotions. An order of the commission directing or noorovine divestitare renders an electric gijlity and its directors. officers and shareholders exemot from Title 13 A. sections $ 14. 517. 624 and 720 and from the Uniform Fraudulent Transfer Act. Title 14. chanter 504 for the matters addressed by the order. A divestiture oursuant to a commission order directine or acorovine the divestiture does not constitute a sale of all or substantially all of the assets of a cornoration within the meanin? of Title 13 A. chanter 10.
I
4 l*.' , 13205. Markedng:large utilldes l 1. DanaNs. As used in this section. unless the context otherwise indicatM. the followine terms have the followinn meaninp A. " Affiliated comnetitive orovider" means a comnetitive electricity orovider whose relationshin with a larne , investor-owned transmission and distribution utility aunlifles it as an affiliated interest. ' B. " Distribution utility" means a larne investor-owned transmission and distribution utility that has ar affiliated i
- comoctitive provider.
C. "Purchasine entity" means a person that ourchases 10% or more of the stock of a distribution utility on or after the efractive d=*= of this section. D. "Related entity" means: (1) Any nerson who owns. directiv. indirectly or throuah a chain of successive ownership.10% or more of the votina securities of the purchasinn entity: (2) Any oerson 10% or more of whose votine securities are owned. directiv or indirectiv. by an affiliated interest as def ied in suboaranraoh (1):
- 3 (3) Any oerson 10% or more of whose votina securities are owned. directly or indirectiv. by a ourchasinn EldlE (4) Any nerson. or aroup of persons actine in concert. w hich the commission may determine. after inventiemrinn and hearina. exercises substantial influence over the colicies and actions of a ourchasine entity.
provided that the person or aroup of persons beneficially owns more than 3% of the ourchasine entity's voting 4 securities: or (5) Any ourchasine entity of which any oerson defined in suboaranraohs (1) to (4)is an affiliated interest. 1 E. "Votine securities" means any security or any nroorietary or other interest oresently entitline the owner or holder of the security to vote in the direction or management of the affairs of a comoany.
- 2. Markedas nermitted. On and after the becinnine of 1
4 4 1
I q retail access. a larne investor-owned transmission and distribution utilev may not sell electrie enernv or capacity to any retail } consumer of electricity. Pursuant to the reauirements of this section. on and after the becinnine of retail access. an affiliated ; comoetitive provider may sell electric energy or capacity to retail consumers of electricity: '
- A. Outside the service territory of the distribution utility with which it is affiliated
- and B Within the service territory of the distribution utility with which it is affiliated. except that:
1 (1) The amliated comoetitive provider may not sell or contract to sell more than 33% oithe total kilowatt hours sold within the service territory of the distribution utility. as determined by the commission by rule: and (2) In accordance with section 3212. the affiliated comativ novider may not at any one time provide or bid to orovide standard-offer service for more than 20% of electric load within the territory of the tapsmission and distribution utility with which it is affiliated. I No later than January 1. 2005. based on its evaluation of the develcoment of the comnetitive retail electric sales market. the commission shall comolete an evaluation of the need for the market share limitation imposed under caranraoh B. suboaranraoh ! (1) and shall recort its findines tonether with any recommendations to the loint standine committe e of the legislature havinn iurisdiction over utility matters.
- 3. Standards of conds.t. The followine orovisions covern the conduct of a distribution utility and an affiliated comoetitive orovider.
! A. A distribution utility may not. throunh a tariff provision or otherwise. nive its affiliated competitive orovider or ' I customers ofits affiliated comoetitive revider oreference over nonaffiliated comoetitive electricity oroviders or customers of nonaffiliated competitive electricity oroviders in matters relatinn to any regulated oroduct or service. B All renulated oroducts and services offered by a distribution utility. includine any discount. rebate or fee waiver. must be available to all customers and comoetitive electricity orovid'rs simultaneously to the exter.t. t I gm-,----mw- gr,e-.e--- , -- ,y , ,, , , , - - v-evw---e--- e- ,e - , , - 4,n --,---rnn< ~en.- -
- _ - . - .~.- -- --.- ----.-.- -
1 . .' l e technically possible and without undue or unreasonable discrimination. i i j C. A distribution utility may not sell or otherwise orovide reculated oroducts or services to its amliated comoetitive orovider without either oosting the offering electronically on a well-known source or otherwise making a sumcient ) j- offerina to the market for that product or service. l .I D. A distribution utility shall orocess all similar reauests for a regulated oroduct or service in the same manner and within the same period of time. E A distribution utility may not condition or tie the orovision of any regulated eroduct. service or rate agreement by the distribution utility to the arovision of any orowd.g service in which an amliated comoetitive orovider is l IN M itsl F A distribution utility shall orggss all similar reauests for information in the same manner and within the same t oeriod of time. A distribution utility may not orovide information to an amliated competitive provider without a ItSuest when information is made available to nonaffiliated comoetitive electricity oroviders only upon reauest. A distribution utility may not allow an amliated comoetitive orovider oreferential access to any nonoublic information renardine the distribution system or customers taking service from the distribution utility that is not made available to , nonamilated competitive electricity oroviders upon reauest. and a distribution utility shall instruct all ofits emolovees i not to orovide amliated comoetitive providers or nonaffiliated competitive electricity oroviders any oreferential access
, to nonnublic information.
G. Emolovees of a distribution utility may not share with any amliated comoetitive orovider or any nonamliated competitive electricity orovider.
)
i (1) Any market information acauired from the amliated comoetitive provider or from any nont.ffiliated ! comoetitive electricity orovider: or l l (2) Any market information developed by the distribution utility in the course of resoonding to reauests for ! distribution service. It A distribution utility shall keen a lot of all reauests for information made by the amliated comoetitive provider and nonamliated comoetitive electricity oroviders and the
, . _ , . . , , . . - . - - - - . -- - ~,.--,-r.=- .-~ - - - - ~- -e's
date of the resoonse to such reauests The loe is subiect to periodic review by the commission ne - commission shall establish categories of reauestt for information and shall specify w hich catteories. if any. are sumelently trivial to be exemot from the loe reauirements imposed under this cararraoh.
- 1. A distritsijall"_;*rmav not release any croorietary customer information without the orior written authorization of the customer.
