ML20206D749

Co Annual Financial Rept for 1998. with

ML20206D749
Person / Time
Site:	Maine Yankee
Issue date:	12/31/1998
From:	Zinke G Maine Yankee
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
GAZ-99-16, MN-99-12, NUDOCS 9905040230
Download: ML20206D749 (54)

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~ #i" l MaineYankee i 321 OLD FERRY RD. + WISCASSET, ME 04578-4922 April 28,1999 MN-99-12 GAZ-99-16 UNITED STATES NUCLEAR REGULATORY COMMISSION Attention: Document Control Desk Washington, DC 20055

References:

(a) License No. DPR-36 (Docket No. 50-309)

Subject:

Annual Financial Report Gentlemen:

Pursuant to 10 CFR 50.71(b), please find enclosed a copy of the 1998 Annual Financial Report for Maine Yankee Atomic Power Company.

Very truly yours, George A. Zinke, Director Nuclear Safety & Regulatory Affairs Enclosure c: Mr. Hubert Miller /

Mr. Michael K. Webb Mr. Michael Masnik

. Mr. Mark Roberts [/

Mr. Ron Bellamy Mr. Patrick J. Dostie Mr. Uldis Vanags oO 4

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l MAINE YANKEE ATOMIC POWER COMPANY -+

ANNUAL FINANCIAL REPORT FOR 1998 l 1

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321 Old Ferry Road Wiscasset. Maine 04578 Company Address (207) 882-6321 Telephone Number Since Maine Yankee retired its publicly-held First Mortgage Bonds in 1993, it is no longer required to file periodic reports on Form 10-K,10-Q and 8-K (the "1934 Act Reports") with  !

.the Securities and Exchange Commission under the Securities Exchange Act of 1934. )

However, in order to continue to keep its investors and other interested parties informed about the Company and to comply with the reporting obligations contained in its various debt and l preferred stock agreements, Maine Yankee prepares annual and quarterly financial reports.

These reports are distributed on request from the Treasurer of the Company at the above address.  ;

THIS REPORT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OF MAINE YANKEE ATOMIC POWER COMPANY.

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, Maine Yankee Atomic Power comoany i

1998 Annual Financial Report t

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TABLE OF CONTENTS l

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! The Company . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . 3 Financial Stataments and Supplementary Data . . . . . . . . . . 14 Directors and Executive Officers . . . . . . . . . . . . . . . 49 l

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THE COMPANY Maine Yankee Atomic Power Company (the " Company" or " Maine Yankee"),

incorporated under the laws of Maine on January 3, 1966, owns and from 1972 to 1997 operated a pressurized-water nuclear-powered electric generating plant at Wiscasset, Maine, with a not capacity of approximately 860 megawatts electric (the " Plant"). The Company sold the Plant's capacity and output to its ten sponsoring stockholder utilities (the

" Sponsors" or the " Stockholders") . The company's principal of fice address is 321 Old Ferry Road, Wiscasset, Maine 04578, and its telephone number is (207) 882-6321.

On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at the Plant and to decommission the Plant. For a discussion of the recent operating history of the Plant that led to the decision to close the Plant and of related regulatory and other issues, see the Company's Annual Financial Report for 1997.

On November 6, 1997, Maine Yankee filed new rates with the Federal Energy Regulatory Commission ("FERC") reflecting the fact that the Plant was no longer operating and was being ~ decommissioned. Intervenors in the I proceeding raised issues concerning the prudence of the decision to close the Plant the estimated costs of decommissioning the Plant, and related l matters. After extensive discovery and negotiations, the active parties to the proceeding agreed on a settlement of those issues, which resulted in the filing of an Of fer of Settlement with the FERC on January 19, 1999.

On February 8, 1999, the FERC Trial Staff recommended that the FERC approve the settlement. For a discussion of the FERC proceeding, see

" Management's Discussion and Analysis of Financial Condition and Results of Operations" "FERC Rate-case Settlement," below.

Underivina Con?.racts. Each of the Sponsors committed under a 1968 Power Contract with the Company to purchase a specified percentage of the capacity and output of the Plant and to pay therefor a like percentage of amounts sufficient to pay the Company's fuel costs, operating expenses (including a depreciation accrual at a rate sufficient to fully amortize the investment in the Plant over the operating life of the Plant and amounts estimated to be sufficient to decommission the Plant) , interest on its debt and a return on its equity. In 1984 the Company and its Sponsors executed Additional Power Contracts for the purpose of extending the term of the Power Contracts, as amended, from 2003 to the and of the useful life of the Plant, then expected to be 2008, and the completion of the Company's decommissioning and financial obligations. Each Sponsor also agreed, under a'1968 Capital Funds Agreement with the Company, to provide a like percentage of the company's capital requirements not obtained from other sources, subject to obtaining necessary authorizations regulatory bodies in each instance. With the Plant being of decommissioned, however, it is highly unlikely that the Plant will have

" capital requirements" as defined in the Capital Funds Agreements. All 1

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m THE COMPANY (continued) such obligations are subject to the continuing jurisdiction of various federal and state regulatory bodies. .

The obligations of the Sponsors to make payments under the Power Contracts

- are unconditional, and were subject only to each Sponsor's right to cancel its Power Contract if . deliveries could not be made to the Sponsor because either (i) the Plant was damaged to the extent of being completely or substantially completely destroyed, or (ii) the Plant was taken by exercise of the right of eminent domain or a similar right or power, or (iii) (a) the Plant could not be used because of contamination or because a necessary license or authorization could not be obtained or was revoked or the utilization thereof was made subject to specified conditions which were not met, and (b) the situation could not be rectified to an extent which would permit the Company to make deliveries to the. Sponsor from the Plant. Under 1997 amendments to the Power Contracts and Additional Power Contracts' submitted to the FERC as part of the recent rate proceeding in which the Offer of Settlement is pending before the FERC, the Sponsors agreed that the permanent shutdown of the Plant did not give rise to a right to cancel those contracts and the cancellation provision designated

" (iii) " above in this paragraph was deleted from the earlier contracts.

Notwithstanding the right to cancel, the obligation to pay decommissioning costs continues until the Plant has been fully decommissioned.

Other Reculation. The decommissioning of the Plant is subject to exten-sive regulation by the Nuclear Regulatory Commission ("NRC"). The Company and several of its Sponsors are subsidiaries of registered holding companies and, as such, are subject to regulation by the Securities and Exchange Ccamission ("SEC") under the Public Utility Holding Company Act of 1935 with respect to various matters, including the issuance of certain securities. The company is also subject to regulation by the SEC under other federal securities laws.

In addition, Maine Yankee is subject to limited regulation by the Maine Public J3tilities Commission (*MPUC") as to some aspects.cf its business, including the iesuance of securities. The Company is also subject to regulation as to environmental matters and land use by the federal Environmental Protection Agency and various state and local authorities in Maine.

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Maine Yankee Atomic Power Company S NAGEMENT'S DISCUSSION AND ANALYSIS OF TI4TANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's analysis of certain significant f actors that have af fected the Company's operating results and financial condition for the period 1996 through 1998.

FERC Rate-case Settlement On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at the Plant and to begin decommissioning the Plant. As reported in detail in the Company's Annual Report for the year ended December 31, 1997, and its Quarterly Reports for the quarters ended March 31, 1998, June 30, 1998, and September 30, 1998, the Plant experienced a number of operational and regulatory problems and did not operate after December 6, 1996. The decision to close the Plant permanently was based on an economic analysis of the costs, risks and uncertainties associated with operating the Plant compared to those associated with closing and decommissioning it. The Plant's operating license from the NRC was scheduled to expire on October 21, 2008.

The entire output of the Plant had been sold at wholesale by Maine Yankee to ten New England electric utilities, which collectively own all of the common equity of Maine Yankee; a portion of that output (approximately 6.2 percent) was in turn resold by certain of the owner utilities to 29 municipal and cooperative utilities in New England (the " Secondary Purchasers"). Maine Yankee recovered, and since the shutdown decision has continued to recover, its costs of prbviding service through a formula rate filed with the FERC and contained in Power Contracts with its utility purchasers, which are also filed with the FERC.

On November 6, 1997, Maine Yankee submitted for filing certain amendments to the Power Contracts (the " Amendatory Agreements") and revised rates to reflect the. decision to shut down the Plant and to request approval of an increase in the decommissioning component of its formula rates. Maine Yankee's submittal also requested certain other rate changes, including recovery of unamortized investment (including fuel) and certain changes to its billing formula, consistent with the nonoperating status of the Plant. By Order dated January 14, 1998, the FERC accepted Maine Yankee's new rates for filing, subject to refund af ter a minimum suspension period, and set Maine Yankee's Amandatory Agreements, rates, and issues concerning the prudence of the Plant-shutdown decision for hearing.

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,ei Maine Yankee Atomic Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF F MANCIAL CONDITION AND RESULTS OF OPERATIONS FERC Rate-case Settlement (continued)

By Complaint dated December 9, 1997, the Maine Office of the Public Advocate ("OPA") sought a FERC investigation of Maine Yankee's actions leading to the decision to shut down the Plant, including actions associated with the management and operation of Maine Yankee since 1993.

The MPUC had initiated an investigation in Maine earlier, raising generally similar issues. By decision dated May 4, 1998, the FERC consolidated the OPA Complaint with the comprehensive rate proceeding.

In addition, the Secondary Purchasers intervened in the FERC proceeding, raising similar prudence issues and other issues specific to their status as indirect purchasers from Maine Yankee.

In support of its request for an increase in decommissioning collections, Maine Yankee submitted with its initial filing a 1997 decommissioning cost study performed by TLG Services, Inc. ("TLG"). During 1998, Maine Yankee engaged in an extensive competitive bid process to engage a Decommissioning Operations contractor (" DOC") to perform certain major decontamination and dismantlement activities at the Plant on a fixed-

-price, turnkey basis. As a result of that process, a consortium headed by Stone & Mobster Engineering Corporation (" Stone & Webster") was selected to perform such activities under a fixed-price contract. The contract provides for, among other undertakings, construction of an independent spent fuel storage installation ("ISFSI") and completion of major decommissioning activities and site restoration by the end of 2004.

The DOC process resulted in fixing certain costs that had been estimated in the earlier decommissioning cost estimate performed by TLG.

Since the filing of the rate request, Maine Yankee and the active intervenors, including among others the MPUC Staff, the OPA, several Sponsors,_the Secondary Purchasers, and a Maine environmental group (the

" Settling Parties"), engaged in extensive discovery and negotiations.

Those parties participated in settlement discussions that resulted in an Offer of Settlement filed by those parties with the FERC on January 19, 1999. On February 8, 1999, the FERC Trial Staff recommended that the presiding judge certify the settlement to the FERC and that the FERC approve it. Upon approval by the FERC, the settlement would constitute a full settlement of all issues raised in the consolidated FERC proceeding, including decommissioning-cost issues and issues pertaining to the prudence of the management, ' operation, and decision to permanently cease operation of the Plant. A separately negotiated settlement filed with the FERC on February 5, 1999, would resolve the issues raised by the Secondary Purchasers by limiting the amounts they will pay for  !

decommissioning the Plant and by settling other points of contention af fecting individual Secondary Purchasers. On February 24, 1999, the FERC 4

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e Haing Yankee Atomic Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS l

FERC Rate-case Settlement (continued)

Trial Staff recommended that the presiding judge certify the additional settlement to the FERC and that the FERC approve it.

The settlement provides for Maine Yankee to collect $33.6 million in the aggregate annually, effective January 15, 1998, consisting of: (1) $26.8 million for estimated decommissioning costs, and (2) $6.8 million for ISFSI-related costs. The original filing with FERC on November 6, 1997, called for an aggregate annual collection rate of $36.4 million for decommissioning and the ISFSI, based on the TLG estimate. Under'the settlement, the amount collected annually could be reduced to approximately $26 million if Maine Yankee is able to (1) use for construction of the ISFSI funds held in trust under Maine law for spent- j fuel disposal, and (2) access approximately $6.8 million being held by the  !

