ML20217R230
| ML20217R230 | |
| Person / Time | |
|---|---|
| Site: | Maine Yankee |
| Issue date: | 12/31/1997 |
| From: | Zinke G Maine Yankee |
| To: | NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM) |
| References | |
| GAZ-98-29, MN-98-37, NUDOCS 9805140211 | |
| Download: ML20217R230 (53) | |
Text
" V MaineVankee P.O. BOX 408 + WISCASSET, MAINE 04578 + (207) 882-6321 ,
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I May 4,1998 MN-98-37 GAZ-98-29 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 1997 Annual Financial Report for Maine Yankee Atomic Power Company.
Very truly yours, l
George A. Zinke, ;or Nuclear Safety & Regulatory Affairs Enclosure c: Mr. Hubert Miller Mr. R. A. Rasmussen ,
Mr. Michael K.. Webb q l Mr. Michael Masnik Mr. Ron Bellamy f b {Cb~
Mr. Patrick J. Dostie Mr. Uldis Vanags 9805140211 971231 PDR ADOCK 05000309 PDR
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l MAINE YANKEE ATOMIC POWER COMPANY ANNUAL FINANCIAL REPORT FOR 1997 PO Box 408 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 preferred stock agreements, Maine Yankee prepares annual and quarterly financial reports.
These reports are distributed to those who formerly received the 1934 Act Reports and are also available to others on request from the Treasurer of the Company at the above address.
THIS REPORT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OF MAINE YANKEE ATOMIC POWER COMPANY.
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I Maine Yanket Atomic Power Company 1997 Annual Financial Report TABLE OF CONTENTS l
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The Company . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . .
. . . . . . 3 I Financial Statements and Supplementary Data . . . . . . . . . . 17 Directors and Executive Officers . . . . . . . . . . . . . . . 48 I
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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 office address is PO Box 408, Ferry Road, Wiscasset, Maine 04578, and its telephone number is (207) 882-6321. At December 31, 1997, the Company had 214 employees, down from 482 at the end of 1996.
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 j led to the decision to close the Plant and of current related regulatory I and other issues, see " Management's Discussion and Analysis of Financial l Condition and Results of Operations", below. l Each of the Sponsors committed under a 1968 Power Contract with the I Company to purchase a specified percentage of the capacity and output of i 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 amortise 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 end 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 of regulatory bodies in each instance. It is highly unlikely, however, that the Plant will have " capital requirements" as defined in the capital Funds Agreements, after permanent cessation of operation. All 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, subject only to each sponsor's right to cancel its Power Contract if deliveries cannot be made to the Sponsor because either (i) ths Plant is damaged to the extent of being completely or substantially completely destroyed, or (ii) the Plant is taken by exercise of the right of eminent domain or a similar right or power, or (iii) (a) the Plant cannot be used because of contamination or becausa a necessary license or authorization cannot be obtained or is revoked or the 1
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THE COMPAHX (continued) utilization thereof is made subject to specified conditions which are nct me t , and (b) the situation cannot be rectified to an extent which will permit the Company to make deliveries to the Sponsor from the Plant.
Under 1997 amendments to the Power Contracts and Additional Power Contracts now pending before the Federal Energy Regulatory Commission
("FERC"), the Sponsors have agreed that the permanent shutdown of the Plant does not give rise to a right to cancel those contracts. The 1997 amendments, if made finally effective by FERC, would delete from the earlier contracts the cancellation provision designated " (iii) " above in this paragraph. Notwithstanding the right to cancel, the obligation to pay decommission 3ng costs continues until the Plant has been fully decommissioned.
The Plant and its decommissioning are subject to extensive regulation by the Nuclear Regulatory Commission ("NRC"), which is empowered to authorize l the siting, construction, operation and decommissioning of nuclear !
reactors after consideration of public health, safety, environmental and antitrust matters. 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 Commission ("SEC") und r the j Public Utility Holding Company Act of 1935 with respect to various i matters, including the issuance of certain securities. The Company is also subject to regulation by the SEC under other federal securities laws.
In addition, the company is subject to regulation by the FERC as to its rates (including the Power Contracts, Additional Power Contracts and the proposed 1997 amendments thereto) and various other matters, and is subject to regulation by the Maine Public Utilities Commission as to some aspects of its business, including the issuance of securitiec. 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 i
MANAnRMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIQLi For a period commencing January 1, 1973, extending for thirty years thereafter in accordance with the Power Contracts, as amended, subsequently extended by the Additional Power Contracts from 2003 to the end of the useful life of the Plant and completion of all licensing and financial obligations, and subject to certain limitations, each Sponsor
- received its entitlement percentage of Plant output and is obligated to
! pay its entitlement porcontage of the company's total costs, including a return on invested capital, regardless of the level of operation of the Plant.
The following is management's analysis of certain significant factors that have affected the Company's operating results and financial condition for the period 1995 through 1997.
Permanent Shutdown of Maine Yankee Plant On August 6, 1997, the Board of Directors of Maine Yankee Atomic Power ,
l_ Company (the " Company" or " Maine Yankee") voted to permanently cease power )
operations at its nuclear generating plant at Wiscasset, Maine (the
" Plant" or the " Maine Yankee Plant") and to begin decommissioning the Plant. As reported in detail in the Company's Annual Report for the year ended December 31, 1996, and its Quarterly Reports for the quarters ended l March 31, 1997, June 30, 1997, and September 30, 1997, and reported in nore condensed form below, t.he Plant experienced a number of operational and regulatory problems and has been shut down since December 6, 1996.
l The decision to close the Plant permanently was based on an economic l analysis of the costs, risks and uncertainties associated with operating l the Plant compared to those associated with closing and decommissioning it. The Plant's operathg license from the Nuclear Regulatory Commission
("NRC") was scheduled to expire on October 21, 2008.
The Plant provided reliable and low-cost power from the time it commenced operations in late 1972 to 1995. Beginning in early 1995, however, Maine Yankee encountered various operational and regulatory difficulties with the Plant. In 1995, the Plant was shut down for almost the entire year j to repair a large number of steam generator tubes that were exhibiting defects. Shortly before the Plant was to go back on-line in December 1995, a group with a history of opposing nuclear power released an l undated, unsigned, anonymous letter alleging that in 1988 Yankee Atomic Electric Company (" Yankee Atomic") (then an affiliated consultant of Maine Yankee) and Maine Yankee had used the results of a faulty computer code as a basis to apply to the NRC for an increase in the Plant's power output. In response to the allegation, on January 3, 1996,
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- Maine Yankee Atewa4e Power Company MANAGenT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Per==nent Shutdown of Maine Yankee Plant (continued) the NRC issued'a Confirmatory Order that restricted the Plant to 90 percera. of its licensed thermal operation level, which restriction was still in effect when the Plant was permanently shut down.