1 A distribution utility shall refrain from civine any anocarance of socakine on behalf ofits amliated comoetitive ggylder. Neither a distribution utility nor an effiliated comoetitive provider may in any way reoresent that any advantare accrues to customers or others in the use of the distribution utility's services as a result of that customer or others dealine with the affiliated competitive orovider. A distribution utility may not enamne in loint advertisine or marketine orograms of any sort with its amliated comoetitive.orovider. nor may the distribution utility oromote or market any oroduct or service offered by its affiliated coraoetitive provider. %e commission shall maintain a current list of all comnetitive providers. If a customer reauests information about comoetitive electricity oroviders. the distribution utility shall orovide a coov of a list on which competitive electricity oroviders aoocar in random seauence and not in alohalatical order. He distribution utility may not in any manner oromote its amliated comoetitive orovider. K. Emolovees of a distribution utility may not strte or orovide to any customer or notential customer any ooinion regardme the reliability. exeerience. aualifications. financial canability. manneerial canability. operations can=hility. customer service record. consumer oractices or market share of any amliated comnetitive orovider or nonamliated comoetitive electricity orovider. L Emolovees of a distribution utility may not be shared with. and must be ohvsically separated from those of. an amliated comnetitive orovider. He commission may noorove an exemotion from these seoaration reautrements upon a findine by the commission that: (1) Sharine emolovees or facilities would be in the best interest of the ouh].ig; (2) Sharine emolovees or facilities would hase no anticomoetitive effect. and W
1 0 O: The costs of any shared employees or facilities can be fully and accurately allocated between the distribution utility and the affiliated comnetitive provider.
,,,,, Any reauest for an exemotion must be accompanied by a full and transoarent allocation of costs for any stiated ^
facilities or ceneral and administrative succort services. The commission shall allow a reasonabb onnortunity for parties to submit comments recardinc any reauest for an exemotion. An exemotion is valid until the commission determines that modification or removal of the exemotion is necessarv. E,,,A distribution utility andjiuffiliated competitive provider shall keen separate books of accounts and records. which are subiect to review by the commission. N A distribution utjlity shall establish and file with the commission a discute resolution crocedure to addren comolaints allecine violations of this section or any rules adopted oursuant to this section. A discute resolution procedure must. at a minimum. desienate e person to conduct an investication of the comolaint and communicate the results of the investi?ation to the claimant in writine within 30 days after the comolaint was received. includine a descriotion of any action taken and the comolainant's richt to flie a complaint with the c?gypission if not satisfied with the results of the investication The distribution utility shall maintain a loc of all ner. resolved and nendine complaints. The loc is subiect to annual review by the commissic;und.pust include. at a minimum. the written statement of the comelaint and the resolution of the comelaint or the reason why the complaint is stil! sendine. O. A distribution utility shall maintain its books of account and reco ds ofits transmission and distribution coerations seoarately from those ofits affiliated competitive provider. and the transmission and distribation books of account and records must be available for commission inspection. P. A distribution utility shall maintain in a Dublic olace and file with the commission current written procedures in.olementine the standards of conduct established by this section and rules adooted by the commission oursuant to this section. Such written crocedure must be in d-tail sutticient to enable customers end ths commission to a p k
f dgtermine that the comoany is in comoliance with the reauirements of this section.
- 4. Rules. The commission shall adont rules imolementine the orovisions of this section. includine:
A. Rules covernine the trackine of the amount of kilowatt-hour sales by any affiliated competitive orovider comoared to the total kilowatt hour sales within the service territory of the affiQtid distribution utility: B. Rules covemine the crocedure for divestiture: and C. Rules establishine standards of conduct for distribution utilities and affiliated comoetitive oroviders consistent with the reauirements of this section. Becinnine on the effective date of comoetition and annually thereafter. cocies of the rules adopted under this section must be pro /ided by distribution utilities to every employee of the distribution utility and posted prominently in everv emoloyee location. Rules adooted under this subsection are maior substantive rules oursuant to Title 5. chanter 375. subchanter ll-A and must be provisionally adooted by March 1.1944
- 5. Penalties, The commission shall reauire the distribution utility to divest the affiliated competitive provider if the commts; ion determines in an adiudicatory proceedine that:
r A. The distribution utility or an a filiated comoetitive provider has knowinelv violated any orovision of this section or any rule adooted by the commission oursuant to this section: and B. The violation resulted or had the notential to result in substantial iniury to retail consumers ofclectric enerev or to the comoetitive retail market for electric enerev. The commission may imoose administrative cenalties of uo to $10.000 for a violation of any provision of this section or any rule adooted by the commission oursuant to this section Each day of a violation constitutes a secarate offense. Penalties collected hv the commission under this section must be deoosited in the Public Utilities Commission Reimbursement Fund under sution i17.
- 6. Prohibition: divestiture. If. after the etTective date
I l 4 pf,this section.10% or more of the stock of a distribution utihty is purchased by an entity: A. The ourchasine entity and any related entity may not sell or offer for sale reneration service to any retail consumer of electric enerry in this State: and B. If. in an adiudicatory oroceedine. the commission determines that an affiliated comnetaive orovider obtainun unfair market advantane as a result of the ourchase. the commission shall order the dhtribution utility to divest the amiinted comnetitive orovider. If the commission orders a divestiture oursuant to this subsection. the distribution utility must complete the diveniture within 12 months of the order to divest. unless the commission grants an extension. Uoon anolication bv the distribution utility. the commission may grant an extension for the ouroose of nermittine the utility to comolete a divestiture that has been initiated in good faith but not finalized within the 12-month period. The commission shall oversee and anorove a divestiture in accordance with rules adopted oursuant to subsection 4.
- 7. Effect of divestiture. If the commiesion orders a distribution utility to divest an amliated comoetitive orovider pursuant to -@ section. the distribution utility may not have an affiliated interest in a competitive electricity orovider after the divestiture.
li3206. Marketina: small utilities
- 1. Small utilities: limitations. Pursuant to the reauirements of this section. on and after the becinnine of retail access. an atTiliatdjnterest of a small investor-owned transmission and distribution utility may sell retail eeneration service to 7 retail consumers cf electricity located within or outside the service territory of the small investor-owned transmission and djitrjbution utility with which it is affiliated.
- 2. Rules of conduct. By Julv I.1998. the commission shall open a mie-makinn oroceedine to dete:mine the extent o(
separation between t 'all mvestor-owned transmission and distribution utility and an affiliated competitive electricity orovider necessary to avoid cro. . zubsidization and market oower abuses. By March I.1999. the commission shall orovisionally adoot all rules reauired undet shis subsection. Rules adooted under this subsection are maior substantive rules oursuant to Title 5. chanter 375. subchanter II-A. In adootine rules under e SA #
e this subsection. the commission shall consider all relevant issues. includinn. but not limited to: _ A. Codes of conduct that may be reauired to er'sure the effectiveness of the seoaration reauirement; B. Restrictions on emoloyee activities: C. Accountina standards: and D. Information and service comoarability reauiremen's.