State of Maine for eventual payment to the State of Texas pursuant to a compact for low-level nuclear waste disposal, the future of which is now in question after rejection of the selected disposal site in west Texas by a Texas regulatory agency. Both would require authorizing legislation in Maine, which Maine Yankee is committed to use its best efforts to obtain. However, Maine Yankee cannot predict whether or when such legislation will be enacted. Any future assessments related to the Texas compact would be recoverable under the settlement.  ;

l The set $lement also provides for recovery of all unamortized investment (including fuel) in the Plant, together with a return on equity of 6.50 percent, effective January 15, 1998, on equity balances up to certain maximum allowed equity amounts. The Settling Parties also agreed in the proposed settlement not to contest the effectiveness of the Amendatory Agreements submitted to FERC as part of the original filing, subject to certain limitations including the right to challenge any accelerated recovery . nf unamortized investment under the terms of the Amandatory Agreements after a required informational filing with the FERC by Maine Yankee. As a separate part of the settlement, the three Maine Sponsors of Maine Yankee, the MPUC Staff, and the OPA entered into a further agreement resolving retail rate issues and other issues specific to the Maine parties, including those that had been raised concerning the prudence of the operation and shutdown of the Plant. l 1

In-addition, the settlement contains certain incentives for Maine Yankee ]

to achieve further savings in its decommissioning and ISFSI-related costs, j based on the amount of savings or overruns below or above a target total l I

budget amount. Maine Yankee would retain 10 percent of any not savings that are more than $10 million below the target amount and would be required to fund 10 percent of any overages more than $10 million over the  !

target, with Maine Yankee's share limited, in each case, to $10 million.

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, a e' j Maine Yankee Atomic Power Comeany MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FERC Rate-case Settlement (continued)

Finally, the settlement resolves some of the issues concerning restoration and future use of the site and environmental matters of concern to certain 4 i intervanors in the proceeding. Maine Yankee believes that the settlement, I if approved by the FERC,.would constitute a reasonable resolution of the issues raised in the FERC proceeding.

Dereculation l All of the states in which the Company and its Sponsors operate are in the process of pursuing deregulation of the retail electric market. It is unclear in most of these states what treatment will be provided to the Sponsors for' recovery of stranded costs once their markets are deregulated. The company has no ability to determine what effect deregulation and the ultimate recovery allowed for stranded costs might have on its Sponsors.

Year 2000 Excosure Many infomation systems were designed to function based on years that j begin with "19" and therefore will not properly recognize a year that begins with *20" . Maine Yankee initiated its Year-2000 compliance program in 1995 and is actively participating in an industry task force that is overseeing remediation efforts. The Company has substantially completed  ;

its assessment of potential areas of noncompliance, which are generally in the areas of internal and external financial syster.s, plant and network support systems, and embedded functions. As of March 1,1999, the Company estimates that it is approximately 80 percent through the necessary remediation work and approximately 60 percent through the testing of the remediation solutions. Computer applications related to nuclear .uel safety.have been assessed-and no Year-2000 problems were identified. At the same time the Company has been developing contingency plans and seeking infomation from its vendors and contractors concerning their Year-2000 readiness, and has not been informed of any significant problems with those parties that would advarsely affect the Company's timely readiness. Maine Yankee believes it is on schedule to attain Year-2000 readiness by the fall of 1999 and that it will not incur material costs in doing so, but cannot predict with certainty what effect, if any, the Year-2000 problem will have on its business operations or financial condition, f

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Maine Yankee Atomic Power Comoany MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Plant Ocerations Prior to 1997, the Plant had been generally operated on a planned eighteen-month operating cycle and taken off line at the end of a cycle =

for approximately six to ten weeks for scheduled refueling, maintenance and planned construction activities. The Plant has not operated since December 6, 1996, and has permanently ceased operation.

During 1996, the Plant operated at an average 67 percent capacity factor (using MDC not rating of 860 Mwe) and generated and sold 5.1 billion KWH ne t , at an average cost of 3.7 cents per KWH.

Fuel Excensel Fuel amortization expense is based on the cost of (1) nuclear fuel in the reactor cer. that is allocated to the accounting period based on the level I of energy rroduction and (2) amortization over the remaining useful life of the Plant for the last core of unburned nuclear fuel.

1 Fuel amortization decreased by $1.1 million in 1998 from 1997 because j unamortized fuel cost not of fuel held for sale was transferred to Net i Unrecovered Asseta as of Januery 15, 1998, and is being amortized along with other unrecovered assets. The decrease of $12.8 mil. lion in 1997 from 1996 is primarily the result of the Plant's not generating in 1997.

Fuel disposal cost results from (1) a disposal fee of $1.00 per megawatt-hour of not generation which is assessed by the federal Department of Energy t" DOE") and (2) a DOE annual assessment for decontaminating and J decommissioning DOE's enrichment facilities. Fuel disposal expense for both 1998 and 1997 was lower than that for 1996 due to the lack of generation after 1996.

Title XI of the Energy Policy Act of 1992 (the " Policy Act") provides for decontaminating and decommissioning DOE's enrichment facilities to be partially funded by a special assessment against domestic utilities.

Under the Policy Act, the total amount collected for a fiscal year will not exceed $150 million escalated by the Consumer Price Index (" CPI")

annually, and the collection of the amounts will cease after the earlier of (1) 15 years af ter the date of the enactment or (2) the collection of

$2.25 billion (to be escalated by the CPI annually) . Each utility's share of the assessment is to be based on its cumulative consumption of DOE enrichment services. The Company's estimated obligation at December 31, 1998, was $25.7 million, based on information from the DOE. Through that date the company had paid $11.6 million, of which $10.1 million had been expensed and recovered through rates.

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l Maine Yankee Atomic Power Comoany NANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Zugl Excenses (continued)

For a discussion of the DOE's unwillingness to accept spent nuclear fuel, including Maine Yankee's, for storage and disposal, see Note 13 of Notes to Financial Statements, "Comunitments and Contingencies" " Nuclear Fuel Storage".

1 Oneration and Maintenance Exnenses Operation expenses and maintenance expenses decreased by $80.6 million and

$57.7 million, respectively, in 1998 from 1997, primarily due to expenditures associated with Plant restart activities in 1997 and the direction of 1998 activities towards decommissioning work. Beginning in May 1998, a significant share of costs has been charged as decommissioning expenditures funded by the decommissioning trust fund.

Operation expenses and maintenance expenses increased by $28.7 million and

$38.3 million, respectively, for 1997 over 1996, primarily due to expenditures associated with the Plant regulatory and operational issues at that time.

Maine Yankee recorded the costs of sleeving a large number of defective steam generator tubes in 1995 as maintenance expense. On October 10, 1995, eleven municipal and electrical cooperative secondary purchasers that purchased Mainn Yankee power through the Company's Sponsors and were collectively. entitled to less than two percent of the Plant's output, filed a complaint with the FERC challanging the Company's accounting treatment of the costs and alleging that such costs should be deferred and amortized over the remaining operating life of the Plant.

On May 30, 1996, the FERC issued an order - directing Maine Yankee to amortizeithe sleeving repair costs over the remaining license life of the Plant (to October 2008). Because Maine Yankee had already billed the /

l repair costs in 1995, it was also directed to refund, with interest, all  !

amounts in excess of the properly amortized amounts. On July 30, 1997, j the FERC. approved a settlement agreement that preserved the benefits of  ;

the FERC's 1996 order for the complainant Secondary Purchasers as well as other Secondary Purchasers whose contracts to purchase Maine Yankee power were scheduled to expire in 2002. The settlement agreement also provided that Maine Yankee was not required to make refunds to its Sponsor customers, which represented in the aggregate approximately 94 percent of the total sleeving expense of approximately $27 million.

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Maine Yankee Atomic Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

. Low-Level Waste Discosal For a discussion of issues relating to low-level nuclear waste storage.and disposal, see Note 13 of Notes to Financial Statements, " Commitments and Contingencies" " Low-Level Waste Disposal".

N rtization and Decreciation The increase in amortization and depreciation expense of $3.3 million for 1998 over 1997 is the result of the transfer of various assets to Not Unrecovered Assets as of January 15, 1998, and the subsequent amortization of those assets over e period ending October 2008. See Note 1 of Notes to Financial Statementu, " Plant Shutdown and Rate Case".

Decommissionino The increase in decommissioning expense of $20.7 million for 1998 over 1997 is due to the increase in the annual collection amount from $14.9 million to $36.4 million, as approved by the FERC effective January 15, 1998, subject to refund. See Note 1 of Notes to Financial Statements,

" Plant Shutdown and Rate Case."

Income Taxes The decrease in income tar expense for 1998 resulted principally from a reduction in the return on common equity associated with the proposed comprehensive settlement of the FERC rate case. This decrease was offset by a reduction in tax benefits associated with the not earnings of the nonqualified decommissioning and spent fuel trust funds.

The increase in income tax expense for 1997 resulted principally from a reductio Lin the tax benefits associated with the not earnings of the non-qualified decommissioning and spent fuel trust funds.

Procerty Taxes The decrease in property taxes in 1998 from 1997 is the result of a lower tax assessment resulting from the Plant shutdown, a revaluation of the taxable property of the town of Wiscasset, and an agreement respecting taxes between Maine Yankee and the town, al.ong with the allocation of taxes to decommissioning expenses being reimbursed from trust funds beginning in October 1998.

Property taxes increased during 1997 over 1996, primarily due to an increase in the mill rate.

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Maine Yankee Atomic Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Income (Excense) Net  !

The increase in other income (expense) not during 1997 over 1996 is primarily due to increased levels of short-term investments and decreased expenditures for civic, political and related activities.

Lona-Term Debt, Revolvina Loan and Fuel Financina Note Interest The fluctuations in interest expense on long-term debt, revolving loans and fuel financing notes between 1998 and 1997 are the result of the refinancina of those debt f acilities on April 7,1998. See " Liquidity and Capital Resources" - " Capital Resources", below.

Other Interest Charoes Other interest charges were higher during 1997 than 1996 primarily due to interest related to the August 1997 refund of sleeving costs to the Secondary Purchasers.

Allowance for Funds Used Fluctuations in the amount of allowance for funds (equity and borrowed) normally occur as the result of changes in the level of investments in Construction Work in Progress ("CWIP") and Nuclear Fuel in Process

-("NFIP") and/or the rates used'for capitalization of these funds.

Prior rate structure allowed current billing of 50 percent of Allowance for Funds Used During Construction ("AFC") and Allowance for Funds Used for Nuclear Fuel ("AFN") ; the current FERC rate case excludes such current billing retroactive to the beginning of 1996. The increase in AFC and AFN for 1998 over 1997 is the result of the capitalization of charges billed from January 1996 through January 1998 which were refunded in June 1998 to comply with the current rate case requirements. During 1997, AFC was lower than in 1996 due to a decreased level of investment in CWIP. AFN was higher due to the anticipation of a 1997 fuel reload.

Net Income and Barninas Aeolicable to Common Stock The decrease in not income and earnings applicable to common stock for 1998 from 1997 is primarily due to the adjustment for the expected refund of return on equity related to the current rate-case settlement agreement.

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O Maine Yankee Atomic. Power Comoany MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liouidity and Cacital Resources Canital Resources cash flow needs during 1998 were provided from operating activities in the amount of $88.3 million, the sale of nuclear fuel of $17.3 million and

' decommissioning' trust earnings of $19.7 million restricted to decommissioning. trust investments.

The primary uses of cash were for various corporate expenditures such as:

(1) not' financing activities of $82.5 million, (2) changes in not ,

l unrecovered assets of $2.6 million, primarily additions to plant and fuel of f set by not salvage, (3) not trust fund investments of $61.7 million to meet future plant decommissioning and prior spent fuel permanent disposal costs, and (4) dividend payments of $3.6 million.