As a result of the controversy associated with the allegations, the NRC, at the request of the Governor of Maine, conducted an intensive Independent Safety Assessment ("ISA") of the Plant in the summer and fall of 1996. On October 7, 1996, the NRC issued its ISA report, which found that while the Plant had been operated safely and could continue to operate, there were weaknesses that needed to be addressed, which would require substantial additional spending by Maine Yankee. On December 10, 1996, Maine Yankee responded to the ISA report, acknowledged many of the weaknesses, and committed to revising its operations and procedures to address the NRC's criticisms.
Another result of the controversy associated with the allegations was an investigation of Maine Yankee initiated by the NRC's Office of Invectigations ("OI"), which, in turn, referred certain issues to the United States Department of Justice ("DOJ") for possible criminal prosecution. Subsequently, on September 27, 1997, the DOJ, through the United States Attorney for Maine, announced that its review had revealed insufficient grounds for criminal prosecution. On December 19, 1997, the NRC identified several apparent violations that had been within the scope of the OI investigation. The company believes that the OI investigation could ultimately result in the imposition of civil penalties, including fines, on Maine Yankee, and expects resoludon of outstanding NRC enforcement action in 1998.
In 1996 the Plant was generally in operation at the 90 percent level from late January to early December, except for a two-month outage from mid-July to mid-September. The Plant was shut down again on December 6, 1996, to address several concerns, and has not operated since then. The precipitating event causing the shutdown was the need to evaluate and resolve cable separation compliance issues, and on Dec. ember 18, 1996, the NRC issued a Confimatory Action Letter requiring the Plant to remain shut down until Maine Yankee's plan for resolving the cable-separation issues was accepted by the NRC. Subsequently, Maine Yankee uncovered additional issues, including among others the possibility of having to replace defective fuel assemblies, address additional cable-separation issues, and determine the condition of the Plant's steam generators, which contributed 4
Maine Yankee Atomic Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1
Per==nent Shutdown of Maine Yankee Plant (continued) to further operational uncertainty. On January 29, 1997, the Plant was placed on the NRC's Watch List, and on January 30, 1997, the NRC issued a supplemental Confirmatory Action Letter requiring the resolution of additional concerns before the Plant could be restarted.
1 In December 1996 Maine Yankee requested proposals from several utilities '
with large and successful nuclear programs to provide a management team and ultimately contracted with Entergy Nuclear, Inc. ("Entergy"),
effective February 13, 1997, for management services that included providing a new president and regulatory compliance of ficer. The Entergy-provided management team made progress in addressing technical issues, but a number of operational and regulatory uncertainties remained. On May 27, 1997, the Board of Directors of Maine Yankee voted to minimize spending while preserving the options of restarting the Plant or conveying ownership interests to a third party. After unsuccessful negotiations with one prospective purchaser, Maine Yankee found no other interest in purchasing the Plant and, based on its economic analysis, closed the Plant l permanently.
As required by the NRC, on August 7, 1997, Maine Yankee certified to the NRC that Maine Yankee had permanently ceased operations and that all fuel assemblies had been permanently removed from the Plant's reactor vessel.
On Augus* 27, 1997, Maine Yankee filed the required Post-Shutdown Decommissioning Activities Report with the NRC, describing its planned post-shutdown activities and a proposed schedule. Maine Yankee's work force was reduced from 482 employees at the end of 1996 to 214 employees as of December 31, 1997.
Maine Yankee's most recent estimate of the cost of decommissioning the Plant is $379.6 million, based on a 1997 study by an independent engineering consultant and adjusted by Maine Yankee, plus estimated costs of interim spent-fuel storage of $127.6 million, for an estimated total cost of $507.2 million (in 1997 dollars). The previous estimate for decommissioning, by the same ' consultant, was $316.6 million (in 1993 dollars), which resulted in approximately $14.9 million being collected annually from Maine Yankee's Sponsors pursuant to a 1994 Federal Energy Regulatory Commission ("FERC") rate order. Through December 31, 1#97, Maine Yankee had collected approximately $126.8 million for its decommissioning obligations.
On November 6, 1997, Maine Yankee submitted the new estimate to the FERC as part of a rate case reflecting the fact that the Plant was no longer operating and had entered the decommissioning phase. On January 14, 1998, the FERC accepted the new rates, subject to refund, and the amount of Maine Yankee's collections for decommissioning increased as of January 15, 5
Maine Yankee Atomic Power Company l
MANAGruwwT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Par ==nant shutdown of Maina Yanleme Plant (continued) 1998, from the $14.9 million previously allowed by the FERC to approximately $36.4 million per year. (see further discussion of this FERC proceeding below in this section.)
On December 31, 1997, Maine Yankee estimated the sum of the future payments for the closing, decommissioning, recovery and return of the remaining investment in Maine Yankee to be approximately $898.8 million.
Based on regulatory precedent established by the FERC in its opinion i relating to the decommissioning of the Yankee Atomic nuclear plant, the l Company believes that it is entitled to recover substantially all of its costs from its Sponsors and as of December 31, 1997, is carrying on its balance sheet a regulatory asset and a corresponding liability in the amount of $660.8 million.
On September 2, 1997, the Maine Public Utilities Commission ("MPUC")
released the report of a consultant it had retained to perform a management audit of Maine Yankee for the period January 1, 1994, to June 30, 1997. The report contained both positive and negative conclusions, the latter including that Maine Yankee's decision in December 1996 to proceed with the steps necessary to restart the Plant was " imprudent",
that Maine Yankee's May 27, 1997, decision to reduce restart expenses while exploring a possible sale of the Plant was " inappropriate", based on the consultant's finding that a more objective and comprehensive competitive analysis at that time "might have indicated a benefit for restarting" the Plant, and that those decisions resulted in Maine Yankee's incurring $95.9 million in " unreasonable" costs. On October 24, 1997, the MPUC issued a Notice of Investigation initiating an investigation of the shutdown decision and of the operation of the Plant prior to shutdown, and announced that it had directed its consultant to extend its review to include those areas. The company believes the report's negative conclusions are unfounded and may be contradictory. The Company believes it would have substantial constitutional and jurisdictional grounds to challenge any effort in an MPUC proceeding to alter Maine Yankee rates made effective by the FERC. On November 7, 1997, Maine Yankee initiated a legal challenge to the MPUC investigation in the Maine Supreme Judicial court alleging that such an investigation falls exclusively within the jurisdiction of the FERC and that the MPUC investigation is therefore barred on constitutional grounds. The MPUC subsequently stayed its investigation pending the outcome of Maine Yankee's FERC rate case, while indicating that its consultant would continue its extended review. Based on preliminary indications from the consultant, the company expects the report on the extended review to call for additional cost disallowances, which the Company expects to contest vigorously.