}fE' ' - studv. The wuonission shall conduct a study to determine the most effective and efficient means of ensuring that the nortions of this State that are currentiv connected to the New Enoland electric arid throuch transmission lines that oass throuah Can=Aa are connected to the arid in a manne- that ensures that customers in those nortions of the State are able to take full advantane of retail access. By knuary 1. la99. the commission shall comolete its study and reoort its findinns and recommendations to the loint standinn committee of the Legislature havina iurisdiction over utility matters.
HZ07. Markerla=' ce- a-r owned utilitM
- 1. Ce==4. -owned utilitM: H'=l* = tica*. Consumer-owned transmission and distribution utilities:
A. May sell retail neneration service only within their resoective service territories: and B. May not sell wholesale neneration service except incidental sales necessary to reduce the cost of orovidinn retail service.
- 2. Comadssion review of marketina within territory. Notwithstandina any other orovision of this chapter. the commission by rule shall limit or orchibit sale of reneration services by comnetitive providers within the service territory of a consumer-owned transmission and distribution utility if the commission determines that allowinn such sales would cause the consumer-owned transmission and distribution utility to lose its tax-exemot status under federal or state law. Rules adooted cursuant to this subsection are routine technical rum .a defined in Title 5. chanter 375. subchanter M M208. Stranded cost recovery
- 1. Stranded costs defined. For the ournoses of this getion. the term " stranded costs" means a utility's lenitimate.
R-
i verifiable and unmitinable costs made unrecoverable as a result of the restructuring of the electric industry reauired by this chanter and determined by the commission as orovided in this subsection.
- 2. Calculation. For e.ach electric utility. the commission 7-f. determine the sum of the followine to the extent they aualify as stranded tasts oursuant to subsection 1:
A. The costs of a utility's renulatory assets related to generation: B. The difference between net olant investment associated with a utility's eeneration assets and the market va'ut.91.sht eeneration assets: and C. The difference between future contract navments and the market value of a utility's ourchased oower contracts. s When determinine the market value of ceneration assets and ourchased power contracts. the commission shall rely to the greatest extent oossible on market information. includine. but not limited to. market valuations that become known as eeneration assets and the rinhts to oower under contracts with oualifyinc facilities are sold.
- 3. Exclusions. Notwithstandine any other orovision of this chaoter. the commission may .iot include any costs for obtinations incurred on er after April 1.1995 la a utility's stranded costs. except that the commission may include:
A. Regulatory assets created after Acril 1.1995 and orior to March I. 2000 for: (1) The amortization of costs associated with the restructurma of a aualifvine facility contract: (2) Costs deferred oursuant to rate olans: or O) Enerry conservation costs: B. Obligations incurred by a utility after Acril 1.1995 and orior to March 1. 2000 that are bevond the control of the electric utility: and C. Oblications incurred by an electric utility after Acril 1.1995 to reduce notential stranded costs.
- 4. Mitigation. An electric utility shall oure*Q reasonable means to reduce its notential strandec* nd to D
e e tgggive the hinhest oossible value for neneration assets and contracts includinn the exoloration of all reasonable and lawful oooortunities to reduce the cost to ratcoavers of contracts with aualifyinn facilities. The commission shall consider a utility's efforts to satisfy this reauirement when determininn the amount of a utility's stranded costs.
). Stranded costs recoverable. When retail access benins. the commission shall provide a transmission and distribution utility a reasonable onoortunity to recover stranded costs through the rates of the transmission and distribution utility. as orovided in this section. The oooortunity must be comoarable to the utility's cooortunity to recover stranded costs before the imolementation of retail access under this chanter. Nothina in this chanter may be construed to nive a transmission and distribution utility a greater or lesser cocortunity to recover stranded costs than existed orior to the imolementation of t rigi[
access. The commission may resNce or increase the amount of stranded costs that the commission allows a utility to recover based on the efforts of the utility so mitinate its stranded costs.
- 6. Determination of stranded costs charnes, Before retail access benins. the commission shall estimate the stranded costs for each electric utility in the State. The commission shall use these estimates as tne basis for a stranded costs charne to be charned by each transmission and distribution utility when retail access benins. In 2003 and every 3 years thereafter until the utility is no lonner recoverine adiustable stranded costs. the commission shall correct any substantial inaccuracies in the stranded costs estimates associated with adiustable stranded costs and adiust the stranded costs charnes to reflect any such correction. The commission may correct adiustable stranded costs estimates and adiust the stranded costs charnes at any other time. - When correcting stranded costs estimates antn[im inn stranced costs charnes. the commission shall make any channe etTective only orosocctively and may nm reconcile east estimates to reflect actual valuet For ourcoses of this subsection. "adiustable stranded costs" means stranded costs other than stranded i costs anaf -+ed with divested neneration assets.
- 7. Recovery of stranded costs. The commission shall set an amount of recoverable stranded costs after calculating the net nonrenate value of all divested assets that had croceeds exceedine book costs anainst the accrenate value of all other stranded electricity neneration assets. The commission may not shift cost recovery among customer classes in a manner inconsistent with existina law. as aoolicable s
e
.- j receive the hiehest oossible value for reneration assets and contracts. includine the excloration cf all reasonable and lawful occortunities to reduce the cost to ratenavers of contracts with aualifyinn facilities. The commission shall consider a utility's efTorts to satisfy this reauirement when determining the amount of a utility's stranded costs.
- 5. Stranded costs recoverable. When retail access begins. the commission shall orovide a transmission and distribution utility a reasonable cooortunity to recover stranded costs through the rates of the transmission and distribution utility. as orovided in this section. %e occortunity must be comoarable to the utility's cooortunity to recover stranded costs Sefore the imolementation of retail access under this chapter. Nothinn in this chanter may be construed to nive a transmission and distribution utility a arcater or lesser occortunity to recover stranded costs than existed orior to the imolementation of retail access. %c commission may reduce or increase the amount of stranded costs that the commission allows a utility to recover based on the efforts of the utility to mitimate its stranded costs.