On April 7, 1998, Maine Yankee refunded all of its First Mortgage Bonds and bank debt by means of a three-year revolving credit f acility with two major banks, which may be extended by agreement of the parties, and a $48 million term loan due in 2006 from a major institutional investor, and discharged its First Mortgage Indenture. The banks' revolving credit commitments are scheduled to be reduced through planned prepayments, structured to conform to Maine Yankee's projected cash flows, in two decrements from their initial level of $80 million to $50 million on March 31, 2099, and then to a working-capital level of $20 million on March 31, 2000. The Company reduced the banks' commitments to $69 million in April 1998, to $50 million in June, and to $48.9 million in December. The new debt obligations are secured by a security interest in Maine Yankee's rights in its Power Contracts, Additional Power Contracts and Capital Funds Agrooments with its Sponsors (the " Assigned Agreements") and its rights to certain expected third-party payments (including a tax refund and fuel sale -proceeds received by Maine Yankee) and contain restrictions on the' payment of common-stock dividends and return of equity capital based on Maine Yankee's cash position and a debt-service coverage test.

In addition, in connection with the refinancing each of the Sponsors affirmed.its obligations under the Assigned Agreements and agreed not to take the position that the permanent shutdown of the Plant gave rise to any right to terminate or reduce payments under the Assigned Agreements.

In March 1997, the Company's Board of Directors elected to strengthen the common-equity component of the Company's capital structure through the retention of earnings. Therefore, no common-stock dividend was declared from the first quarter of 1997 until resumed in the third quarter of 1998.

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Maine Yankee Atomic Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liauidity Mhile the Plant was operating, the Company billed its customers under a formula rate based on its costs. Unlike traditional utility ratemaking, where rates are based on a test-year rate base and total revenue requirements, the Company's rates consisted of its actual costs of providing service each month, regardless of the production level of the Plant, plus the costs, as determined by the FERC in periodic rate cases, of several items, including return on common equity, amortization, and decommissioning expense.

In addition to funding its short-term needs, the Company must also fund the payment of its long-term prior spent fuel disposal liability of $50.4 million and accrual of interest from April 7, 1983, to the time of payment, which, through December 31, 1998, amounted to an additional $82.8 million. Maine Yankee is funding an external trust to provide for i payment of this liability. Payment from the trust to the DOE is scheduled for not earlier than December 1999. The trust is funded by the Company through deposits, which began in December 1985, with current projected annual deposits of approximately $1.3 million through December 2003.

Deposits are expected to total approximately $78.2 million. The estimated liability, including interest due at the time of disposal, is projecend to-be approximately $168.7 million at December 31, 2003. The Company estimates that trust fund deposits plus earnings will meet this total liability if funding continues without material changes. For a discussion of lawsuits by the Company _against the DOE seeking to require the DOE to honor its contractual obligation to dispose of the Company's spent nuclear g

fuel, see " Notes to Financial Statements" - Note 13, " Commitments and

-Contingencies" " Nuclear-Fuel Storage".

i The company must also provide for the costs of decommissioring the Plant.

On March 31, 1994, the FERC approved an increase in the annual amount of collection to fund the decommissioning costs of the Plant from $9.1 million to $14.9 million commencing April 1, 1994. On January 14, 1998, the FERC .. approved the annual collection of $36.4 million commencing

- January 15, 1998, which may be reduced based on the rate-case settlement pending before the FERC. The amounts collected in cost of service are

-being deposited into an external trust. These amounts, together with the trust earnings, will be used to meet the Company's decommissioning obligation (estimated to be $547 million in mid-1998 dollars). The Company- recognizes the relative uncertainties associated with decommissioning, including changing technology and the possibility of new requirements of law, and therefore recognizes the need to monitor and adjust decommissioning collections through supplemental rate filings with the FERC.

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Maine Yankee Atomic Power Company MANAGEMENT'S. DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Licuidity (continued)

Maine Yankee has been notified by the Maine Department of Environmental Protection ("DEP") that it is one of many potentially responsible parties under the Maine Uncontrolled Hazardous Substance Sites law for having arranged for the transport of hazardous substances to sites owned by the Portland Bangor Waste Oil Company that have been designated uncontrolled hazardous substance sites by the DEP. Under the Maine law, each responsible party is jointly and severally liable for costs associated with the abatement, cleanup or mitigation of the hazards at such a site.

After lengthy investigation and settlement discussions to determine the appropriate allocation of responsibility for such costs, Maine Yankee recorded an estimated current liability of $248,572 at December 31, 1998.

Site characterization and other work at the Plant site throughout the decommissioning process could give rise to additional environmental issues.

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4 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL AND STATISTICAL SECTION 1

Index Pace Report of Independent Public Accountants . . . . . . . . . . . 15

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Financial Statements:

Statement of Income for each of the three years in the period ended December 31, 1998 . . . . . . . . . . . 16 Balance Sheet at December 31, 1998 and 1997 . . . . . . . . 17 Statement of Capitalization at December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . 19 Statemented* Changes in Common Stock Investment for each of the three years in the period ended December 31, 1998 . . . . . . . . . . . . . . 20 Statement of Cash Flows for each of the three years in the period' ended December 31, 1998 . . . . . . . . . . . 21 1

Notes to Financial Statements . . . . . . . . . . . . . . . 22 l

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U ARTHL'R ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS I

. To the Board of Directors of Maine Yankee Atomic Power Company:

f We have audited the accompanying balance sheet and statement of capitalization of Maine Yankee Atomic Power Company (a Maine Corporation) as of December 31,1998 and 1997, and the related statements of income, changes in common stock investment and cash flows for each of the three years in the period ended December 31,1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those .

standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

1 In our opinion, the financial statements referred to above present fairly, in all material respects, the l financial position of Maine Yankee Atomic Power Company as of December 31,1998 and 1997, and I the results of its operations and cash flows for each of the three years in the period ended December 31,1998, in conformity with generally accepted accounting principles.

h7A+u l

Boston, Massachusetts i January 27,1999 15

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.- 1 1

• Maine Yankee Atomic Power 9_o.oany om .

I STATEMENT OF INCOME (Dollars in Thousands Except Per Share Amounts) l Year Ended December 31, j llll 1212. M.A.6 )

1 ELECTRIC OPERATING REVENUES $110,608 $238,586 $185,661 OPERATING EXPENSES  !

Fuel l Amortization (Note 2) 42 1,122 13,952 {

Disposal Cost (Note 2) 1,597 1,709 6,618 110,362 81,661

)

Operation 29,760 Maintenance 2,539 60,262 21,953 Amortization and Depreciation (Note 2) 21,989 18,725 18,052 ]

Decommissioning (Note 2) 35,627 14,900 14,900 j Taxes (Benefits)

Federal and State Income (Note 3) (691) 84 (439)

Local Property 6,315 13,252 11,814 Total Operating Expenses 97,178 220,416 168,511 OPERATING INCOME 13,430 18,170 17,150 OTHER INCOME (EXPENSE)

Allowance for Equity Funds Used During Construction (Note 2) 315 158 138 For Nuclear Fuel (Note 2) - - -

Other, Not 7,129 7,316 5,271 INCOME BEFORE INTEREST CHARGES _20,874 25,644 22,559 INTEREST CHARGES Long-Term Debt (Notes 4 and 7) 4,748 6,795 7,349 Revolving Loans (Note 7) 2,719 - -

Fuel Disposal Liability (Note 2) 6,547 6,394 6,055 Fuel Financing Notes (Notes 5 and 6) 1,043 3,628 1,120 Other_ Interest Charges 281 267 199 Allowance for Borrowed Funds Used During Construction (Note 2) (306) (133) (161)

For Nuclear Fuel (Note 2) (453) (344) (109)

Total Interest Charges 14,579 16,607 14,453 NET INCOME 6,295 9,037 8,106 Dividends on Preferred Stock 1,379 1,425 1,469 EARNINGS APPLICABLE TO COMMON STOCK $ 4,916 $ 7,612 $ 6,637 SHARES OF COMMON STOCK OUTSTANDING 500,000 500,000 500,000 EARNINGS PER SHARE OF COMMON STOCK $ 9.83 $ 15.23 $ 13.27 DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

$ 8.75 $ -

$ 13.00 The accompanying notes are an integral part of these financial statements.

16

U Maine Yankee Atomic Power comoany l

BALANCE SHEET (Dollars in Thousands)

ASSETS December 31, 1998 ljl97 l ELECTRIC PROPERTY AND NUCLEAR FUEL Electric Property, at Original Cost (Note 4) $ 687 $ 687 Nuclear Fuel Held for Sale - 17,250 Total Electric Property and Nuclear Fuel 687 17,937 I

CURRENT ASSETS Cash and Cash Equivalents 5,158 30,247 Accounts Receivable 12,550 34,647 Prepayments 3,187 6,204 j Testal Current Assets 20,895 71,098 DEFER 2ED CHARGES AND OTHER ASSETS Trust Funds (Note 2)

Plant Decommissioning 212,664 199,457 Fuel Disposal 129,350 121,316 Regulatory Assets j Closure (Note 1) 534,155 660,826 Net Unrecovered Assets (Note 1) 217,878 238,284 Accumulated Deferred Income Tax Assets (Note 3) 43,472 36,918 DOE Decontamination and Decommissioning Fee (Note 2) 15,595 16,939 Other 8,428 5,189 Other Deferred Charges and Other Assets 174 179 Total Deferred Charges and Other Assets 1,161,716 1,279,108

$1,183,2 9 8 $1,3 6 8,14 3 The accompanying notes are an integral part of these financial statements.

17

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Maine Yankee Atomic Power comoany BALANCE SHEET (Dollars in Thousands) i STOCKHOLDERS' INVESTMENT AND LIABILITIES

, . December 31, Alla 112.7 CAPITALIZATION (See Separate Statements)

Common Stock Investment $ 79,490 $ 78,950 Redeemable Preferred Stock 16,800 17,400 Long-Term Debt (Notes 4 and 7) 48,000 76,665 Total Capitalization 144,290 173,015 LONG-TERM FUEL DISPOSAL LIABILITY (Note 2) 133,181 126,634 REVOLVING LOANS (Note 7) 20,433 -

NUCLEAR FUEL FINANCING NOTES (Notes 5 and 6) - 67,000 CURRENT LIABILITIES Current Sinking Fund Requirements (Notes 4 and 8) 600 7,267 Accounts Payable 8,721 23,086 Dividends Payable 2,545 356 Accrued Interest and Taxes 1,332 2,803 Other Current Liabilities 1,924 2,006 Total Current Liabilities 15,121 35,518 COMMITMENTS AND CONTINGENCIES (Note 13)

RESERVES AND DEFERRED CREDITS Plant Decommissioning Reserve (Note 2) 215,676 200,743 Deferred Credits Closure (Note 1) 534,155 660,826 Income Taxes (Note 3) 7,306 8,396 Acmumilated Deferred Income Tax Liabilities (Note 3) 84,726 74,421 DOE Decontamination and Decommissioning Fee (Note 2) 12,358 13,899 Unamortized Investment Tax Credits (Note 3) 5,400 5,887 Accumulated Provision for Rate Refunds 3,837 -

Unamortized Gains on Reacquired Debt (Note 2) 1,387 1,804 other Deferred Credits 5,427 -

Total Reserves and Deferred Credits 870,272 965,976

$1,183,2 9 8 $1,3 6 8,14 3 The accompanying notes are an integral part of these financial statements.