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i Maing Xankta Atomic Power Company MANAGruruT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND nunULTS OF OPERATIONS Par =mnant Shutdown of Maine Yaniree Plant (continued)
Maine Yankee entered into agreements in August 1997 with the holders of its outstanding First Mortgage Bonds and its lender banks (the " Standstill Agreements") under which the bondholders and banks agreed that they would not assert that the August 1997 voluntary permanent shutdown of the Plant constituted a covenant violation under Maine Yankee's First Mortgage Indenture or its two bank credit agreements. The parties also agreed in the Standstill Agreements to maintain Maine Yankee's bank borrowings_at a level below that of the prior aggregate bank commitments, which level Maine Yankee considered adequate for its foreseeable needs. The Standstill Agreements, as extended in October 1997, were to terminate on January 15, 1998, by which date Maine Yankee was to have reached agreement on restructured debt arrangements reflecting its decommissioning status.
Maine Yankee's rate filing with the FERC reflected the Plant's decommissioning status and requested an effective date of January 15, 199C, for the amendments to Maine Yankee's Power Contracts and Additional Power Contracts, which revise Maine Yankee's wholesale rates and clarify and confirm the obligations of the Sponsors to continue to pay their shares of Maine Yankee's costs during the decommissioning period.
On January 14, 1998, the FERC issued an " Order Accepting for Filing and Suspending Power Sales Contract Amendment, and Establishing Hearing Procedures" (the "FERC Order") in which the FERC accepted for filing the i rates associated with the amended Power Contracts and made them effective '
January 15, 1998, subject to refund. The FERC also granted intervention requests, including among others those of the MPUC, Maine Yankee's largest bondholder, and two of its lender banks, denied the request of an intervenor group to summarily dismiss part of the filing, and ordered that a public hearing be held concerning the prudence of Maine Yankee's decision to shut down the Plant and on the justness and reasonableness of Maine Yankee's proposed rate amendments. The Company expects the prudence issue to be pursued vigorously by several intervenors, including among others the MPUC and the Maine Office of the Public Advocate, both of which have filed complaints with the FERC challenging the prudence of the decision to close the Plant and of the management of the Plant prior to the shutdown. The hearing on the FERC rate proceeding is scheduled to begin on December 1, 1998. The Company cannot predict the outcome of the FERC proceedings.
On January 15, 1998, Maine Yankee, its bondholders and lender banks revised the Standstill Agreements and extended their term to April 15, 1998, subject to satisfying certain milestone obligations during the term of the extension. One such obligation was that Maine Yankee must have 7
Maine Yankee Atomic Pawer Company MANAGWMWWT'S DISCUSSION AND ANALYSIS OF ZINANCIAL CONDITION AND RESULTS OF OPERATIONS Par ==nant shutdown of Maina Yankee Plant (continued) accepted, by February 12, 1998, an underwritten commitment to refinance its bonds and bank debt, subject only to closing conditions reasonably capable of being satisfied by April 15, 1998, and reasonably satisfactory to the bondholders and banks. Maine Yankee accepted such a commitment prior to the deadline, received regulatory approval of the refinancing on March 9, 1998, and is negotiating final loan documentation and preparing for a closing before April if, 1998. The proposed refinancing consists of an extendible three-year bank credit facility and an eight-year term loan facility.
Higher nuclear-related costs, when combined with the Sponsors' own replacement-power costs, are affecting the stockholders of Maine Yankee in varying degrees. Central Maine Power Company (" CMP"), which is responsible for 38 percent of Maine Yankee's operating costs, has stated that the impact of nuclear-related costs was the major obstacle to achieving satisfactory results in 1997. Bangor Hydro-Electric Company, a Maine-based 7 percent stockholder, cited its " deteriorating" financial condition, suspended its common-stock dividend, and eventually obtained rate relief. Maine Public Service Company, a 5 percent stockholder, cited problems in satisfying financial covenants in loan documents, reduced its conunon-stoch dividend substantially in early March 1997 and obtained rate relief. Northeast Utilities (a 20 percent stockholder through three subsidiaries), which is also adversely affected by the substantial additional costs associated with the three shut-down Millstone nuclear units and the permanently shut-down Connecticut Yankee unit, as well as significant regulatory issues in Connecticut and New Hampshire, has implemented an indefinite suspension of its quarterly common-stock dividends. Largely as a result of nuclear-related costs, Northeast Utilities reported a loss of $135 million for 1997 and continues to experience difficulty in satisfying loan covenants. A default by a Maine Yankee stockholder in making payments under its Power Contract or Capital Funds Agreement could have a material adverse effect on Maine Yankee, depending on the magnitude of the default, and would constitute a default under Maine Yankee's bond indenture and its two major credit agreements, which the Company is planning to discharge and terminate by April 15, 1998, upon consummation of the refinancing discussed.above, unless cured within applicable grace periods by the defaulting stockholder or other j stockholders. The Company cannot predict, however, what effect, if any, '
the financial difficulties being experienced by some Maine Yankee stockholders will have on the Company.
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Maine Yankee Atomic Power Company i
MANAtantWMT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Deregulation 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 l 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.
Plant Operations l
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 did not operate during 1997.
During 1996, the Plant operated at an average 67 percent capacity factor (using MDC not rating of 860 Mwe) and generated and sold 5.1 billion KWH
. net.
l Because of the long tube-sleeving outage, during 1995 the Plant operated i at an average 3 percent capacity factor and generated for sala 197,192 1pfH l
not, all in January. The Plant was taken off-line on January 14, 1995, and remained off-line into January 1996. For a discussion of the 1995 and
! 1996 operating history of the Plant, see " Permanent Shutdown of Maine Yankee Plant," above.
Generation l
l The following table sets forth the company's average cost of power and generation for the yokr 1996. Corresponding information for 1997 and 1995 l is not meaningful since the Plant had no generation in 1997 and did not l
generate after mid-January in 1995. See the discussion above on " Plant Operations."
I Avermae Cost of Power Cents per KWH M Generation:
Net KWH sold (in billions) M 9
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Maine YankPe Atomic Power Company MANAGemmT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RRitULTS OF OPERATIONS Fuel Expenses Fuel amortization expense is based on the cost of (1) nuclear fuel in the reactor core that is allocated to the accounting period based on the leval of energy production and (2) amortization over the remaining useful life of the Plant for the last core of unburned nuclear fuel.