- 6. Determination of strarded costs charmes. Before retail access begins. the commission shall estimate the stranded costs for each electric utility in the State. De commission shall use these estimates as the basis for a stranded costs charne to be charred by each transmission and distribution utility when retail access becins. In 2003 and every 3 years thereafter until the utility is no lorizer recoverinn adiustable stranded costs. the commission shall correct any substantial inaccuracies in the stranded costs estimates associated with adiustable stranded costs and adiust the stranded costs charces to reflect any such correction The commission may correct adiustable stranded costs estimates and adiust the stranded costs charees at any other time. When correcting stranded costs estimates and adiustine stranded costs charnes. the commission shall make any chance efTective only crosocctively and may not reconcile east estimates to reflect actual values.
For ourooses of this subsection. "adiustable strar.ded costs" means stranded costs other than stranded costs associated with divested ceneration asum
- 7. Rece,very of stranded costs. The commission shall set an amount of recoverable stranded costs after calculating the net noorenate value of all divested assets that had croceeds exceedine book costs moninst the noorenate value of all other stranded electricity eeneration assets. He commission may not shift cost recovery amone customer classes in a manner inconsistent with existing law. as aoolicabit e
receive the hiehest oossible value for eeneration assets and contracts. includine the exploration of all reasonable and lawful l onoortunities to reduce the cost to rateoavers of contracts with auslifyine facilities. The commission shall consider a utility's efforts tr satisfy this reauirement when determinine the amount of a utility's stranded eggt
- 5. Stranded costs recoverable. When retail access begins. the commission shall orovide a transmission and distribution utility a reasonable oooortunity to recover stranded costs thmuch the rates of the transmission and distribution utility. as orovided in this section. The oooortunity must be comoarable to the utility's ocoortunity to recover stranded costs before the imolementation of retail access under this chanter. Nothine in this chanter may be construed to nive a transmission and distribution utility a greater or lesser oooortunity to recover stranded costs than existed orior to the imolementation of retail access. The commission may reduce or increase the amount of stranded costs that the commission allows a utility to recover based on the efforts of the utility to mitimate its stranded costs.
- 6. Determination of stranded costs charnes. Before retail access becins. the commission shall estimate the stranded costs for each electric utility in the State. The commission shall use these estimates as the basis for a stranded costs charce to be charged by each transmission and distribution utility when retail access becins. In 2003 and everv 3 vears thereafter until the utility is no lonner recoverine adiustable stranded costs. the commission shall correct any substantial inaccuracies in the stranded costs estimates associated with adiustable stranded costs and adiust the stranded costs charees to reflect any such correction. The commission may correct adiustable stranded costs estimates and adiust the stranded costs charees at any other time. When correctine stranded costs estirnates and adiustine stranded costs charnes. the commission shall make any chance effective only orosocctively and may not reconcile east estimates te reflect actual values.
For ournoses of this subsection. "adiustable stranded costs" means stranded costs other than stranded costs associated with divested generation assets.
- 7. Recovery of stranded costs. The commission shall set an amount of recoverable stranded costs after calculatine the net noorenate value of all divested assets that had croceeds exceedine book costs against the noorecate value of all other stranded electricity generation assets. The commission may not shift cost recovery amone customer classes in a manner inconsistent with existine law. as anolicable.
e
.O l
o*
- 8. Prin#=5 The commission shall conduct seoarate adiudicatorv proceedings to determine the stranded costs for each investor-owned utility and each consumer-owned utility. In the same croceedines. the commission shall establish the Igygnue reauirements for each transmission and distribution utility and stranded costs charges to be charned by each transmluion and distribution utility when retail access beeins. The oroceedines must be comoleted by Julv I.1990 E3209 Rate design The commission shall set charues and rates collected by tran mission and distribution utilities in accordance with this section.
- 1. Anolicable law. The design of rate recovery for the collection of transmission and distribution costs. stranded sosts and other costs recovered oursuant to this chanter must be consistent with existine law. as anolicable. The commission may continue to permit recoverv. in transmission and distribution utility rags. of costs oreviously incurred by the utility when it was an intenrated electric utlhty that are not inchided in the recovery of stranded costs oursuant to section 3208.
- 2. Proceed $ Followinn notice and hearirie. the commission shall comotete an adiudicatory oroceedine on or before October 1.1999 for the desian of cost recovery for transmission and distribution costs. stranded costs and other costs recovered oursuant to this chanter and for the desien of rates for backun or standby service.
- 3. Exit fees. A customer who sienificantly reduces or eliminates consumr,. ion of electricity due to self-ceneration.
conversion to an alternative fuel or demand side manacement may not be assessed an exit or reentry fee in any form for the reduction or elimination of consumotion or reestablishment of service with a transmission and distribution utility.
- 4. DecotmrMieim costs. As regired by federal law. rule or order. the commission shall include in the rates of a mmission and distribution utility decommissionine exoenses associated with a nuclear unit.
13210. Renewable resources
- 1. Policy. In order to ensure an adeauate and reliable sucolv of electricity for Maine residents and to encourage ;he use of renewable and indigenous resoyIges. it is the oolicy of this State to encourane the ceneration of electricity from
O a renewable sources and to diversify electricity eroduction on which residents of this State relv in a manner consistent with this cction.
- 2. Definition. As used in this section. the term " renewable resource" means a source of electrical ceneration that cenerates power that can ohysically be delivered to the control recion in w hich the New Encland Pcwer Pool. or its successor as accroved by the Federal Snercy Reculatory Commission. has authority over transmission and that:
A. Oualifies as a cualifyinc small power oroduction facility under the Federal Enercy Reculatory Commission rules. 18 Code of Federal Reculations. Part 292. Subcart B. as in effect on January 1.1997: B. Qualifies as a cualifyinc coceneration facility under the Federal Enercy Reculatory Commission rules.18 Code of Federal Reculations. Part 292. Suboart B. as in effect on January 1.1997 and was constructed orior to January 1. 1997.or C. Whose total power oroduction canacity does not exceed 100 mecawatts and that relics on one or more of the followinc: (1) Fuel cells: (2) Tidal oower: (3) Solar arrays and installations: (4) Wind power installations: (5) Geothermalinstallations: (6) Hydroelectric cenerators: (7) Biomass cenerators: or (8) Generators fueled by municinal solid waste in coniunction with reeveline.
- 3. Portfolio r autrements. As a condition oflicensine oursuant to section 3203. each comoetitive electricity orovider in this State must demonstrate in a manner satisfactory to the commission that no less than 30% ofits cortfolio of sucolv sources for retail electricity sales in this State are accounted for by renewable resources By January 1.1999. the temmission shall orovisionally adoot rules establishine reasonable
/
I ! orocedures for imolementine this reauirement Rules adooted under this subsection are maior substantive rules oursuant to l Title 5. chapter 375. subchanter ll-A. L Report. In view of oronerty tax benefits. developments in other states and the deveicoment of a market for tradable credits for satisfyine renewable resource reauirements. the commission shall review the 30% nortfolio reauirement and make a recommendation for any chance to the icint standine committee of the Lecislature havine iurisdiction over utilities and enerev matters no later than 5 years after the becinnine of retail competition.