18

i[* ' 1 Maine Yankee Atomic Power Company STATEMENT OF CAPITALIZATION (Dollars in Thousands)

December 31, 1998 1997 COMMON STOCK INVESTMENT Common Stock, $100 Par Value, 500,000 Shares Authorized and Outstanding $ 50,000 $ 50,000 Other Paid-in Capital 16,504 16,538 Capital Stock Expense (289) (324)

Gain on Redemption of Preferred Stock 1,139 1,132 Premiums on Preferred Stock 35 44 Retained Earnings (Note 9) 12,101 11,560 79,490 78,950 REDEEMABLE PREFERRED STOCK 7.48% Series, $100 Par Value Authorized 60,000 Shares outstanding 24,000 in 1998 and 30,000 in 1997 (Note 8) 2,40C 3,000 8.00% Series, $100 Par Value Authorized 200,000 Shares outstanding 150,000 (Note 8) 15,00Q 15,000 17,400 18,000 Less: Current Sinking Fund Requirements 600 600

! 16,800 17,400 LONG-TERM DEBT Term Note (Note 7) 48,000 -

First Mortgage Bonds (Note 4)

Series D - 8.79 % due May 1, 2002 - 25,000 Series E - 8.13 % due May 1, 2008 - 40,000 Series F - 6.89 % due May 1, 2008 - 18,332 48,000 83,332 Less: Current Sinking Fund Requirements - 6,667 48,000 76,665 I

Total. capitalization $144,290 $173,015 The accompanying notes are an integral part of these financial statements.

19

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s \

e l Maine Yankee Atomic Power Company STATEMENT OF CHANGES IN COMMON STOCK INVESTMENT for the Three Years Ended December 31, 1998 (Dollars in Thousands)

Amount at Retained Shares Par Value Other, Net Earninos Total Balance - December 31, 1995 500,000 $50,000 $17,390 $ 3,811 $71,201 Add (Deduct) :

Net Income - - - 8,106 8,106 Cash Dividends-Declared on -

Common Stock - - - (6,500) (6,500)

Preferred Stock - - - (1,469) (1,469)

Redemption of Preferred Stock - -

7 - 7 Other - -

(8) -

(8)

Balance - December 31, 1996 500,000 50,000 17,389 3,948 71,337 Add (Deduct) :

Net Income - - - 9,037 9,037 Cash Dividends Declared on -

Preferred Stock - - - (1,425) (1,425)

Redemption of Preferred Stock - - 7 - 7 Other - -

(6) -

(6)

Balance - December 31, 1997 500,000 50,000 17,390 11,560 78,950 Add (Deduet) :

Net Income - - - 6,295 6,295 Cash Dividends

-Declared on -

Common Stock - - - (4,375) (4,375)

Preferred Stock - - - (1,379) (1,379)

Redemption of Preferred Stock - - 7 - 7 Other - -

(8) -

(8)

Balance - December 31, 1998 500,000 $50,000 $17,389 $12,101 $79,490 The accompanying notes are an integral part of these financial statements.

3 20

. , . l Maine Yankee Atomic Power Comcacy STATEMYNT OF CASH FLOWS (Dollars in Thousands)

Year Ended December 31, 1118, 1997 1996 Onoratina Activities Not Income $ 6,295 $ 9,037 $ 8,106 Items Not Requiring (Providing) Cash Fuel Amortisation 42 1,122 13,952 Decossaissioning, Amortisation, and Depreciation 57,616 33,625 32,952 Deferred Income Taxes and Investment Tax credits, Not (258) 13,035 (2,579)

Allowance for Equity Funds Used for Nuclear Fuel and During construction (315) (158) (138)

Long-Tern Fuel Disposal Interest, Net of AFN 6,547 6,195 5,961 Provision for Rate Refund 3,837 - -

Other, Net 1,864 (1,350) (833)

Changes in Certain Assets and Liabilities Accounts Receivable 22,097 (11,050) (5,939)

Other Current Assets 3,017 429 166 Accounts Payable (10,988) 1,155 4,361 Accrued Interest and Taxes (1,471) 253 ( 6J,)

Net Cash Provided by Operating Activities 88,281 52,293 55.944 Investina Activities Changes in Net Unrecovered Assets (1,352) - -

Sale (Acquisition) of Nuclear Fuel 17,250 (27,643) (7,181)

Construction of Electric Property - (11,786) (4,365)

Changes in Accounts Payable - Investing Activities Net Unrecovered Assets (1,270) - -

Nuclear Fuol - $37 93 construction of Electric Property -

(692) 822 Investment Income in Decomunissioning Trust 19,747 23,002 6,421 Trust Fund Investments Fuel Disposal (8,034) (8,793) (8,634)

Plant Deconnaissioning (53,648) (37,886) (21,420)

Net Cash Used by Investing Activities (27., $ 07 ) (63,261) (34,264)

Financins Activities Issuatces (Redemptions)

Bank Notes, Not . - (1,850)

Revolving Loans 20,433 - -

Fuel Financing Notes, Net (67,000) 47,000 -

Long-Term Debt First Mortgage Bonds (03,332) (6,667) (6,667)

Term Note 48,000 - -

Preferred Stock (600) (600) (600)

Dividend Payments Cosunon Stock (2,175) (1,500) (6,675)

Preferred Stock (1,391) (1,436) (1,481)

Net Cash Provided (Used) by Financing Activities (86,065) 36,797 (17 r273)

Net Increase (Decrease) in Cash

and Cash Equivalents (25,089) 25,829 4,407 Cash and Cash Equivalents ac Beginning of Year 30,247 4.418 __,_2 Cash and Cash Equivalents at End of Year $ 5,158 $ 30,247 $ 4,418 Supplemental disclosure of cash flow information

Cash paid during the year fors Interest (not of amounts capitalized) $ 9,194 $ 10,848 $ 8,736 Income taxes $ - $ 860 $ 4,866 Disclosure of accounting policy:

Tror purposes of the statement of cash flows, the company considers all highly liquid instruments purchased having a maturity of three months or less to be cash equivalents.

The accompanying notes are an integral part of these financial statements.

21

L ."

Maina Yankee Atomic Power comoany NOTES TO FINANCIAL STATENENTS December 31, 1998

1. PLANT SHUTDOWN AND RATE CASE Ownershin: The following New England electric utilities own all of the cosanon stock of Maine Yankee Atomic Power Company (the " Company" or " Maine Yankee") :

~

Ownership Soonsor/Particinant Interest Central Maine Power Company 38%

New England Power Company 20 The Connecticut Light and Power Company 12 Bangor Hydro-Electric. Company 7 Maine Public Service Company 5 Public Service Company of New Hampshire 5 Cambridge Electric Light Company 4 Montaup Electric Company 4 Western Massachusetts Electric Company 3 Central Vermont Public Service Corporation _1 10.%

on August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at the Plant and to begin decommissioning the Plant. As reported in detail in the Company's Annual Report for the year and6d December 31, 1997, and its Quarterly Reports-for the quarters ended March 31, 1998, June 30, 1998, and September 30, 1998, the Plant experienced a number of operational and regulatory problems anJ.did not operate after December 6, 1996. The decision to close the Plant permanently was based on an economic analysis of the costs, risks and uncertainties associated with operating the Plant compared to those associated with closing and decommissioning it. The Plant's operating license from the Nuclear Regulatory Commission ("NRC") was scheduled to expire on October 21, 2008.

The entire output of the Plant had been sold at wholesale by Maine Yankee to ten New England electric utilities, which collectively own all..of the common equity of Maine Yankee; a portion of that output (approximately 6.2 percent) was in turn resold by certain of the owner utilities to 29 municipal and cooperative utilities in New England (the " Secondary Purchasers"). Maine Yankee recovered, and since the shutdown decision has continued to recover, its costs of providing service through a formula rate filed with the Federal Energy Regulatory Commission ("FERC") and contained in Power Contracts with its utility purchasers, which are also filed with the FERC.

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MAIDg Yankee Atomic Power Comeany NOTES TO FINANCIAL STATEMENTS December 31, 1998

1. PLANT SHUTDOWN AND RATE CASE (continued)

On November 6, 1997, Maine Yankee submitted for filing certain amendments to the Power Contracts (the " Amendatory Agreements") and revised rates to reflect the decision to shut down the Plant and to request approval of an increase in the decommissioning component of its formula rates. Maine Yankee's submittal also requested certain other rate ' changes, including recovery of unamortized investment (including fuel) and certain changes to its billing formula, consistent with the nonoperating status of the Plant. By Order dated January 14, 1998, the FERC accepted Maine Yankee's new rates for filing, subject to refund after a minimum suspension period, and set Maine Yankee's Amandatory Agreements, rates, and issues concerning the prudence of the Plant-shutdown decision for hearing.

By Complaint dated December 9, 1997, the Maine Office of the Public Advocate ("OPA") sought a FERC investigation of Maine Yankee's actions leading to the decision to shut down the Plant, including actions associated with the management and operation of Maine Yankee since 1993. The Maine Public Utilities Commission ("MPUC") had initiated an investigation in Maine earlier, raising generally similar issues.

By decision dated May 4,1998, the FERC consolidated the OPA Complaint ]

with the comprehensive rate proceedinf. In addition, the Secondary Purchasers intervened in the FERC proceeding, raising similar prudence issues and other issues specific to their status as indirect purchasers from Maine Yankee.

In support of its request for an increase in decommissioning collections, Maine Yankee submitted with its initial filing a 1997 decommissioning cost study performed by TLG Services, Inc. ("TLG").

During 1998, Maine Yankee engaged in an extensive competitive bid process to engage a Decommissioning Operations Contractor (" DOC") to perform certain major decontamination and dismantlement activities at the Plant on a fixed-price, turnkey basis. As a result of that process, a consortium headed by Stone & Webster Engineering Corporation (" Stone & Webster") was selected to perform such activities under a fixed-price contract. The contract provides for, ,

among other undertakings, construction of an Independent Spent Fuel Storage Installation ("ISFSI") and completion of major decommissioning activities and site restoration by the end of 2004. The DOC process resulted in fixing certain costs that had been estimated in the earlier decommissioning cost estimate performed by TLG.

l Since the filing of the rate request, Maine Yankee and the active )

intervenors, including among others the MPUC Staff, the OPA, several Sponsors, the Secondary Purchasers, and a Maine environmental group i

I 23 ,

1

• - Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1998

1. PLANT SHUTDOWN AND RATE CASE (continued)

(the " Settling Parties"), engaged in extensive discovery and negotiations. Those parties participated in settlement discussions that resulted in an Offer of Settlement filed by those parties with the FERC on January 19, 1999. On February 8,'1999, the FERC Trial Staff recommended that the presiding judge certify the settlement to the FERC and that the FERC approve it. Upon approval by the FERC, the settlement would constitute a full settlement of all issues raised in the consolidated FERC proceeding, including decommissioning-cost issues and issues pertaining to the prudence of the management, operation, and decision to permanently cease operation of the Pltnt.

A separately negotiated settlement filed with FERC on February 5, 1999, would resolve the issues raised by the Secondary Purchasers by limiting the amounts they will pay for decommissioning the Plant and by settling other points of contention af fecting individual secondary Purchasers. On February 24, 1999, the FERC Trial Staff recommended that the presiding judge certify the additional settlement to the FERC and that the FERC approve it.

The settlement providee for Maine Yankee to collect $33.6 million in the aggregate annually, ef fective January 15, 1998, consisting of (1)

$26.8 million for estimated decommissioning costs, and (2) $6.8 million for ISFSI-related costs. The original filing with FERC on November 6, 1997, called for an aggregate annual collection rate of

$36.4 million for decommissioning and the ISFSI, based on the TLG estimate. Under the settlement, the amount collected annually could be reduced to approximately $26 million if Maine Yankee is able to (1) use for the construction of the ISFSI funds held in trust under Maine law for spent-fuel disposal, and (2) access approximately $6.8 million being held by the State of Maine for eventual payment to the State of Texas pursuant to a compact for low-level nuclear waste disposal, the future of which is now in question af ter rejection of the selected disposal site in west Texas by a Texas regulatory agency. Both would require authorizing legislation in Maine, which Maine Yankee is committed to use its best efforts to obtain. However, Maine Yankee cannot predict whether or when such legislation will be enacted. Any future assessments related to the Texas compact would be recoverable under the settlement.