The fluctuation in fuel amortization - a decrease of $12.8 million in 1997 from 1996, and an increase of $11.7 million in 1996 over 1995 -
is primarily the result of no generation in 1997 and the low level of generation in 1995 as a result of the extended outage discussed above.
Fuel disposal cost results from (1) a disposal fee of $1.00 per megawatt-hour of not generation which is assessed by the federal Department of Energy (" DOE") and is paid quarterly, and (2) a DOE annual assessment for decontaminating and decommissioning DOE's enrichment facilities. Fuel disposal expense for 1997 was lower than that for 1996 due to the lack of generation in 1997; the increase for 1996 over 1995 resulted from the higher generation in 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 after the date of the enactment or (2) the collection of
$2.25 billion (to be escalated by the CPI annually). Each utility's share of the assessment is to be based on its cumulative consumption of DOE enrichment services.
The Company's estimated obligation at December 31, 1997, was $25.5 million, based on information from the DOE. Through that date the Company had paid $9.8 million, of which $8.5 million had been expensed and recovered through rates.
, For a discussion of the DOE's unwillingness to accept spent nuclear fuel j for storage and disposal, see Note 13 of Notes to Financial Statements,
" Commitments and Contingencies" -
" Nuclear Fuel Storage".
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. l Maine Yankee Atomic Power Company MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Oneration and Maintenance Ernanmes Operation expense increased by $28.7 million for 1997 over 1996, primarily due to expenditures associated with the plant regulatory and operational issues discussed above.
Opere, tion expense increased by $9.9 million for 1996 over 1995, primarily due to " work in supporting, responding and implementing corrective actions associated with the ISA performed by the NRC discussed above, and the work associated with the overall self-improvement of operations for Maine Yankee.
Maintenance expenses increased by $38.3 million for 1997 over 1996, primarily due to work associated with the plant regulatory and operational issues discussed above.
Maintenance expenses decreased by $48.3 million for 1996 from 1995, primarily due to work associated with the 1995 extended steam generator tube-sleeving outage discussed above.
Maine Yankee recorded the sleeving costs as maintenance expense. On October 10, 1995, eleven municipal ar.d electrical cooperative secondary purchasers that purchased Maine Yankee power through the Company's Sponsors and were collectively entitled to less than 2 percent of the Plant's output, filed a complaint with the FERC challenging the Company's accounting treatment of the costs and alleging that such costs should be deferred and amortized over the remaining operating life of the Plant.
On May 3 0, 1996, the FERC issued an order directing Maine Yankee to amortise the sleeving repair costs over the remaining license life of the Plant (to October 2008) . Because Maine Yankee had already billed the repair costs in 1995, it was also directed to refund, with interest, all amounts in excess of the properly amortized amounts. On July 30, 1997, the FERC approved a settlement agreement, which preserved the benefits of the FERC's May 30 order for the complainant secondary purchasers as well as other secondary purchasers whose contracts to purchase Maine Yankee power expire in 2002 (the " Secondary Purchasers"). The settlement agreement also provided that Maine Yankee is not required to make refunds to its Sponsor customers, which represent in the aggregate approximately 94 percent of the total sleeving expense of approximately $27 million. I 11
Maine Yankee Atomic Eg3Cr Company M)wururuT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Conration and Maintan=nce Ernenses (continued)
Upon the permanent shutdown of the Maine Yankee Plant, 26 of the 29 Secondary Purchasers that had purchased Maine Yankee power under identical contracts with Maine Yankee's Sponsors stopped making payments under their contracts, claiming that the decision to permanently close the Plant constituted a breach of those contracts. The Secondary Purchasers had contracted with the Sponsors in 1971 for a total of 6.2847 percent of the output of the Plant. On December 15, 1997, the Sponsors filed a Complaint with the FERC seeking to compel the Secondary Purchasers to pay their {
respective shares of Maine Yankee costs under the contracts and to modify j the contracts to require such payments to continue past the present termination date of the contracts throughout the period of the Plant's decommissioning. The Secondary Purchasers are contesting the Complaint at FERC and on January 19, 1998, filed a motion with the Superior Court i of Maine to compel arbitration of the contract disputes, which the I sponsors are contesting. The sponsors remain responsible under their Power Contracts fo payments not made by the Secondary Purchasers urder their secondary contracts.
Low-Level Waste Disnosal l 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".
Income Taxes l
The increase in income tax expense for 1997 resulted principally from a {
reduction in the tax benefits associated with the not earnings of the non- !
qualified decommissioning and spent fuel trust funds.
The increase in income tax expense for 1996 resulted principally from a reduction in . the flowback of investment tax credits associated with credits claimed in 1995 under the " transitional" rule of the Tax Reform Act of 1986.
Pronerty Taxes Property taxes increased during 1997 from 1996, primarily due to an increase in the mill rate.
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Maine Yankee Atomic Power Company MANAGenmT* S DISCUSSION AND ANALYSIS OF f FINANCIAL CONDITION AND nestULTS OF OPERATIONS !
l Oehar Ince-- (Exnense) 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. l I
Fuel Financina Note Interest The average level of borrowings on fuel financing notes was higher during !
1997 than in 1996. This, along with an increase in interest rates, contributed to the increase in interest expense.
Other Interest Charaes l Other interest charges were higher during 1997 than in 1996 primarily due to interee't related to the August refund of sleeving costs to the Secc.adary Purchasers. Other interest charges were higher during 1995 than ,
in 1996 due to the recording of interest on additional state income taxes l associated with the 1988 and 1989 Internal Revenue Service audit i settlement in 1995, along with higher levels of bank borrowings at higher interest rates.
Allowance for Funds Used Fluctuations in the amount of allowance for funds (equity and borrowed) occur as the result of changes in the level of investments in Construction Fork in Progress ("CWIP") and Nuclear Fuel in Process ("NFIP") and/or the rates used for capitalization of these funds.
During 1997, Allowance for Funds Used During Construction ("AFC") was lower than in 1996 due to a decreased level of investment in CWIP.
Allowance for Funds Used for Nuclear Fuel ("AFN") was higher due to the anticipation of a 1997 fuel reload.
l During 1996, AFN was higher than in 1995 due to increased levels of NFIP.
Maine Yankee Atomic Power Company MANAf2 N 'S DISCUSSION AND ANALYSIS OF FINANCTAL CONDITION AND RESULTS OF OPERATIONS Liouidity and Canital Resources Capital Resources l Cash flow needs during 1997 were provided from operating activities in the amount of $52.3 million, decommissioning trust earnings of $23.0 million restricted to decommissioning trust investments, and $39.7 million from not issuance of overall debt.