- 5. r'unding for research and development. De commission by rule shall establish a crocram allowine retail consumers of electricity to make voluntary contributions to fund renewable resource research and drvelopment. The crocram must:
A. Include a mechanism for customers to indicate their willineness to make contributionn B. Provide that transmission and distribution utilities cullect and account for the contributions and forward them to the commission. and C. Provide fcr a distribution of the funds to the University of Maine Svstem. the Maine Maritime Academy or the Maine Technical Collece System for renewable resource research and develonment. Rules adooted under this subsection are routine technical rules oursuant to Title 5. chanter 375. subchanter II-A.
!i3211. Conservation procram_1 De commission shall reauire transmission and dir :bution utilities to imolement enercy conservation orocrams and include the cost of any such crocrams in the rates of transmission and distribution utilities. The commission shall reauire transmission and distnbution utilities to select enerev efficiency service oroviders throuch neriodic competitive biddinc crocrams. He commission shall establish a reasonable level of fundine for those procrams comnarable to the amount expended for similar orocrams in the scar 1999 and recularly review the amount of fundine needed.
By July 1.1998. the commission shall commence a rule-makinc croceedinc on enercy conservation crocrams By July 1.1999. the commission shall orovisionally Wet rules establishine enerev conservation crocrams in comoliance with this sousection Rules 4 4
O adooted under this subsection are maior substantive rules oursuant to Title 5. chaeter 375. subchanter Il A. 53212. Standard offer When retail access becins. the commission shall ensure that standard-offer service is available to all consumers of electricity. t Establishrr.ent of terms and conditions. He conimission shall open a rule-makine croceedine no later than October 1.1997 to establish terms and conditions for standard-ofter seivice that include. but are not limited to: A. Entry and exit restrictions: B. Protection acainst a standard-offer service provider's failure to orovide service as contracted for: C. Acerocriate rate desien issues: D. Retainine averaced crices for all customers in the same class: an-t E Credit _ collection and disconnection oractices. By February 15.1998. the commission shall orovisionally adoot rules establishine terms and conditions for standard-offer service. Rules adooted under this subsection are maior substantive rules oursuant to Title 5. chanter 375. subchanter II-A.
- 2. Selection of standard offer service providers After terms and conditions for standard-offer service have been gitablished under subsection I. the commission shall administer a bid orocess to select a standard-offer service provider for that ansmission and distribution utility's service territory. By Julv I.1999. the commission shall review the bid submissions for each transmission and distribution utility and select the standard-offer service provider or providers for that utility's service temtorY.
/ A. He commission shall determine the eeneral credit data and specific information from ceneral load and usace data 1 that transmission and distribution utilities must provide to notential standard-otter service hidders. includine. but not limited to. monthly demand and encres consumotion and the number of customers in each customer class. He commission shall ensure that individual customer confidentiality is creserved in thi;; rocess and that a transmission and e 4
djattibution utility releases customer-soecific data only with the customer's oermission. If the transmission and distribution utility incurs additional costs to develoo and eroduce the reauired data. the commission sha;l oermit that utility to recover those costs thr mah transmission and distribution rates. B. The commission shall establish the maximum duration of a standard-offer service contract after considerina all relevant factors. including. but not limited to. market risks and the need for orice stability and contract flexibihty. C. A comoetitive electricity orovider that is an affiliate of a larne investor-owned transmission and distribution utility may submit bids to orovide standard-offer service for un to 20*4 of the electric load within the service territory of the larne investor-owned transmission and distribution utility with which it is affiliated. To orevent the unfair use of information oossessed by a large investor-owned transmission and 6stribution utility. the commission shall ensure that a utility seekinn to bid on standard-offer service has no creater aensip relevant information than is orovided to other potential bidders. D. A consurner-owned transmission and distribution utility and a s.v.all investor-owneo transmission and distribution utility may submit bids to orovide standard-offer service for that tity's service territory. To oreventihgyrfft use of J,fonnation oossessed by a consumer-owned transmission and d,11tikption utility or a small investor-ownet. transmission and distribution utility. the commission shall ensure that a utility seeking to bid on standard-offer service has no creater access to relevant information than is orovided to other notential bidders. Bv February 15.1998. the commission shall orovisionally adoot rules establishine a methodology for structurina the biddine ptgsess for standard-offer service in order to imolement the orovisions of this subsection. In adootine rules. the commission shall consider methods to ensure. to the extent oossible. at least 3 oroviders of standard-offer service in each transmission and distribution ut:lity service territory. as lone as the method does not result in any sir <nificant adverse imoacts on rates oaid by consumers. Rules adooted under this subsection are maior substantive rules oursuant to Title 5. chanter 375. subchanter II-A.
- 3. Price can: Investination, if the cualifying bids under subsection 2 for standard-offer service in any service territom
(
f O when combined with the reculated rates of transmission and distribution service and any stranded costs charce. exceed. on averace. the total rate for electricity immediately before the imolementation of retail access. the commission shall investicate whether the imolementation of retail access remains in the oublic interest or whether other mechanisms to achieve the oublic interest and to adeauately protect consumer interests need to be out in olace. Pursuant to section 3217. the commission shall notify the Lecislature of the results ofits investication and its determmation.
- 4. Implementdion pedod. Standard-offer service must be available until March 1. 2005. By January 1. 2004. the s.gmmission shall becin an investication to determine w hether the continued availabiliN of standard-offer service is necessary and in the oublic interest. The commission . hall conclude the investication by June 30. 2004 and recort its results to the Lecislature oursuant to section 3217.
- 5. Territorial and rate class application. Nothine in this section crecludes the commission from permittine or reauirine different terms and conditions for standard-offer service in different utility service territories or for different customer classet 13213. Bill unbundline: consumer educat19n
- 1. Unbundled bills. Becinninc January 1.1999. electric utilities shall issue bills that state the current cost of electric sacacity and enercy seoarately from transmission and distribution chartes and other charces for electric service. Bv January 31.1948. each electric utility shall file with the commission a bill unbundline crocosal. He commission shil comolete its review of those proposals and adopt a rule establishine unbundled bill reauirements by July 1.1948. Rules adopted under this subsection are routine technical rules cursuant to Title 5. chaoter 375. subchaeter ll A.