The settlement also provides for recovery of all unamortized investment (including fuel) in the Plant, together with a return on

. equity of 6.50 percent, ef f ective January 15, 1998, on equity balances up to certain maximum allowcd equity amounts. The settling Parties also agreed in the proposed settlement not to contest the effectiveness of the Amandatory Agreements submitted to FERC as part of the original filing, subject to certain limitations including the right to challenge any accelerated recovery of unamortized investment under the terms of-the Amandatory Agreements after a required 24

n st- $,

Maine Yankee Atomic Power ggsp_uy

' NOTES TO FINANCIAL STATEMENTS December 31, 1998

1. PLANT SHUTDOWN AND RATE CASE (continued) informational filing with_the FERC by Maine Yankee. As a separate part of the settlement, the three Maine Sponsors of Maine Yankee, the MPUC Staff, and the OPA entered into a further agreement resolving retail rate issues and other issues - specific to the Maine parties, including those that had been raised concerning the prudence of the  !

operation and shutdown of the Plant.

In addition, the settlement alco contains certain incentives for Maine Yankee to achieve further savings in its decommissioning and ISFSI-related costs, based on the amount of savings or overruns below er above a target t.otal budget amount. Maine Yankee would retain 10 percent of any not savings that are more than $10 million below the target amount and would be required to fund 10 percent of any overages more than $10 million over the target, with Maine Yankes's share limited, in each case, to $10 million. Finally, the settlement resolves some of the issues concerning restoration and future use of the site and environmental matters of concern to certain intervenors  !

in the proceeding.

Maine Yankee believes that the settlement, if approved by the FERC, would constitute a reasonable resolution of the issues raised in the FERC proceeding.

The components of the not unrecovered assets at December 31, 1999 and 1997 are:

1998 1997 (Dollars in Thousands) j Not plant $165,834 $182,687 Nuclear fuel, excluding salvage 39,830 41,814 Materials and supplies 9,079 10,332 Other_ regulatory assets 3,135 3,451

$217,678 $238,284 The estimated future costs of closure to be incurred by Maine Yankee have been recorded as a regulatory liability. Management believes that the decision to close the Plant was prudent and that the Company in entitled to recover substantially all of the resalting costs of closure and any unrecovered assets through FERC-approved amended rates. Maine Yankee has recognized the sum of its astimated future costs as a regulatory asset.

25

Maine Yankee Atomic Power comoany NOTES TO FINANCIAL STATEMENTS December 31, 1998

1. PLANT SHUTDOWN AND RATE CASE (continued)

The components of the sum of the estimated future costs of closura at December 31, 1998 and 1997 are:

1211..e, 9 1997 (Dollars in Thousands)

Decommissioning contributions $287,885 $393,847 ISFSI contributions 55,992 -

j Operations and maintenance 47,811 91,533 Return and interest, not 70,668 90,322 ,

Taxes - federal and state 71,799 85,124 l

$534,155 $660,826 See Note 2 for additional information regarding the closure of the Plant, the recovery of assets and closure costs, and nuclear decommissioning.

2.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES Prenaration of Financial Statements: 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 financial statements and the reported amounts of revenues and expenses during the reporting period thac, in the opinion of management, as audited, i are necessary to a fair statement of results. Actual results could differ from those estimates.

Eggpsors: The Company entered into power contracts with its Sponsors

in 1968. for the sale of the entire output of the Plant to them for the life of the Plant. Under the terms of the contracts, each Sponsor is required to pay the Company an amount equal to its entitlement percentage of.the Company's total operating expenses, including a return on not unit investment.

Reculation: The Company is subject to the regulatory authority of the FERC, the.NRC, the MPUC and other federal and state agencies as to rates, accounting, operations and other matters.

Amortization of Net Unrecovered Assets: As of January 15, 1998, not plant, nuclear fuel, materials and supplies, and other regulatory assets are being amortized over the period ending October 2008, subject to refund pending FERC approval.

26

E .

" D gging Yankee' Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1998

2.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Decreciation: Through January 14, 1998, depreciation was provided using a composite remaining life method designed to fully depreciate the original cost of electric plant over the Plant operating life.

Under the composite method, at the time depreciable property is retired, the original cost, plus cost of removal, less salvage, of such property is charged to accumulated depreciation.

Accountina for Effects of Certain Tynes of Reculation: Statement of Financial Accounting . Standards ("SFAS") 71, " Accounting for the Ef fects of Certain Types of Regulation," requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain 4 costs that are expected to be recovered in future rates. The Company's remaining unrecovered investments in plant, nuclear fuel and other assets, including deferred expenses, which are now before the FERC as part of the pending offer of settlement in the current rate proceeding, would continue to be treated as a regulatory asset. The company believes that it currently meets and, assuming the settlement is approved, expects it will continue to meet the criteria established in SFAS 71.

Decommissionina: A study conducted for the Company in 1993 by an external engineering consultant estimated decommissioning costs, based on the DECON method, to be $273.1 million, plus a contingency of $43.5 million, for a total of $316.6 million (in mid-1993 dollars). On March 31, 1994, the FERC approved a Settlement Agreement calling for an increase in the annual amount of collection to fund the decommissioning costs for the Plant from $9.1 million to $14.9 million commencing April 1, 1994.

Maine Yankee's most recent estimate of the cost of decommissioning the Plant, including ISFSI-related costs and reflecting the fixed-price decommissioning operations contract, is $547 million (in mid-1998 dollars).

Through 1998, the Company had collected $160.7 million for decommissioning, which funds are held by an independent trustee. The total decommissioning fund balance as of December 31, 19 9 8, was $18 8 . 7 million (including earnings, and not of $42.4 million expended by Maine Yankee for decommissioning expenses through December 31, 1998) )

with an adjusted market value as of December 31, 1998, of $212.7 j million for financial reporting purposes under SFAS 115.

1 When reflecting the tax effect on unrealized investment returns, the  !

fund balance would be $207.8 million as of December 31, 1998. The amounts collected, together with the trust earnings, will be used to meet the Company's decommissioning obligation.

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. Maine Yankee Atomic Pow n Company NOTES TO FINANCIAL STATEMENTS December 31, 1998

2.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company recognizes _ the relative uncertainties associated with decommissioning, including changing technology and the possibility of new requirements of law, and therefore recognizes the need to monitor and adjust decommissioning collections through supplemental rate filings with.the FERC.

Amortization of Nuclear Fuel While the Plant was operating, the cost of nuclear fuel in the reactor was amortized to fuel expense based on the ratio of energy produced during the period to the estimated total core capability.

Through January 14, 1998, the Company was amortizing to expense the estimated costs of the unburned nuclear fuel that was expected to be in the reactor core at the expiration of the Plant's NRC operating license life in 2008. Accumulated amortization for last core fuel for 1997 was $12.3 million. As of January 15, 1998, not nuclear fuel costs are being amortized over the period ending October 2008, along with other not unrecovered assets, subject to refund in the pending FERC rate-case settlement. See Note 1 for discussion of the rate case.

Federal Denartment of Enerov (" DOE") Decontamination and Decommissionino Fee: Title XI of the Energy Policy Act of 1992 (the

" Policy Act") provides for decontaminating and decommissioning DOE's enrichment facilities to be partially funded by a special assessment against domestic utilities. Under the Policy Act, the total amount collected for a fiscal year will not exceed $150 million escalated by the Consumer Price Index (" CPI") annually, and the collection of the amounts will cease after the earlier of (1) 15 years after the date of the enactment or (2) tho ' collection of $2.25 billion (to be escalated by the CPI annually). Each utility's share of the assessment is to be based on its cumulative consumption of DOE enrichment services.

A -liability for the Company's DOE obligation, along with a )

corresponding regulatory asset, has been recognized in the l accompanying financial statements. The total liability at December 31, 1998, was $25.7 million, of which the Company had paid $11.6 million. Through December 1998, the Company had expensed and recovered $10.1 million. The unrecovered balance of the regulatory

= asset at December 31, 1998 and 1997, was $15.6 million and $16.9 million, respectively. The Company believes that the full assessment will be recovered in rates as provided in the Policy Act.

28

.V Maine Yankee Atomic Power comoany NOTES TO FINANCIAL STATEMENTS December 31, 1998

2.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Fuel Discosal cost: In 1983, the Company entered into a contract with the DOE for disposal of its spent nuclear fuel, as required by the Nuclear Waste Policy Act of 1982, pursuant to which a fee of $1.00 per megawatt-hour was assessed against current generation and paid to the DOE quarterly. The Company also has an obligation of $50.4 million with respect to generation prior to April 7, 1983 (the date current DOE assessments began), all of which the Company has already collected from its customers, but for which a reserve was not funded. The Company elected, under the terms of this contract, to make a single payment of this obligation prior to the first delivery os, spent fuel to DOE, which was scheduled to begin by January 31, 1998. Inter'est on the obligation accrues at the 13-week Treasury Bill rate compounded on a quarterly basis from April 7, 1983, through the date of the actual payment and is billed under the terms of the Power Contract.

Interest accrued and billed through December 31, 1998, amounted to

$82.8 million. The Company has formed a trust to provide for payment of this long-term fuel obligation. The total spent fuel fund balance, held by an independent trustee, as of December 31, 1998, was $129.4 million (including interest earned) and is included in Deferred Charges and Other Assets on the accompanying balance sheet. The trust is funded by the-Company through deposits, which began in December 1985, with current projected annual deposits of approximately $1.3 million through December 2003. Deposits are expected to total approximately $78.2 million. The trust fund deposits plus estimated earnings are projected to meet the total estimated future liability of $168.7 million at December 31, 2003.

For discussion of litigation that resulted from DOE's refusal to assume responsibility for disposal of such spent fuel, cae Note 13,

" Commitments and Contingencies" " Nuclear Fuel Storage."

Amortization of Materials and Sunolies: Through January 14, 1998, the Company had been reserving for materials and supplies inventory that was expected to be unutilized at the end of the Plant's life. This amortization expense was based on the current inventory balance less the accumulated amortization. This cost was being amortized over the period ending October 2008 on a monthly basis. Accumulated amortization for 1997 was $7.0 million. As of January 15, 1998, the not cost of materials and supplies is being amortized over the period ending October 2008, along with other not unrecovered assets, subject to refund in the pending FERC rate-case settlement. See Note 1 for  !

discussion of the rate case.

29

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Maine Yankee Atomic Power Comoany NOTES TO FINANCIAL STATEMENTS -

. December 31, 1998

2.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Allowance for Funds Used Durina Construction ("AFC") and Allowance for Funds Used for Nuclear Fuel ( " AFN"1,2 Through January 14, 1998, in accordance with prior rate-making treatment, the Company earned a current return on up to 50 percent of Construction Work in Progress

("CWIP") and 50 percent of Nuclear Fuel in Process ("NFIP"), subject to certain limitations. The Company capitalized the not cost of borrowed funds and the allowed rate of return on equity funds used to finance its remaining construction and nuclear fuel acquisition costs as AFC and AFN. The amount of the allowance recorded was determined by multiplying the applicable average monthly balance of CWIP and NFIP ,

by the weighted average cost of capital used to finance the respective  !

additions.

The following table contains the rates used for 1998, 1997 and 1996:

AFC AFN on CWIP on NFIP 1998 9.46% -%

1997 9.32 8.83 1996 10.37 10.63 The current FERC rate case excludes current billing of AFC and AFN retroactive to the beginning of 1996. The current return billed for the period January 1996 through January 1998 was refunded in June 1998 to comply with the current rate case requirements.

Unamortized Gain or Loss on Reaccuired Debt: Gains and losses on bonds reacquired to satisfy sinking fund requirements of First Mort-gage. Bonds were deferred and are being amortized to income over the remaining original terms of the applicable series as prescribed by the Uniform System of Accounts of the FERC. j i

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• Maing Y_ankee Atomig Power Company y

NOTES TO FINANCIAL STATEMENTS December 31, 1998

=3. INCOME TAX EXPENSE The components of federal and state income taxes (benefits) reflected in the Statement of Income are as follows:

Year Ended December 31, 1121 1297_ 1996 (Dollars in Thousands)

Federal Current $(1,046) $(154) $ 1,922 Deferred (15) (83) (2,813)

Investment tax credits, not (487) (487) (487)

(1,548) (721) (1,378)

State Current 612 (29) 218 Deferred 245 837 721 l 857 801 Q 939 Total federal and state income taxes $ (691) $y S (439)

Deferred income taxes are provided to recognize the income tax effect of reporting certain transactions in different years for income tax and financial reporting purposes in accordance with the rate-making policies of the FERC. Provisions for deferred income taxes reflect the tax effect of all timing differences.