The primary uses of cash were for various corporate expenditures such as:
(1) nuclear fuel acquisitions of $27.1 million, (2) construction of I operating property of $12.5 million, (3) trust fund investments of $46.7 l
million to meet future plant decommissioning and prior spent fuel permanent disposal costs, and (4) dividend payments of $2.9 million.
Under the Standstill Agreements in effect with the Company's bondholders ,
and lender banks at December 31, 1997, the Company had bank borrowings l that were being maintained at a level of $67 million (subsequently reduced to $60.3 million), out of the original aggregate commitments of $85 million.
Each of the Maine Yankee Sponsors agreed in 1968 under a Capital Funds Agreement with the Cospany to provide a percentage equal to its respective ownership percentage of the Company's capital requirements not obtained !
from other sources, subject, however, to obtaining necessary authorizations of regulatory bodies in each instance. It is highly unlikely, however, that the Plant will have " capital requirements," as defined in the Capital Funds Agreements, after permanent cessation of operation. All such obligations are subject to the continuing jurisdiction of various federal and state regulatory bodies.
In June 1995 the company's Board of Directors elected to strengthen the common-equity component of the company's capital structure through the retentic.n of earnings. Therefore, no common stock dividend was declared for the second and third quarters of 1995. The Board of Directors also elected not to declare a com:non-stock dividend for any quarter in 1997.
On February 5, 1997, Standard & Poor's Corp. ("S&P") lowered its corporate credit rating for the Company to "BBB " from "BBB" and the preferred stock rating to "BB+" from "BBB ." S&P said the outlook remained negative.
14 l
Maine Yankee Atomic Power Company MANAQ1nnNT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity The company bills its customers under a formula rate based on its cost of service. Unlike traditional utility ratemaking, where rates are based on a test-year rate base and total revenue requirements, the company's rates consist of its actual costs of providing service each month, regardless of the production level of the Plant, plus the costs, as determined by the FERC in periodic rate cases, of the following items: (1) return on common equity; (2) property depreciation; (3) decommissioning expense; (4) amortization of the materials and supplies inventory that will remain at the end of the Plant's operating life; (5) amortization of the fuel remaining in the core at the end of the Plant's operating life; (6) 50 percent of the earnings on CWIP balances; and (7) expenses of postratirement benefits other than pensions. The Company therefore recovers all of its actual or estimated costs monthly from its customers.
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 cf interest from April 7, 1983, to the time of payment, which thrcucQ 1997 amounted to an additional $76.2 million.
Maine Yankee in f d ing an external trust to provide for 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 $2.1 million through December 1999. Deposits I are expected to total approximately $74.6 million. The estimated liability, including interest due at the time of disposal, is projected to be approximately $139.9 million at December 31, 1999. The Company estimates that trust fund deposits plus earnings will meet this total liability if funding continues without material changes.
The Company must also provide for the costs of decommissioning of 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 l
)
January 15, 1998, subject to refund after a hearing on the proposed rates and the prudence of the Plant shutdown decision. 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 $507.2 million in mid-1997 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 15 i
Maine Yankee Ata=4 e Power Company MANAamnfT' S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPWDELTIONS Liquidity (continued) to monitor and adjust decommissioning collections through supplemental rate filings with the FERC. See Note 2 of Notes to Financial Statements,
" Summary of Significant Accounting Policies" " Decommissioning."
The staff of the Securities and Exchange Commission has questioned certain ;
current accounting practices of the electric utility industry regarding l the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to those questions, the Financial Accounting Standards Board ("FASB") has initiated a review of the accounting for such costs. The FASB has considered several approaches, including recording the entire estimated liability for decommissioning costs initially, rather than accruing the costs over the operating life of the generating unit.
The Company, based on the Maine Yankee Board's decision to decommission the Plant, has recorded the total estimated liability for decommissioning the Plant, utilizing the study completed during 1997. >
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 Maste 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 abatament, cleanup or mitigation of the h: ards at such a site. j Since the investigations by the DEP and the Company are in their early l stages and a large number of potentially responsible parties is involved, the Company cannot now predict the amount of costs it will ultimately be required to assume. Environmental costs that are unrelated to the i decommissioning and dismantlement of the Plant site could generally be l considered to be operation and maintenance costs to be recovered through ;
the company's billing process. I i
Site characterization work at the Plant site, an initial part of the decommissioning process, and related activities could give rise to additional environmental issues, i
l l
16
I s
l FINANCIAL STATEMRNTS AND STTPPLEMENTARY DATA FINANCIAL AND STATISTICAL SECTION
( Index l
ESSA Report of Independent Public Accountants . . . . . . . . . . . 18 l
l Financial Statements:
Statement of Income for each of the three years ended December 31, 1997 . . . . . . . . . . . . . . . . . . 19 Balance Sheet at December 31, 1997 and 1996 . . . . . . . . 20 Statement of Capitalization at December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . 22 Statement of Changes in Common Stock Investment for each of the three years ended December 31, 1997 . . . . . . . . . . . . . . . . . . . . . 23 Statement of Cash Flows for each of the three years ended December 31, 1997 . . . . . . . . . . . . . . . . . . 24 Notes to Financial Statements . . . . . . . . . . . . . . . 25 i
i 17 l 1
ARTHL'R ANDERSEN LLP REPORT OF INDEPENDEh"r PUBuC ACCOUNTANTS To the Board of Directors of Maine Yankee Atomic Power Company:
We have audited the accompanying balance sheet and statement of capitalization of Maine Yankee Atomic Power Company (a Mame corporation) as of December 31,1997 and 1996, and the related statements of mcome, changes in common stock investment and cash flows for each of the three years in the period ended December 31,1997. 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 obtam reasonable assurance about whether the financial statements are free of matenal nusstatement. An audit includes ex==inine, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signi6 cant estunates made by manam. as well as evaluating the overall nanaci=1 statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mame Yankee Atomic Power Company as of December 31,1997 and 1996, and the results ofits operations and its cash flows for each of the three years in the period ended December 31,1997, in conformity with generally accepted accounting principles.