- 2. Consumer education advisory board: rules. The commission shall adoet rules implementine a: _tt educa! ion orocram in comolmnce with this subsection.
A. The commission shall immediately orcanize a consumer education advisory board to invest'cate and recommend methods w educate the oublic about the imolementation of retail access and its impact on consumers. He commission shall ensure broad representation of residential. industrial and commercial electric consumers. oublic acencies and the electric industry on the advisory board. Members of the board shall serve without compensation.
B. In its recommendations. the advisory board shall address: (1) ne level of fundine necessary for adeauate educational efforts and the noorooriate source of that fundmg. (2) ne asocets of retail access on which consumers need education: (3) ne most efTective means of accomolishine the education of consumers: (4) ne aoorooriate entities to conduct the education effort: and (5) Any other issue relevant to the education orconsumers renardine the imolementation of retail access and its imoact on consumers. C. The commission shall consider the recommendations of the advisory board when adootine rules to imolement a consumer education orocram Rules adopted under this subsection are maior substantive rules oursuant to Title 5. chanter 375. subchanter II-A. The commission shall orovide these rules to the Lecislature in rtcordance with Title 5. chanter 375. subchanter II.A. no later than February 1.1998. 13214. Needs based low-income M*Mance
- 1. Policy. In order to meet lecitimate needs of electricity consumers who are unable to ony their electricity bills in full and who satisfy clinibility criteria for assistance. and recocnizinn that electricity is a basic necessity to which all residents of the State should have access. it is the nolicy of the State to ensure adeouate orovision of financial assistance.
- 2. Lowdgome anles-e. In order to continue existine levels of financial assistance for low. income households and to meet future ineceases in need caused by economic exinencies. the commission shall:
A. Receive funds collected by all transmission and distribution utilities in the State at a rate set by the commission in periodic rate cases: and B. Set initial fundine for orocrams based on an assessment of accrecate customer need in periodic rate cases. The ftmdine formula may not result in assistance beine counted 1
t . i l ) as.iptome or as a resource in other means-tested assistance crocrams for low-income households. To the extent oossible. assistance must be orovided in a manner most likely tc crevent the loss of other federal assistance. _ 3. Special rate. Nothine in this section may be construed to orchibit a tt;;nminion and distribution utility from gjfgjemjpnial rate or procram for low-income customers that is not in effect as of the effective date of this chapter. subiect to 6g gromval of the commission.
- 4. Fin _antialjypoort. If the Lecislature aooropriates from the General Fund Gnancial sypoort for households and individuals rectivine assistance under this srction. the commission may not terminate the assistance provided by transmission and distribution utilities unless the General Fund source has comoletely reolaced such assistance. The commission may adiust the assistance orovided oursuant to this section based on the amount of any financial sunoort from the General Fund and may reinstitate assistance subsecuera to any termination of assistance if the commission finds that the General Fund source no loncer comoletely reolaces such assistance.
13215. Comm_ission authority and responsibility
- 1. Authority. Without limitine the commission's authority under any other provision oflaw. the commission mav:
A. Intervene and carticioate in croceedines at the Federal Enerev Reculatory Commission. the Nuclear Reculatory Commission. the Unit-d States Decartment of Enercy and other federal atencies and in tiroceedines conducted by Canadim or other authorities or acencies whenever the interests of competition. consumers of electricity or economic dty;looment in this State are affected; and B. Monitor tre . %qncommenditgnL.gs aco coriate. to the Lecislature. to th Govemor. t to Concress or to any federal acens . _ adine: (1) %e saferand economic efrect.s or notential etTects of market comoetition on nuclear units: nad (2) ne effects or notential effects of market competition on Maine's air cuality.
- 2. Flmilpar responsibility. The tecislature finds that. in order for ritgil competition in this State to function effectively. the covemance of any independent system operator t ith resconsibility for coerations of the recional transmission
e-4 system must be fully indeoendent ofinfluence by n.arket earticioants. The commission shall use all means within its authority and resources to advocate for and oromote the interests of Maine rateoavers in any oroceedine at the Federal Enerev Regulatory Commission involt ing the development novemance. operations or conduct of an indeoendent system ooerator.
-13216. Transinon: utility emnievees
- 1. Definitions. As used in this section. unless the context otherwise indicates. the following terms have the following meanmgs.
A. "Elieible emolovees" means all emolosees of an electric utility: (1) Who are not officers of the utility: (2) Who are employed by the utility on January 1.1998: and (3) Who are laid off due to retail comoetition. Absent other iust cause. a layoff after March 1. 2000 is deemed to have been due to retail comoetition. The commission by rule shall establish a date after which a layoffis deemed not to have been due to retail comoetition. An emoloyee is not an eligible emolovee by reason of the transfer of the emolovee's iob duties or assignment within a comoany or within affiliated comoanies at similar levels of comoensation. B. " Retail comoetition" raeans: (1) Retail access: or (2) The sale or mercer of any ceneration asset that occurs crior to March 1. 2000.
- 2. Substantive plan. Prior to the becinnine of retail access. each investor-owned electric utility shall oreoare a olan for providing transition services and benefits for clieible emolovees. The olan must:
A. Include a crocram to assist elicible emolovees in maintainine frince benefits and obtainine emolovment that makes - use of their notential: B. For 2 years after the beginnine of retail access. orovide to elicible emolovees retra:nine services and out clacement 1 e
e I services and benents. includine intensive vocational-interests-and-actitude screeninc: C. Provide full tuition for 2 years at the University of Maine or a vocational or technical school in the State or other reasonable retrainine services of value eaual to full in-state tuition for 2 vears at the University of Maine. at the discretion of the clicible employee: D. For 24 months or until permanent reolacement coverace is obtained throuch reemoloyment. whichever comes first. crovide continued health are insurance at the benefit and contribution levels existine durine emolovment with the utility: and E. Provide severance nav eaual to 2 weeks of base nav for each year of full-time emolovment. He clan may include orovisions for orovidine early retirement benefits.
- 3. Procedural reautrements. Each investor-owned utility shall file with the commission a clan for orovidine transition services and benefits for elicible employees that conforms to the reauirements of subsection 2. A clan must be filed prior to the utility finalizine any transaction that would result in an clicible emolovee beine laid off or at least 90 days crior to the start of retail access. whichever is first. Prior to filine the clan with the commission. the utility shall inform its employees and their certified representatives of the orovisions of the crocosed clan and. in accordance with noclicable law. shall confer with those emoloyees or their certified reoresentatives recardine the imoact of the crocosed clan on those emoloyees and measures to minimize any resultine hardshios on those emolovees.