Maine Yankee accounts for income taxes under the provisions of SFAS 109, " Accounting for Income Taxes." The standard requires the use of the liability method under which existing deferred taxes will be adjusted currently to reflect the effect of tax rates applicable to the years in which these taxes would become payable. Under this l method, deferred tax liabilities and assets are determined based on j the 'dif ference between the financial statement and tax basis of assets and liabilities using enacted t.ax rates in effect in the year in which the differences are expected to reverse. The standard

-had no impact on total income tax expense for financial reporting purposes. The not regulatory liability related to income taxes is

$7.3 million as of December 31, 1998. This liability is being amortized consistent with the company's ratemaking.

31

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Maine Yankee Atomic Power Company l

NOTES TO FINANCIAL STATEMENTS December 31, 1998

3. INCOME TAX EXPENSE (continued)

! I Accumulated deferred income taxes consisted of the following as of I December 31, 1998 and 1997: l I 1118 1997 (Dollars in Thousands)

Liabilities Property $84,295 $75,138 i Other 431 (717)

! J_i., 711 74,421 Assets Decommissioning 23,917 18,609 Regulatory Tax Liability 3,129 3,485 Investment Tax Credit 3,584 3,885 j Last Core Fuel and Material i and Supplies Inventory 9,033 7,108 l Other 3,809 3,831 43,472 36,918 Accumulated Deferred Income Tax Asset,

! Net $41,254 $37,503 A valuation allowance was not recorded at December 31, 1998 and 1997, as the Company expects that all deferred income tax assets will be realized in the future.

1 Investment tax credits utilized to reduce federal income taxes I currently payable are deferred and amortized over the financial reporting lives of the related assets.

The following table reconciles the statutory federal income tax rate to the effective tax rate for financial reporting purposes.

1998 1997 1996 (Dollars in Thousands)

Amount  % Amount  % Amount  %

statutory federal income tax rate $ 1,614 34.0 $ 2,826 34.0 $ 2,288 34.0 Increase (reduction) in taxes resulting from:

Investment tax credits (487) (10.3) (487) (5.9) (487) (7. 2)

Flowback of excess deferred income taxes (741) (15.6) (741) (8.9) (738) (11.0)

Nontaxable interest income - Spent Fuel Trust - -

(947) (11.4) (2,157) (32.1)

Tax benefits.from Nonqualified Decom-missioning Trust investments (2,179) (45.9) (1,700) (20.4) (640) (9.5)

Other 245 5.2 325 3.9 357 5.3 Calculated rate $ (1,54 8) (32. 6) $ (724) (8.7) $ (1,377) (20. 5) 32

{

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l Mai.no Yankee Atomic Power comoany NOTES TO FINANCIAL STATEMENTS December 31, 1998

4. FIRST MORTGAGE BONDS Under the terms of the Indenture securing the First Mortgage Bonds, substantially all electric plant of the company was subject to a first mortgage lien. The Company discharged its First Mortgage Indenture upon the consummation of its debt refinancing on April 7, 1998. See Mote 7,

" Refinancing". In addition to interest, the Company also paid standstill agreement fees of $664,155 from August 1997 to April 1998.

5. SECURED CREDIT AGREEMENT In 1989, the Company entered into a secured credit agreement with a group of banks inc?2 ding the Bank of New York, which also acted as the agent bank, under which the Company could borrow amounts up to $50 million to finance corporate expenditures. Borrowings were secured by the Company's nuclear fuel inventory, as defined, and certain rights under the Power Contracts and Capital Funds Agreements. The Company discharged this facility upon the consumnation of its debt refinancing on April 7, 1998. See Note 7, " Refinancing". In addition to interest, the company also paid standstill agreement fees of $365,000 from August 1997 to April 1998.

Certain other information relating to this loan arrangement is as follows:

Year Ended December 31, 1998 1997 1996 l (Dollars in Thousands)

Promissory notes outstanding at end of period $ - $42,000 $20,000 Average daily outstanding borrowings $38,770 $39,222 $18,519 Highest level of borrowing. $42,000 $50,000 $33,000 Annual interest rate at end of period. _

- 6.45% 6.07%

Effective average annual interest rate 6.39% 6.29% 6.05%

6. EURODOLLAR REVOLVING CREDIT AGREEMENT In January 1990, the Company entered into a Eurodollar Revolving Credit Agreement with a group of major international banks including Union Bank of Switzerland, which also acted as agent bank, under which the Company could borrow up to $25 million. The loans were secured by a second lien on the Company's nuclear fuel inventory (excluding fuel in the reactor) and on certain rights under its Power Contracts and Capital Funds Agreements. The Company discharged this f acility upon the consummation of its debt refinancing on April 7, 1998. See Note 7, " Refinancing".

In addition to interest, the Company also paid standstill agreement fees of $222,500 from August 1997 to April 1998.

33

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• y Maino Yankan Atomic Power Comor.nv L

y NOTES TO FINANCIAL STATEMENTS December 31, 1998

6. EURODOLLAR REVOLVING CREDIT AGREEMENT U:ontinued)

Certain other information relating to this loan arrangement is as follows:

b g Year Ended December 31.

- , , 1998 1997 (Dollars in Thousands)

Promissory notes outstanding at end of period $ - $25,000 Average daily outstanding borrowings $23,077 $17,990 Highest level of borrowing $25,000 $25,000

Annual interest rate at and of period -

6.52%

Effective average annual interest rate 6.44% 6.49%

The Company had no borrowings under the Eurodollar Revolving Credit Agreement during 1996.

7. REFINANCING

=

On April 7, 1998, Maine Yankee refunded all of its First Mortgage Bonds and Nuclear Fuel Financing Notes by means of a three-year revolving credit f acility with two major banks, which may be extended by agreement of the parties, and a $48 million term loan due in 2006 from a major

! institutiona? investor, and discharged its First Mortgage Indenture.

The banks' revolving credit commitments are being reduced through planned prepayments, structured to conform to Maine Yankee's projected cash flows, in two decrements from their initial level of $80 million (reduced to $46.9 million as of December 1993) to a working capital level of $20 million on March 31, 2000. The new debt obligations are secured by a security interest in Maine Yankee's rights in its Power Contracts, Additional Power Contracts and Capital Funds Agreements with ,

its Spensors and its rights to certain third-party payments. Tne new debt f acilities also contain restrictions on the payment of cemmon-stock d;vidends and return of equity capital based on Maine Yankee's cash position and a debt-service coverage test. The amount of unrestricted dividends and equity capital ratios are based on estimates which are expected to vary over time and may vary trom actual results.

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Maine Yankee Atomic Power Comoany NOTES TO FINANCIAL STATEMENTS December 31, 1998 i l

l

7. REFINANCING (continued)

Certain other information relating to the revolving credit facility is as follows: 1 1

YeLr Ended December 31, 1998 (Dollars in Thousands)

Promissory notes outstanding at and of period $20,433 Average daily outstanding borrowings $39,169 Highest level of borrowing $80,000 Annual interest rate at and of period 7.15%

Effective average annual interest rate 7.52%

Certain other information relating to the term loan is as follows:

Year Ended December 31, 1998 l (Dollars in Thousands)

Promissory note outstanding at end of period $48,000 Average daily outstanding borrowings $48,000 Highest level of bcrrowing $48,000 Annual interest rate at end of period 7.87%

Ef*ective average annual interest rate 7.87%

8. REDEEMABLI: PREFERRED STOCK

~7.48%-Series. The Company must redeem and cancel 6,000 shares annually of the 7.48% Series Preferred Stock at par value plus accrued dividends.

At the election of the Company, up to an additional 6,000 shares may be redeemed and canceled at par plus accrued dividends on each redemption date. The optional provision is not cumulative. The annual sinking fund requirement through Decem%er 31, 2002, i s $600,000. The Company may also redeem, in whole et in part, any additional shares of the 7.48%

Series Preferred Stock upon not less than thirty nor more than fifty days' notice at $100.00 per share plus accrued dividends.

35

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• j Maine Yankee Atomic Power Comoany NOTES TO FINANCIAL STATEMENTS  !

December 31, 1998 l

8. REDEEMABLE PREFERRED STOCK (continued) '

8.00% Serieg. At the option of the Company, at any time on and after October 1,1997, shares of the Cumulative Preferred Stock, 8.00% Series, j are redeemable at redemption prices decreasing from $104.80 per share j on or af ter October 1,1998, to $100.00 per share as of October 1, 2007. 1 Mandatory sinking fund redemptions of the 8.00% Series shares begin l October 1, 2002, and each October 1 thereaf ter with a noncumulative optional provision to redeem additional shares at a price cf $100.00 per share plus accrued dividends.

There was no Preferred Stock repurchased for either sinking fund in j advance and not canceled at December 31, 1998, 1997 and 1996. )

1

9. 'l AINED EARNINGS i 1

.t March 1997 the Company's Board of Directors elected to strengthen tne j common-equity component of the Company's capital structure through the i retention of earnings. Tharefore, no common-stock dividend was declared  ;

from the first quarter of 1997 until resumed in the third quarter of 1998. The total dividends declared per share for 1998 and 1996 were

$8.75 and $13.00, respectively.

Under the terms of the most restrictive test in the Company's Articles ]

of Incorporation, no dividend may be paid on any class of its stock j unless the Company is in compliance with specific equity ratio ]

requirements. Through December 31, 1998, the Company was in compliance with these requirements. The amount of unrestricted dividends and equity capital ratios are based on eatimates which are expected to vary over time and may vary from actual results.

10. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMEh"IS The methods and assumptions used to estimate the fair value of each class of financial instruments foi which it is practicable are discussed j below. The carrying amounts of cash and temporary investments, accounts payable, and accrued liabilities approximate f air value because of the  ;

short maturity of these instruments. The fair value of r.2deemable l preferred stock, other notes and long-teon obligations is based on  !

quoted market prices for the same or similar issues.  !

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Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1998 l

.10. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) l The estimated fair _value of the Company's financial instruments as of December 31, 1998, is as follows:

Carrying Fair Amount Value (Dollars in Thousands) l Cash and. Cash Equivalents S 5,158 $ 5,138 Fuel Disposal Trust 129,350 129,652

. Plant Decommissioning Trust 212,664 212,664 Redeemable Preferred Stock 17,400 15,174 Term Note 48,000 48,000 l Revolving Loans 20,433 20,433 Any differences between fair value and carrying value of the Company's J financial instruments is expected to be considered in future rates charged by the Company. ,

l

11. DERIVATIVE FINANCIAL INSTRUMENTS j As of December 31, 1998 and 1997, the Company held no derivative financial instruments that require disclosure under SFAS 119.

12. EMPLOYEE AND POSTRETIREMENT BENEFITS l

The Company has two separate noncontributory defined-benefit pension i plans that cover substantially all of its union and nonunion employees.

The Company's funding policy is to contribute amounts to the separate j plans which are sufficient to meet the funding requirements set forth in the Employee. Retirement Income Security Act, plus u ch additional amounts as the Company may determine to be appropriate.

Effective January 1, 1998, the Retirement Income Plan for Non-Uni on Employees was merged into the Retirement Income Plan for Union Employees and the plan was renamed the Retirement Income Plan for Employees of Maine Yankee Atomic Power Company. 1998 results are presented here for j the consolidated plan. 1997 and 1996 results are shown separately and i also combined for the union and nonunion plans for comparative purposes only.