l k4- L.\ h l
Boston, Mme=mchusetts January 23,1998 18
. o Maing Yankee Atn=4e Power Comoany STATEMENT OF INCOME I (Dollars in Thousands Except Per Share Amounts)
)
Year EndcLD3. ceder 31, i
1997 1111 1995 ELECTRIC OPERATING REVENUES $238,586 $185,661 $205,977 OPERATING EXPENSES Fuel Amortization (Note 2) 1,122 13,952 2,280 Disposal Cost (Note 2) 1,709 6,618 2,221 Operation 110,362 81,661 71,715 Maintenance 60,262 21,953 70,261 Depreciation (Note 2) 18,725 18,052 17,822 Decommissioning (Note 2) 14,900 14,900 14,900 Taxes (Benefits)
Federal and State Income (Note 3) 84 (439) (2,981)
Local Property 13,252 11,814 11,232 Total Operating Expenses 220,416 168,511 187,450 OPERATING INCOME 18,170 17,150 18,527 OTHER INCOME (EXPENSE)
Allowance for Equity Funds Used During Construction (Note 2) 158 138 133 l For Nuclear Fuel (Note 2) - - -
Other, Net 7.316 5,271 5,729 INCOME BEFORE INTEREST CHARGES 25,644 22,559 24,389 INTEREST CHARGES Long-Term Debt (Note 5) 6,795 7,349 7,903 Fuel Disposal Liability (Note 2) 6,394 6,055 6,360 Fuel Financing Notes (Notes 6 and 7) 3,628 1,120 1,106 Other Interest Charges (Note 4) 267 199 626 Allowance for Borrowed Funds Used During Construction (Note 2) (133) (161) (164)
For Nuclear Fuel (Note 2) (344) (109) (13)
Total Interest Charges 16,607 14,453 15,818 NET INCOME 9,037 8,106 8,571 Dividends on Preferred Stock 1,425 1,469 1,514 EARNINGS APPLICABLE TO COMMON STOCK $_]_,_(12 $ 6,637 $ 7.057 SHARES OF COMMON STOCK OUTSTANDING 500,000 500,000 500,000 EARNINGS PER SHARE OF COMMON STOCK $ 15.23 $ 13.27 $ 14.11 DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ --
$ 13.00 $ 6.70 The accompanying notes are an integral part of these financial statements.
l l
19 l
t
1 Maine Yankee Atomic Power Company BALANCE SHEET (Dollars in Thousands)
ASSETS Dec-ker 31, 1997 1996 ELECTRIC PROPERTY, at Original Cost (Note 5) $ 687 $409,865 Less: Accumulated Depreciation and Amortization (Note 2) - 225,735 687 184,130 Construction Work in Progress - 5,687 Net Electric Property 687 189.817 NUCLEAR FCEL, at Original Cost (Note 2)
Nuclear Fuel in Reactor - 78,037 Nuclear Fuel - Spent - 391,803 17,250 8,657 Nuclear Fuel - Stock 478,497 17,250 453,756 Less: Accumulated Amortization (Note 2) -
17,250 24,741 Nuclear Fuel in Process - 7.802 17,250 32,543 Not Nuclear Fuel Not Electric Property and Nuclear Fuel 17,937 222,360 CURRENT ASSETS Cash and Cash Equivalents 30,247 4,418 Accounts Receivable 34,647 23,597 l Materials and Supplies, at Average Cost (Note 2) - 10,665 l 6,204 6,299 Prepayments i 1
Total Current Assets 71,098 44.979 DEFERRED CHARGES AND OTHER ASSETS Trust Funds (Note 2)
Fuel Disposal 121,316 112,523 Plant Decommissioning 199,457 163,536 Regulatory Assets Closure (Note 1) 660,826 -
Not Unrecovered Assets (Note 1) 238,284 -
Accumulated Deferred Income Tax Assets (Note 3) 36,918 33,103 DOE Decontamination and Decommissioning Fee (Note 2) 16,939 18,270 Other 5,189 7,072 Other Deferred Charges and Other Assets 179 218 Total Deferred Charges and Other Assets 1.279,108 334,722
$1,368,143 $M The accompanying notes are an integral part of these financial statements.
20
. 1 Maing Yankee Atomic Power Company BALANCE SHEET (Dollars in Thousands)
STOCKHOLDERS' INVESTMENT AND LIABILITIES Dec =her 31, 1997 1996 CAPITALIZATION (See Separate Statements)
Comunon Stock Investment $ 78,950 $ 71,337 Redeemable Preferred Stock 17,400 18,000 Long-Term Debt 76,665 83,332 Total Capitalization 173,015 172,669 LONG-TERM FUEL DISPOSAL LIABILITY (Note 2) 126,634 120,240 NUCLEAR FUEL FINANCING NOTES (Notes 6 and 7) 67,000 20,000 CURRENT LIABILITIES Current Sinking Fund Requirements (Notes 5 and 8) 7,267 7,267 Accounts Payable 23,086 19,061 Fuel Disposal Cost Payable (Note 2) - 1,103 Dividends Payable 356 1.967 Accrued Interest and Taxes 2,803 2,550 Other Current Liabilities 2,006 2,417 Total Current Liabilities 35,518 34,265 COMMITMENTS AND CONTINGENCIES (Note 13)
RESERVES AND DEFERRED CREDITS Plant Decommissioning Reserve (Note 2) 200,743 164,807 Deferred Credits Closure (Note 1) 660,826 -
Income Taxes (Note 3) 8,396 9,487 Accumulated Deferred Income Tax Liabilities (Note 3) 74,421 56,704 DOE Decontamination and Decommissioning Fee (Note 2) 13,899 15,295 Unamortized Investment Tax Credits (Note 3) 5,887 6,374 Unamortised Gains on Reacquired Debt (Note 2) 1,804 2,220 Totel Reserves and Deferred Credits 965,976 254,887
$1,368,143 $M The accompanying notes are an integral part of these financial statements.
21
Ms.ing Yankee Atomic Power Comnany STATEMENT OF CAPITALIZATION ,
(Dollars ir. Thousands) I December 31, 1997 1996 COMMON STOCK INVESTMENT Common Stock, $100 Par value, 500,000 Shares Authorized and Outstanding $ 50,000 $ 50,000 Other Paid-in Capital 16,538 16,572 Capitel Stock Expense (324) (361)
Gein on Redemption of Preferrod Stock 1,132 1,125 Premiums on Preferred Stock 44 53 Retained Earnings (Note 9) 11.560 3,948 78,957 71,337 REDEEMABr3 PREFERRED STOCK 7.48% Series, $100 Par Value Authorized 60,000 Shares outstanding 30,000 in 1997 and 36,000 in 1996 (Note 8) 3,000 3,600 8.00% Series, $100 Par Value Authorized 200,000 Shares outstanding 150,000 (Note 8) 15,000 15,000 18,000 18,600 Less: Current Sinking Fund Requirements 600 600 17,400 18,000 LONG-TERM DEBT (Note 5)
First Mortgage Bonds Series D - 8.79 % due May 1, 2002 25,000 30,000 Series E - 8.13 % due May 1, 2008 40,000 40,000 Series F - 6.89 % due May 1, 2008 18,332 _11a111 83,332 89,999 Less: Current Sinking Fund Requirements 6.667 6,667 76.665 83,332 Total Capitalization $173,015 $172,669 The accompanying notes are an integral part of these financial statements.