While a clan is in effect. an investor-owned utility shall file notice with the commission of any closure or relocation of facilities and any action or reorcanization that will result in layoffs The notice must include a descriotion of the actions. the reasons for them and ar. assessment of their effects on the utility's emolovees.
- 4. Collective harealnina. If an investor-owned electric utility comoany er one or more of its subsidiary or carent companig is carty to a collective barcainine acreement recocnized by federal or state law. and if as a result of retail comnetition any of those comoanies creates. acauires or merces with any other entity. that entity shall continue to recoenize and hycain with the union reoresentine the emolovees of the comoany at the time of the creation. acauisition or mernt and
- e shall refrain from makine unilateral channes in the emoloyees' terms and conditions of emolovment. In addition. any successor emolover is bound to the terms of the collective bargainine acreement to the extent oermitted by federal law. Nothine in this section orevents any comoany. corooration or other business from enterine into any collective agreement as allowed by state or federal law.
- 5. Cost im,-.
The commission shall allocate the reasonable accrual increment cost of the services and benefits reauired under this section to rateoavers through charces collected by the transmission and distribution utility. All charges collected must be transferred to a system benefits administrator in the transmission and distribution utility and used to orovide scryices and benefits oursuant to the reauirements of this sectu .
- 6. Rules. The commission shall adoot rules necessary to imolement this section. Rules adopted under this section are routine technical rules oursuant to Title 5. chaoter 375. subchanter II A.
13217. Reports
- 1. Annual restructurina recort. On December 31st of each calendar year. the commission shall submit to the ioint standine committee of the Legislature havine iurisdiction over utility matters a reoort describine the commission s ctivities in carrvine out the reauirements of this chanter and the activities relatine to channes in the reculation of electric utilities in other states.
In its reoort the commission shall orovide an accountine of the commission's actual and estimated future costs of enforcine and imolementing the orovisions of this chanter covernine the relationshio between a transmission and distribution utility and an affiliated comoetitive electricity orovider and the costs incurred by transmission and distribution utilities in comolvine with those provisions. The commission shall also orovide an assessment of the effects ofimoosine these costs on rateoavers and the potential effects of assessine transmission and distribution utilities for these costs and erohibitirie the costs from beine oassed through to ratenavers.
- 2. Pronosed channes. If the commission determines. after orovidine interested carties an occortunity to be heard.
that any orovision in this chanter is not in the oublic interest. the commission shall oresent a recort to the icint standine Egtn aittee of the Lecislature havine iurisdiction over utility maggn, statine the basis for the commission's conclusion and includine,
o draft lecislation desicned to modify this chanter consistent with the oublic interest.
- 3. Independent system operator. The commission shall monitor events in the recion certainine to:
A The development of an indeoendent system onenitor with resconsibility for transmission reliability: R 't: mnagement of comoetitive access to the recional transmission system: and C. Richts to necotiate notential contracts between sellers and buyers of electricity. If the commission determines that there exists insufficient indeoendence on the cart of the independent system operator from any provider of wholesale transmjssion. comoetitive electricity orovider or electric utility. or ifit determines any other oroblem threatens recional transmission reliability. the commission shall orovide a report to the icint standine ec,inmittee of the Lecislature havine iurisdiction over utilitv matters with a recommendation as to what actions within the authority of the State are available to remedy this oroblem. Sec. 4. Rules on filings by competitive electricity providers. In adopting by rule requirements for competitive electricity providers pursuant to the Maine Revised Statutes, Title 35 A, section 3203, subsection 3 the commission may consider any requirements that the commission believes appropriate and shall consider the following filing requirements:
- 1. A statement of average prices at representative levels of kilowatt-hour usage in the most recent 6-month period;
- 2. A description of the average duration of supply arrangements with retail customers in the most recent 6-month period;
- 3. An explanation addressing whether pricing arrangements are fixed or will vary over a specified time period;
- 4. A statement indicating percentages of electricity supply over the recent 6-month period under categories of generation, including, but not limited to, oil-fired, nuclear, hydroelectric, coal, biomass or other renewable resources and regional apot market purchases; and
- 5. A listing of expected air emissions and a comparison of -
those emissions to a reg' anal average, as determined by the
e l 3. commission, for nitrous oxide, sulfur dioxide, mercury, fine particulates, radionuclides and carbon dioxide, calculated for a competitive electricity provider's supply sources in the aggregate os er the most recent 6-month period. Sec. 5. Conservation and qualifying facility contracts. All existing contracts and agreements in etTect as of March 1, 2000 between electric utilities and energy resource providers, including but not limited to qualifying facilities, continue in efTect notwithstanding any other provision of this Act, and the rights of the parties to these contracts and agreements may not be abrogaMd or diminished as a result ofimplementing this Act. All existing electric utilities shall provide each qualifying facility and each demand-side management or conservation provider, broker or host with whom it has contracts as of March 1,2000 the option to have the contract or contracts:
- 1. Retained by the transmission and distribution utility if it is the same legal entity as the electric utility that entere into the contract or contracts; or
- 2. Assigned by the existing electric utility to the transmission and distribution utility ifit exists as a distinct legal entity aller implementation of the provisions of this Act.