Effective. January 1, 1998, the Company adopted SFAS 132, " Employers' Disclosures about Pensions and Other Post-retirement Benefits," which revises prior disclosure requi eaments. The information for 1997 and 1996 has been rest.ated to coruer..a to the 1998 presentation. The not cost for these plans and agreemente charged to expense was as follows:

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Maine Yankee Atomic Power Comeany NOTES TO PINANCIAL STATEMENTS December 31, 1998

12. EMPLOYEE AND 70STRETIREMENT BENEFITS (continued) .

I I

Pensions 1998 1997 1996 l

Mon. Non. j Retirement Income union Union union Union Plan P14D Plan Total Plan Plan Total j (Dr.il.nrs in Thousands) l Service Cost $ 462 $ 1,5 G $ 405 $ - 1,991 $ 1,416 $ 411 $ 1,827 l Interest Cost 2,241 1,729 383 2,112 1,469 346 1,815 Expected Return on Assets (2,134) (1,845) (557) (2,402) (1,476) (463) (1,939)

Net Amortisations Prior Service Cost 164 208 (1) 207 207 (1) 206 Net Actuarial Gain (1,546) . . . . . .

Net Transition obligation J ))3) J) DJ) (54) (31) 12 2) J)

Total (M) 176 m) 153 176 D3) 153 I Net Periodic Benefit Cost (Income) $ g) $ 1,646 $ g $ 1,854 $ 1,585 $ 3 8 1,856 Reconciliation of Prepaid (Accrued)

Benefit Cost Prepaid (Accrued) Benefit Cost (January 1) $(4,318) $ 1,9 50 $ 1,2 81 $ 3,231 $ 562 $ 8 5 6 $ 1,418 Net Periodic Benefit Income (Cost) 866 (1,646) (208) (1,854)(1,585) (271) (1,856)

Contributions Nade During Year 1,106 1,838 242 2,080 2,973 696 3,669 One. Time Cost Associated with Benefit Itnhancement . (J) (1,600) (7,775) - - -

Prepaid (Accrued) Benefit Cost (December 31) $(2,346) $ ( 3, 83 3 )$ ( 18 5 )$ (4, 318 )$ 1, 9 50 $ 1, 2 81 $ 3,231 I

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• l,e Maine Yankee Atomic Power comoany j NOTES TO FINANCIAL STATEMENTS December 31, 1998 l' .

f

. 12. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued) i

)

.Postratirement Nelfare Benefits l 1998 1997 1996

)

Non- Non- Non- j union Union union Union union Union Elga 2119 22131 ElAE_, Plan Total Plan .. Plan Total  ;

(Dollars in Thousands) l l ' service Cost 8 2 $ 1 8 3 $ 450 $ 142 $ 592 8 474 $ 152 $ 626 )

Interest cost- 278 122 .400 575 187 762 543 175 718 j Expected Return on Assets (486) (253) (739) (420) (213) (633) (351) (191) (542)

! Net Amortisations l Net Actuarial Gain (176) (76) (252) (5) -

(5) - - -

Net Transition obligation _f.2, ,,,, J. 1,00 0 111 ,3, ,,,_1])9 111 _,1 111 Total J.7.1) J.7,1) 5 (1.5.1) lia _,_,1 _.111 13,1 _1 111 Loss . (Gain) Recognised j due to settlement / Curtailment ._,

,,,, (111) 131 523 , , , _ , , , ._

Net Periodic Benefit Cost }

l (Income) $ (g) $ (g) $ (g) $ $ $ g $12.318 3 $g $$ $$

l

Reconciliation of Prepaid I

(Accrued) Benefit cost Prepaid (Accrued) Benefit cost (January 1) $(205) $(356) $(561) $ (15) $ 294 $ 279 $ 175 8 391 $ 566 Net Periodic Benefit Income l (Cost) 285 203 4S8 (642) (756)(1,398) (820) (141) (961)

Contributions Nade During f

Year -

All 1.02.

Q _ 111 $10 ._i1 ill l . , . _ , _ ,

! Prepaid (Accrued) Benefiu cost (December 31) $ g $(g) $ M) $ (M) $ (g)$ (561) $ g ) $g $g As a result of early retirement and downsizing related to Plant closure, the Company had a one-time curtailment gain in 1997 of $2,943,474.

The Compeny is recognizing the initial not transitia obligation as of January 1,'1993, in a straight line over 16 years.

39

Maine Yankee Atomic power comoany l NOTES TO FINANCIAL STATEMENTS December 31, 1998

12. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued)

The following tables set forth the change in benefit oblig sdon and plan assets and reconciliation of funded status of Company plans and amounts recorded in the company's balance sheet as of December 31, 1998 and 1997, using actuarial measurement dates of January 1, 1998 and 1997:

phance in Benefit Oblicaticg: ,

I Pension Benefits 1998 1997 Retirement Nonunion Union Income Plan Plan Plan Total (Dollars in Thousands)

Beginning of Year Benefit Gbligation $33,411 $20,597 $4,823 $25,420 Service Cost 462 1,586 405 1,991 Interest Cost 2,241 1,729 383 2,112 Actuarial Loss (Gain) 1,903 (1,401) (762) (2,163)

Disbursements (2,578) (698) (63) (761) 1,803 6,812 Settlements / Curtailments - 5,009 j End of Year Benefit Obligation $35,439 $26,822 $6,589 $33,411 Postratirement Welfare Benefits 1598 1997 Non- Non-union Union union Union PlAu_. Plan 19191 Elan Pla_q., Total (Dollars in Thousands)

Beginning of Year Benefit Obligation $ 8,022 $ 3,525 $11,547 $7,750 $2,501 $10,251 Service Cost 2 1 3 450 142 592 Interest Cost 278 122 400 575 187 762 Actuarial Loss (Gain) (2,700) (1,126) (3,826) 148 116 264 Disbursements (931) (481) (1,412) (157) (44) (201)

Settlements / Curtailments - - -

(744) 623 (121)

End of Year Benefit Obligation $ 4,671 $ 2,041 $ 6,712 $8,022 $3,525 $11,547

+ 40

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Maine Yankee Atomic Power Company

)

NOTES TO FINANCIAL STATEMENTS December 31, 1998 I i

12. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued)

{

Chance in Plan Assets: I Pension Benefits 1998 1997 l Retirement Nonunion Union Income Plan Plan Plan Istial j (Dollars in Thousands)

Beginning of Year Fair value of Assets $37,731 $23,236 $7,334 $30,570 Actual Return on Assets 8,091 4,591 1,251 5,842 l Company Contribat. ions 1,106 1,838 242 2,080 Disbursements (2,578) (69J) (63) (761) 1 l End of Year Fair value of Assets $44,350 $28,967 $8,764 $37,731 l Postratirement Welfare Eenefits 1998 ,

1997 Non- Non-union Union union Union l

Plan Plan Total Plan Plan Tota}

(Dollars in Thousands)

Beginning of Year Fair Value of Arsets $7,542~ $3,438 $10,980 $6,193 $2,844 $ 9,037 i Actual Return on Assets 766 331 1,097 1,054 532 1,586 l Company Contributions - - - 452 106 558 Disbursements M) M) (1,412) M) (44) (301)

End of Year Fair Value of Assets $7,377 $3,288 $10,665 $7,542 $3,438 $10,980 l l

41

Maine Yankee Atomic Power Comoany NOTES TO FINANCIAL STATEMENTS December 31, 1998

12. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued)

Reconciliation'of Funded Status:

Pension Senefits 1998 1997 Retirement Nonunion Union Income Plan Plan Plan Total (Dollars in Thousands)

Projected Benefit Obligation ("PB0") $ (3 5,43 9) $ (26,822) $(6,589) $ ( 3 3,411)

Fair Value of Assets ("FVA") 44,350 28,967 8,764 37,731 PRO Less Than FVA 8,911 2,145 2,175 4,320 Unrecognised Prior Service Cost 1,338 1,395 (7) 1,388 Unrecognised Not Transition obligation (505) (316) (243) (559)

Unrecognised Actuarial Gain (12,090) (7,057) (2,410) (9,467)

Net Amount Recognised $ M) $ (3,833) $ g) $ (4,318)

Amount Recognized in the Balance Sheets Accrued Benefit Liability $ (2,3 4 6) $( m ) $ (g) $( g )

(

l Postratirement Nelfare Benefits 1998 1997 Non- Non-union Union union Union l

P.1&IL. Plan Total Plan Plan Total (Dollars in Thousands)

Accumulated Postratirement Benefit Obligation (*APBO*) $ (4,671) $ (2,041) $(6,712) $(8,022) $(3,525) $(11,547)

Fair Value of Assets ("FvA") 7,377 M M61 7,542 3,438 10,980 APRO Less Than (In Excess Of) FVA 2,706 1,247 3,953 (480) (87) (567)

Unrecognised Not Transition obligation 965 37 1,002 1,062 41 1,103 Unrecognised Actuarial Gain (3,591) (1,437) (5,028) (787) (310) (1,0P7)

Net Amount Recognized $ 80 $ (153) $__ (7 3) $ (205) $ (356) $ (561)

Amount Recognized in the Balance Sheet:

Prepaid Benefit Cost $80 $ -

$ 80 $ - $ - $ -

Accrued Benefit Liability ,,,,, Q31) (113) (2 0 5_) (),16 ) (if1)

Net Amount Recognised $g $ (g',) $ Q) $( g ) $( g ) $ ($) i I

i 42

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• Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1998

12. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued)

Effect of one-Percentaae Point Chance in Assumed Health Care Cost Trends A one-percentage point change in assumed health care cost trend rates would have the following effects on the information for the postratirement we?. fare plans:.

Increase Decrease

, (Dollars in Thousands)

Nonunion Union Nonunion Union Plan Plan Total Plan Plan Ig_t;,a,1 Effect on total of service and interest cost components S 33 $ 14 $ 47 $ (29) $ (13) $ (42)

Effect on APBO 467 205 672 (415) (183) (598)

Key Economic Assusctions as of December 31:

1U.E I.M.2. Ill.f.

Discount Rate 6.50% 7.00% 7.50%

Salary Increase 4.50% 4.50% 5.25%

Return on Assets

• PRW Assets 6.00% 7.50% 7.50%

• Pension Assets 6.00% 7.00% 8.50%

Medical Cost Trend

• First Year (1998) 7.50% 6.50% 6.50%

• Ultimate 5.50% 5.50% 5.50%

• Years to Reach Ultimate (From 1998) 4 1 1 l

5 t

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Maine Yankee Atomic Power comoany NOTES TO FINANCIAL STATEMENTS December 31, 1998 l

13. COMMITMENTS AND CONTINGENCIES Maine Yankee Shareholders: Higher nuclear-related costs, when combined with the Sponsors' own replacement-power costs, have affected the financial condition .of the stockholders of Maine Yankee in varying degrees. In addition, the electric utility industry is in a period of transition which has resulted, or may result, in a shif t from cost-based rates for generation to market-based rates. The states in which the Company's Sponsors. operate are exploring or, in some cases, have implemented regulatory and legislative changes to bring greater competition, customer choice and market-based pricing to the industry. The Company cannot predict what effect these changes will have on the Company Sponsors or ultimately the Company. While the company currently believes that it will recover its currently unrecovered costs and any future costs to decommission its facilities, it is possible that the changes resulting from restructuring or other regulatory actions could have a material adverse effect on one or more of its Sponsors.

A def ault by a Maine Yankee stockholder in making payments under its Power Contract or Capital Funds Agreement could have a material adverse ef fect on Maine Yankee, depending on the magnitude of the default, unless cured within applicable grace periods by the defaulting stockholder or other stockholders. The company cannot predict, however, what ef fect, if any, the financia3. dif ficulties being expsrienced by some Maine Yankee stockholders will have on the Company.

Nuclear Fuel Rorage: Federal legislation enacted in 1987 directed the DOE to proceed with the studies necessary to develop and operate a permanent j high-level waste (spent fuel) disposal site at Yucca Mountain, Nevada. The legislation also provided for the possible development of a Monitored Retrievable Storage (" HRS") facility and abandoned plans to identify and select a second permanent disposal site. An MRS facility would provide-temporary storage for high-level waste prior to eventual permanent disposal.  !

The DOE has indicated that the permanent disposal site is not expected to open before 2010, although originally scheduled to open in 1998.