22
Maine Yankee Atomic Power Comnany STATEMENT OF CHANGES IN COMMON STOCK INVESTMENT for the Three Years Ended December 31, 1997 (Dollars in Thousands)
Amount at Retained Shares Par Value Other. Net Earninas Total Balance - December 31, 1994 500,000 $50,000 $17,390 $ 104 $67,494 Add (Deduct) :
Net Income - - - 8,571 8,571 Cash Dividends Declared on -
Common Stock - - - (3,350) (3,350)
Preferred Stock - - - (1,514) (1,514)
Redemption of Preferred Stock - -
6 -
6 O';her - -
(6) -
(6)
Balance - December 31, 1995 500,000 50,000 17,390 3,811 71,201 Add (Deduct) :
Not 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) -
(B)
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 M $50,000 $17,390 $M $g The accompanying notes are an integral part of these financial statements.
23 l
, , Naine Yankee Atomic Power Company STATENENT OF CASH FLOWS (Dollers in Thau: ends) -
Year Wadad Decarbor 31, 1217, 1996 1215.
Oneratina Activities Not Income $ 9,037 $ 8,106 $ 8,571 Items Not Requiring (Providing) Cash Fuel Amortization 1,122 13,952 2,280
. Depreciation and Decosstissioning 33,625 32,952 32,722 Deferred Income Taxes and Investment Tax Credits, Net 13,035 (2,579) (5,681)
Allowance for Equity Funds Used for Nuclear Fuel and During Construction (158) (138) (133)
Long-Term Fuel Disposal Interest, Net of AFN 6,195 5,961 6,349 Oth6r, Not (1,350) (833) (3,557)
Changes in Certain Assets and Liabilities Accounts Receivable (11,050) (5,939) 260 Other Current Assets 429 166 3,865 l Accounts Payable 1,155 4,361 1,804
} Accrued Interest and Taxes 253 (65) 1,345 l Net Cash Provided by Operating Activities 52,293 55,944 47,825 i
I Investina Activities Acquisition of Nuclear Fuel (27,643) (7,181) (570)
Construction of Electric Property (11,786) (4,365) (6,790) l Changes in Accounts Payable - Investing Activities l Nuclear Fuel 537 93 (548)
Construction of Electric Property .(692) 822 (1,047)
Investment Income in Decommissioning Trust 23,002 6,421 18,623 j' Trust Fund Investments Fuel Disposal (8,793) (8,634) (9,979) i Plant Deconnaissioning (37,886) (21,420) (33,438) l Net Cash Used by Investing Activities (63,261) (34,264) (33,749) j Flamaraina Activities Issuances (Redemptions)
- Bank Notes, Net - (1,850) 100 Fuel Financing Notes, Neu 47,000 - (2,000)
Long-Term Debt (6,667) (6,667) (6,667)
Preferred Stock (600) (600) (600)
Dividend Payments Common stock (1,500) (6,675) (3,450)
Preferred Stock (1,436) (1,481) (1,525)
Net Cash Provitted (Used) by Financing Activities 36,797 (17.273) (14,102)
Net Increase (Decrease) in Cash and Cash Equivalents 25,829 4,e07 (26)
Cash and Cash Equivalents at Beginning of Year 4,418 11 37 Cash and Cash Equivalents at End of Year $ 1Llil $M$J Supplemental disclosure of cash flow informations cash paid during the year fore Interest (not of amounts capitalized) $ 10,348 $ 8,736'$ 9,882 Income taxes 8 860 $ 4,866 $ 1,381 Disclosure of accounting policy:
For purposes of the statement of cash flows, the company considers all highly liquid instruments purchased havingfa maturity of three months or less to be cash equivalents.
The accompanying notes are an integral part of these financial statements.
24
, , Maine Yankee Atomic Power Comnany NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 1. PLANT SHUTDOWN AND RATE CASE I
ownership: The following New England electric utilities own all of
{
the common stock of Maine Yankee Atomic Power Company (the " Company" I or " Maine Yankee") :
Ownership ;
Soonsor/Particinant Interest Central Maine Power Company (" CMP") 38%
New England Power Company 20 The Connecticut Light and Power Company 12 l 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 l Western Massachusetts Electric Company 3 Central Vermont Public Service Corporation ___l M%
On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations at the Plant and begin the process of decommissioning the Plant.
On November 6, 1997, the Company submitted a rate filing to the Federal Energy Regulatory Commission ("8'r RC") to provide for uecovery of its costs during the decommissioning period. The filing provides for investment in plant, nuclear fuel and associated facilities to continue to be recovered through October 2008 and includes a revised decommissioning cost study that would increase the annual amount collected by the Company for decommissioning from the $14.9 million established by the FERC in 1994 to $36.4 million. The increase reflects an increase in the total decommissioning cost estimate, including interim spent fuel storage expenses, from $377.8 million (the former FERC-approved amount converted to 1997 dollars) to approximately $507.2 million (in 1997 dollars), with the estimated costs of interim spent fuel storage representing $127.6 million of the total estimate. The filing also seeks approval of the amendments to the Company's Power Contracts and Additional Power Contracts entered into in August 1997, as well as the Additional Power Contracts themselves. In addition, the rate filing requests approval of a change in the level of amortization of last-core fuel, a reduction in the level of collection for postratirement benefits other than pensions, cessation of earning a current return on construction work in progress, but seeks no adjustments for other components of its rates, including its current return on equity of 10.65 percent.
Finally, the Company indicates in the filing that it expects the increased decommissioning and fuel-management costs to be more than offset by reduced operation and maintenance expenses as a result of the shutdown of the Plant and estimates such savings in the Company's revenue requirements to be approximately $60 million in 1998, compared 25
, , , Maine Innkee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 1. PLANT SHUTDOWN AND RATE CASE (continued) with 1996. On January 14, 1998, the FERC approved an order for hearing which, among other things, accepted the Company's contract amendment for filing and suspended new rates for a nominal period.
The new rates became effective January 15, 1998, subject to refund after a hearing on the proposed rates and the prudence of the Plant shutdown decision. Aspects of the rate filing are being contested by intervenors. Maine Yankee cannot predict tne outcome of the FERC
! proceeding.
l The components of the not unrecovered assets at December 31, 1997, i ares (Dollars in Thousands)
Net plant $182,687 l Nuclear fuel, excluding salvage 41,814 Materials and supplies 10,332 Other regulatory assets 3.451 8L1LJJLi The estimated future costs of closure to be incurred by Maine Yankee l have been recorded as a regulatory liability. Management believes that the decision to close the Plant was prudent and that the Company l in entitled to recover substantially all of the resulting costs of l
closure and any unrecovered assets through FERC-approved amendeed rates. Maine Yankee has recognized the sum of its estimated future costs at December 31, 1997, as a regulatory asset.