If contracts with qualifying facilities in existence on March I,2000 contain provisions for the simultaneous purchase of energy, or energy and capacity, by an electric utility from a qualifying facility and by a qualifying facility from an electric . utility, the transmission and distribution utility shall continue to sell at retail all transmission and distribution services to the qualifying facility, including the transmission of any energy, or energy and capacity, the qualifying facility may obtain in the competitive market. In the case of each such qualifying facility contract and each demand-side management or conservation contract assigned or retained as provided for in this section, any requirement pursuant to the contract that the qualifying facility or customer or host implementing demand-side management or conservation measures remain a customer of the electric utility that was an original party to the contract or any requirement pursuant to the contract to purchase a certain amount of electricity from that electric utility is deemed to be fully satisfied by the qualifying facility, customer, or host (a) remaining a customer of the transmission and distribution utility tha' has retained the contract, or tn whom it has been assigned pursuant to the option provided for m this section,(b) receiving any such required amounts of electricity by making purchases in the competitive energy market, and (c) receiving such purchases over the facilities of the transmission and / o
.. = -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
s t distribution utility. The transmission and distribution utility shall make payments required under any such demand-side management or conservation contracts or this Act r.ed is entitled to collect those payments in rates and charges as provided for in the Maine Revised Statutes, Title 35-A. Sec. 6. Qualifying facility contracts tied to retail tariffs. Certain contracts for the sale of energy, or energy and capacity, by qualifying facilities contain terms that establish or adjust the purchase rate based upon the retail tanff rate or changes to that retail tarifIrate paid by the qualifying facility to the electric utility for its purchases of electricity or upon reference to a particular retail tariff rate or changes in such retail tariff rate. The Legislature finos that after the date of retail access as provided for in this Act, a question may arise as to w hether there is a retail taritT rate that provides for a comparable standard for sale of combined generation and transmission or distribution services. Following the implementation of retail access as provided for in this Act, the Public Utilities Commission shall, at the request of any qualifying facility, annually establish a rate using the same terminology as may be found in the contract, such as " industrial tariff" or " Principal Base Rate" or other reference term. Such rate or reference term will then be used to establish or adjust the rate for the purchase of energy, or energy and capacity, under the contract. Any such rate or reference term will be established by adjusting the applicable rate or reference term or actual contract rate, as the case may be, as it stood as of the date of implementation of deregulation, by the applicable annual change in the average of the total price paid for electric services by all retail customers in Maine taking service at the same voltage level as the customer w hose rate or reference term is being established. The total price paid for electric services for this purpose includes the price paid by customers for transmission and distribution services, including any access charges, for electric energy and capacity, for stranded costs included in transmission and distribution company charges, for metering services and for any special facilities or equipment necessary for the customers to take service and any other fee, levy, premium, license, surcharge or other charge imposed by or pursuant to the act of any transmission and distribution utility, any competitive electricity provider or any arm, agency or institution of govemment collected froni such customers as a condition of obtaining those electric services. If the aserage price can not be determined in any year due to the absence or unavailability of data, then the commission shall use changes in the federally established Gross Domestic Product Price 1 dex to determine the rate or reference term for that year. Solely for purposes of establishing a purchase rate under the applicable contract, the rate or reference term so established is deemed to
o be the applicable retail tariff or other reference term used in the contract for the qualifying facility's purchases of retail electric services from the utility purchaser under the contract, notwithstanding the actual price paid for such services established in accordance with this Act. Sec. 7. Short term energy rate contracts. After March 1,2000, the Public Utilities Commission, no less frequently than annually, shall establish, for the 12-month period succeeding the annual date of establishment of such rates, short term-energy-only rates for use in the purchase of energy by an electric utility where such a short-term-energy-only rate is used in a contract between a qualifying facility and an electric utility. The ammission shall amend chapter 36, section 3 ofits rules to comply with requirements of this section. The commission shall establish short-term-energy-only rates for both on-peak and off peak hours, as defined by the commission by rule as of January 1,1997, and, at the request of an electric utility or a qualifying facility, establish time-differentiated, peak and offten short-term-energy-only rates for any other hours defined in the applicable contract. After March I,2000, short term-energy-only rates are defined as the estimated cost for the wholesale purchase of energy in Maine dat includes fuel costs, start-up costs and variable operating and maintenance costs expressed on a cents-per-kilowatt hour basis using the number of significant digits as employed in the establishment of the short term energy-only rate as of January 1,1997 and adjusted to reflect the line loss costs or savings for deliveries at the various voltage levels for which the commission established adjustmer.ts as of January 1,1997. In making estimates of short term-energy-only rates, the commission shall be guided by the average mvket price for purchases of short-term energy in Maine during the 12 months previous to the period for which the rates will be estimated. In determining this average market price, the commission shall use, to the extent available, generally accepted and pablicly available indicators of the market price or the components of market price as published or, if unavailable, the market price elsewhere in New England that the commission determines to represent a market price similar to the market price that would exist in Maine given relevant market conditions in the State at the time of the estimation. Sec. 8. Other contracts. Consistent with this Act, the Public Utilities Commission by rule shall establish methods for establishing any rate, term, condition or other provision of any contract between an electric utility and a qualifying facility that may arguably be rendered impractical or impossible to perform or implement as a result of the restructuring of the electric industry pursuant to this Act, including but not limited to a method for establishing terms related to long term avoided
O ' [ costs, as defined in chapter 36 of the commission's rules, as in effect on the efrective dat, of this Act, By November 1,1997, the commission shall commence a rulemaking establishing the method for establishing terms related to long-term avoided costs. The rules must establish methods that preserve the intent and purposes embodied in the contractual provisions. At the request of a party to a qualifying facility contract or pursuant to the terms of a contract, the commission shall employ the methodology establishd by the mies to address the impracticability or impossibility associated with provisions of the contract so as to preserve the intent and purposes embodied in the contact. Rules adopted pursuant to this section are routine technical rules as defined in the Maine Revised Statutes, Title 5, chapter 375, subchapter Il-A. Sec. 9. New contracts. Notwithstanding the Maine Revised Statutes, Title 35-A, chapter 33, an electric utility or transmission and distribution utility may not be required pursuant to Title 35-A, chapter 33 to enter into a contract to purchase power from a qualifying facility atter the effective date of this Act. Nothing in this section abrogates existing law or rules that provide qualifying facilities with the right to seh energy to an electric utility prior to March 1,2000 on an as-available basis at the utility's si ort term only rate or to sell capacity and energy to an electric utility at any time before or after March 1,2000 on a basis voluntarily and mutually agreed to by the qualifying facility and the electric utility. Sec.10. Recommenda .on for low-income assistance program. On or before January 1,1998, the Public Utilities Commission and the State Planning Office shall provide to the Joint Standing Committee on Utilities and Energy, the Joint Standing Committee on Appropriations and Financial Affairs and the Joint Standing Committee on Taxation, and to any other committees of relevant jurisdiction, legislation that funds assistance to low-income consumers of electricity through the General Fund or through a tax on all energy sources in the State. The commission and the State Planning Office shall solicit public comment prior to the production of draft legislation and also solicit public comment before finalizing its legislative proposal. Sec. I1. Conforming amendments. By December 31,1998, the Public Utilities Commission shall identify and submit to thejoint standing committee having jurisdiction over utilities and energy matters legislation proposing amendments required to conform other statutes to the provisions of this Act. Sec.12. Authority. The joint standing conunittee havingjurisdiction over utilities and energy matters may report out legislation conceming electric industry restructuring to the
1 , f Second Regular Session of the il8th Legislature or to the First Regular Session of the 119th Legislature or the Second Regular Session of the 119th Legisiature. ___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ >}}