In 1997 the two branches of the United States Congress approved separate bills to comprehensively reform the federal spent nuclec.r fuel program. In the spring of 1998 House and Senate members resolved dif ferences between the bills, which would have required the DOE to establish an interim storage facility and begin accepting spent fuel from nuclear power plants by 2003.

On June 2, 1998, the Senate fell short of the 60 votes needed to and debate on the bill and the bill was not brought to a vote in the House.

44

y, 3 Maine Yankee Atomic Power comoany NOTES.TO FINANCIAL STATEMENTS December 31, 1998

13. COMMITMENTS AND CONTINGENCIES (continued)

In 1994 several nuclear utilities other than Maine Yankee filed suit against the DOE. The utilities sought a declaration from the United States Court of Appeals for the District of Columbia Circuit that the Nuclear Waste Policy Act of 1982 required the DOE to take responsibility for spent nuclear  !

fuel in 1998. In July 1996 the court held that the DOE was obligated "to start disposing of (spent nuclear fuel) no later than January 31, 1998."

The DOE did not appeal the decision, but announced in December 1996 that it j anticipated it would be unable to start accepting cpent nuclear fuel for disposal by January 31, 1998. A large number of nuclear utilities and state regulators filed a_new lawsuit against.the DOE in January 1997 seeking to force the DOE to honor its obligation to store spent nuclear fuel and seeking other appropriate relief.

In November 1997 the U.S. Court of Appeals for the District of Columbia Circuit confirmed the DOE's obligation. On February 19, 1998, Maine Yankee filed a petition in the same court seeking to compel the DOE to take Maine Yankee's spent fuel from the Plant site "as soon as physically possible,"

alleging that removing the spent fuel on the DOE',s indicated schedule would delay the decommissioning of the Maine Yankee Plant indefinitely. On May 5, 1998, the Court dismissed the lawsuit of the Company, as well as that of the other nuclear utilities and state regulators, saying that petitioners' f ailure to pursue remedies under the standard contract rendered their appeal not appropriate at that time for review. On June 2, 1998, Maine Yankee filed a claim for money damages in the U.S. Court of Federal claims for the costs associated with the DOE's failure to begin to take fuel in 1998. On November 3, 1998, the Court granted summary judgment in favor of Maine Yankee, ruling that the DOE had violated its contractual obligations and leaving the amount of damages incurred by Maine Yankee for later determination by the Court. The Company expects the hearing on its claim to take place in late 1999. Maine Yankee intends to pursue its claim for damages vigorously, but as an interim alternative to DOE disposal, is planning the construction of an independent spent fuel storage installation

("ISFSI") on the Plant site.

Nuclear Insurance: In accordance with the Price-Anderson Act, the limit of liability for a nuclear-related accident was decreased to $9.8 billion 4 effective November 19, 1998. The primary layer of insurance for the liability is $200 million of coverage provided by the commercial insurance market. The secondary coverage is approximately $9.6 billion, based on 109 licensed reactors. The secondary layer is based on a retrospective premium assessment of $88.095 million per nuclear accident per licensed reactor, payable at a rate not exceeding $10 million per year per accident. However, after appropriate exemptive action by the NRC Maine Yankee is not responsible for retrospective premiums resulting from any event or incident occurring after January 7, 1999.

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Maine Yankee Atomic Power comoany NOTES TO FINANCIAL STATEMENTS j December 31, 1998 i l

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13. COMMITMENTS AND C0NTINGENCIES (continued) I

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k In recognition' of'the dhSd risk posed by the shutdown and defueled

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nuclear reactor, the Company substantially reduced the amount of property l damage insurance coverage consistent with lower limits permitted by the NRC.

Low-Level Waste Discosal: The federal Low-Level Radioactive Waste Policy j Amendments Act (the " Waste Act") , enacted in 1986, required states either alone or in multistate compacts to provide for the disposal of low-level radioactive waste generated within their borders. The states of Maine, j Texas and Vermont ent.ered into a compact for the disposal of low-level waste at a site in Texas. The compact provided for Texas to take Maine's low-level waste over a 30-year period for disposal at a then-planned facility in west Texas. In return, Maine would be required to pay $25 million, assessed to the Company by the State of Maine, payable in two equal installments, the first after ratification by Congress and the second upon commencement of operation of the Texas facility; or, as a possible alternative, the states could agree to a financing arrangement for the payment, in which case the Company's share, along with interest, could be paid out over an extended period of time. In addition, the company would be assessed a total of $2.5 million for the benefit of the Texas county in which the facility would be located and would also-be responsible for its pro-rata share of the Texas governing commission's operating expenses.

The bill providing for ratification of the compact was before several sessions of the Congress before finally being approved on September 2,1998, and signed by the President on September 21, 1998. However, on October 22, 1998,.the Texas Natural Resources Conservation Commission voted to deny a permit for the proposed west Texas site for the facility.

i Since the Maine Yankee Plant has permanently stopped operating, the compact is less beneficial to the company than it would have been if the Plant had remained in operation, due to the new schedule for the Company's shipments and the uncertainty associated with the schedule for opening a Texas facility. Although other potential sites in Texas have been proposed by various parties, the Company cannot predict whether or when a facility in Texas will be licensed and built. The company intends to utilize its on-site storage facility as well as dispose of low-level waste at an active South Carolina site or other available sites in the interim and continue to cooperate with the State of Maine in pursuing all appropriate options. The Company is unable to predict whether or when the state of Maine may assess any payments required under the compact.

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1 . . , 1 g s Maine Yankee Atomic Power Comoany NOTES TO FINANCIAL STATEMENTS December 31, 1998

13. COMMITMENTS AND CONTINGENCIES (continued)

Hazardous Substance Site Maine Yankee has been notified by the Maine j Department of Environmental Protection ("DEP") that it is one of many potentially responsible parties- under the Maine Uncontrolled Hazardous Substance Sites law for having arranged for the transport of hazardous ,

substances to sites owned by the Portland Bangor Waste Oil Company that have ,

been designated uncontrolled hazardous substance sites by the DEP. Under I the Maine law, each responsible party is jointly and severally liable for costs. associated with the abatement, cleanup or mitigation of the hazards at such a site. After lengthy investigation and settlement discussions to determine the appropriate allocation of responsibility for such costs, Maine Yankee recorded an estirtated current liability of $248,572 at December 31, 1998.

Site characterization and other activities throughout the decommissioning process could give rise to additional environmental issues.

Year 2000 (unaudited):

Many information systems were designed to function based on years that begin with "19" and therefore will not properly recognize a year that begins with

• 20". Maine Yankee initiated its ' rear-2000 compliance program in 1995 and is actively participating in an industry task force that is overseeing remediation ef forts. The Company has substantially completed its assessment of potential areas of noncompliance, which are generally in the areas of internal and external financial systems, plant and network support systems, and embedded fuw.locs. As of March 1, 1999, the company estimates that it is approximately 80 veccent through the necessary . remediation work and approximately 60 port.ent through the testing of the remediation solutions.

Computer applicatior.s related to nuclear fuel safety have been assessed and no Year-2000 pr@ lams were identified. At the same time the Company has been -tieveloping contingency plans and seeking information from its vendors and contractorr concerning their Year-2000 readiness, and has not been informed of any significant problems with those parties that would adversely affect the Company's timely readiness. Maine Yankee believes it is on schedule to attain Year-2000 readiness by the f all of 1999 and that it will not incur material costs in doing so, but cannot predict with certainty what offect, if any, the Year-2000 problem will have on its business operations or financial condition.

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Maine Yankee Atomic Fg_w_gI Company NOTES TO FINANCIAL STATEMENTS December 31, 1998

14. UNAUDITED QUARTERLY FINANCIAL DATA l

Unaudited quarterly financial data are shown below.

Quarter Ended March 31 June 30 Sent + er 30 December 31 (Dollars in Thousands, Except Per Share Amounts)

Electric Operating Revenues $37,603 $28,935 $26,276 $17,794

• Operating Income 4,523 3,922 4,354 631

• Net Income 2,420 2,478 2,523 (1,126)

• Earnings Per Share of Common Stock 4.15 4.27 4.35 (2.94)

• 1 12.2.

Electric Operating Revenues 63,864 81,869 52,983 39,870 Operating Income 4,151 4,436 4,824 4,759 Net Income 2,122 2,214 2,187 2,514 Earnings Per Share of Common Stock 3.53 3.72 3.66 4.32

• Fourth quarter 1998 earnings were adjusted to reflect the expected return l I

on equity refund related to the current rate case settlement agreement.

15. TRANSACTIONS WITH ASSOCIATED COMPANIES During 1998,1997 and 1996, the Company paid $0.6 million, $22.9 million and'$14.0 million, respectively, to Yankee Atomic Electric Company, an associate of several of the Sponsors, for services at cost for its Nuclear Services Division ("YNSD"). On December 1, 1997, YNSD was acquired by Duke Engineering & Services (" Duke"), which is not an associated company. Central Maine Power Company (" CMP") has furnished the company certain engineering, administrative and legal services, furnished certain facilit.ies at cost, and provided electric service at its filed rates. During 1998, 1997 and 1996, CMP was reimbursed in the amount of $3.8 million, $6.5 million and $4.9 million, respectively, for such services. It is expected that Duke and CMP will continue to perform services for the Company in the future, for which they will be reimbursed by the Company.

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DIRECTORS AND EXEuvrivs OFFICERS Directors The directors of the Company and their principal occupations and all positions and of fices with the Company are as follows:

Name Princinal Occucation Dasid T. Flanagan President and Chief Executive Chairman of the Board of Officer, CMP Group, Inc, Directors Arthur W. Adelberg Executive Vice President, Director CMP Group, Inc.

Robert S. Briggs Chairman of the Board, Director President and Chief Executive Officer, Bangor Hydro-Electric Company i

Kent R. Brown Senior Vice President, Director Engineering and Operations, Central Vermont Public Service Corporation Paul R. Cariani President and Chief Executive I

Director Officer, Maine Public Service Company Lillian M. Cuoco Senior Nuclear Counsel, j Director Northeast Utilities Service Company Ted C. Feigenbaum Executive Vice President and Director Chief Nuclear Officer, North Atlantic Energy Services Corporation Frederic E. Greenman Consultant; Vice President and Director General Counsel (retired),

New England Power Company 1

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s, DIRECTORS AND EXECUTIVE OFFICERS (continued) i Directors (continued)

Name Princical Occucation John B. Keane Vice President and Treasurer, Director Northeast Utilities f Carroll R. Lee Senior Vice President and Chief Director Operating Officer, Bangor Hydro-Electric Company

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David E. Marsh Chief Financial Officer, Director CMP Group, Inc. i Thomas E. Murley Nuclear Safety and Management Director Consultant; former Director of Nuclear Reactor Regulation, j United States Nuclear Regulatory Commission Donald G. Pardus Chairman and Chief Executive Director Officer, Eastern Utilities ,

Associates Gerald C. Poulin Vice President, Generation, Director CMP Group, Inc.

Kirk L. Ramsauer Associate General Counsel, Director New England Power Company f I

James S. Robinson Vice President, New Director England Power Company 3 F. Allen Wiley Managing Director of Director Generation, Central Maine Power Company Frederick Woodruff Managing Director, Energy Director Trading and Marketing, ,

Central Maine Power Company Russell D. Wright Chairman and Chief Executive Director Officer, Cambridge Electric Light Company i

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DIRECTORS AND EXECUTIVE OFFICERSIcontinuedj,,

Executive Officers The follcwing are the executive officers of the company with all positions and offices held:

i Hama Office l David-T. Flanagan Chairman of the Board of Directors Michael J. Meisner President Mark S. Ferri Vice President, Decommissioning i

I Mary Ann Lynch Vice President, Law and Governmental 8 Affairs, Clerk and Assistant Secretary Michael E. Thomas Vice President and Treasurer l

l William M. Finn Secretary i

1 March 29, 1999 L ' 4 * -- - --

Date Michael E. Thomas Vice President and Treasurer l

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