The components of the sum of the estimated future costs of closure at December 31, 1997, ares (Dollars in Thousands) l Decommissioning contributions $393,847 Operations and maintenance 91,533 Return and interest, not 90,322 Taxes - federal, state, local 85.124 SLL9.dLE.fi, see Note 2 for additional information regarding the closure of the i Plant, the recovery of assets and closure costs, and nuclear
! decommissioning.
l.
26
__ __ __ _ _ . _ . . _ _ _ . _ j
, Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES i Prenaration of Financial Stat ===nts: 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 I contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period that, in the opinion of management, as audited, are necessary to a fair statement of results. Actual results could differ from those estimates.
Sponsors: 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.
Regulation: The Company is subject to the regulatory authority of the FERC, the Nuclear Regulatory Commission ("NRC"), the Maine Public Utilities Commission ("MPUC") and other federal and state agencies as to rates, accounting, operations and other matters.
l Depreciation: 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 Raoulation: Statement of Financial Accounting Standards ('SFAS") 71, " Accounting for the Effects of Certain Types of Regulation," requires regulated entities, in appropriate circumstances, to establish regulatory assets and liabilities, and thereby defer the income statement impact of certain costs that are expected to be recovered in future rates. The company's remaining unrecovered investments in plant, nuclear fuel and other assets, including deferred expenses, which are now before the FERC in a rate proceeding, would require regulatory asset treatment for recovery. For a discussion of the Company's November 6, 1997, rate filing, see Note 1, " Plant Shutdown and Rate Case". The Company believes that it currently meets the criteria established in SFAS 71.
However, the effects of regulatory and/or legislative initiatives could, in the near future, cause all or a portion of the Company's operations to cease meeting the criteria of SFAS 71. In that event, the application of SFAS 71 to the Company would result in a write-off 27
Maine Yankee Atomic Power comoany NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued) l of previously established regulatory assets and liabilities. At December 31, 1997, the Company had pretax regulatory assets (not of regulatory liabilities) of approximately $774.2 million. The l Company's regulatory assets as of December 31, 1997, are currently ;
being recovered through the FERC rate-making process.
If competitive or regulatory change should cause a default of cost recovery from the Company's Sponsors or if the permanent shutdown of ;
the Company's generating facility results in the Company's being l unable to recover these costs in rates, a substantial write-down of l
Plant assets could be required pursuant to SFAS 121, " Accounting for !
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Dispesed Of." This standard clarifies when and how to recognize an l
impairment of long-lived assets. '
i The Company believes that it is entitled to recover substantially all of its potentially strandable costs under existing regulatory principles, but cannot predict how much of such costs it will ultimately be allowed to recover.
Decnem4smionina: A study conducted for the Company in 1993 by an external engineering consultant estimated decommissioning costs, based 1 on the DECON msthod, 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 j an increase in the annual amount of collection to fund the !
decosunissioning 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 is $379.6 million, based on a 1997 study by the same consultant and adjusted by Maine Yankee, plus estimated costs of interim spent-fuel storage of $12'.6 million, for an estimated total cost of $507.2 million (in 1997 dollars) .
28
_ __._.~_ -
4 Maine Yankee Atomic Power Comnany NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICTES (continued)
Through 1997, the Company had collected $126.8 million for decommissioning, which funds are held by an independent trustee. The total decommissioning fund balance as of December 31, 1997, was $173.8 million (including actual interest earned, not of $3.9 million payable to Maine Yankee for decommissioning expenses to date and income taxes) with an adjusted market value as of December 31, 1997, of $199.5 million . for financial reporting purposes under SFAS 115. When reflecting the tax effect on unrealized investment returns, the fund balance would be $190.7 million as of December 31, 1997. The amounts collected, together with the trust earnings, will be used to meet the Company's decommissioning obligation.
The staff of the Securities and Exchange Commission has questioned certain current accounting practices of the electric utility industry regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to those questions, the Financial Accounting Standards Board ("FASB") has initiated a review
. of the accounting for such costs. The FASB has considered several approaches, including recording the entire estimated liability for decommissioning costs initially, rather than accruing the costs over the operating life of the generating unit. The Company believes that such an accounting change, if adopted by the FASB, would not adversely affect the Company's results of operations due to its ability to recover decommissioning costs through rates. The company, based on the Maine Yankee Board's decision to decommission the Plant, has recorded the total estimated liability for decommissioning the Plant, utilizing the study completed during 1997.
The company recognizes the relative uncertainties associated with l 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.
h rtization of Nuclear Fuel: 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 tetal core capability.
29
4 Maine Yankee Atomic Power Comoany NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company was amortizing to expense the estimated costs of the unburned nuclear fuel which was expected to be in the reactor core at
,the expiration of the Plant's NRC operating license life in 2008.
These ecsts are being amortized over the period ending October 2008.
Accumulated amortization for last cors fuel for 1997 and 1996 was
$1". 3 million and $11.2 million, respectively.
Federal Denartment of Enerav (" DOE") Decontamination and Dec-- 4salonina 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 et the amounts will cease after the earlier of (1) 15 years after the date of the enactment or (2) the collection of $2.25 billion (to be escalated by the CPI annually). Each utility's share of the assessment is to be based on its cumulative consumption of DOE enrichment services.
A liability, along with a correspondinc regulatory asset, has been recognized in the accompanying financial statements. The total ,
liability at December 31, 1997, was $25.5 million, of which the Company had paid $9.3 million. Through December 1997, the Company had expensed and recovered $8.5 Irillion. The unracovered balance of the
-regulatory asset at December 31, 1997 and 1996, was $16.9 million and
$18.3 million, respectively. The company believes that the full assessment will be recovered in rates as der.cribed in the Policy Act.
Fuel Dianosal Cost: In 1983, the Company entered into a contract with the DOE for disposal of its spent nuclear fuel, as required by the Nuclear Maste 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 curront DOE assessments began), all of which the Company has already collected from its customers, but for which a reserve was not funded. The company has elected, under the terms of this contract, to make a single payment of this obligation prior to the first delivery of spent fuel to DOE, which was scheduled to begin by January 31, 1998. See Note 13, " Commitments and Contingencies" -
" Nuclear Fuel Storage."
Interest on the obligation accrues at the 13-week Treasury Bill rate compounded on a quarterly basis from April 7, 1983, through the date 30
Maine Yankee Atomic Power Comnany NOTES TO FINANCIAL STATEMENTS December 31, 1997 l
- 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued) l I
of the actual payment and is billed under the terms of the Power Contract. Interest accrued and billed through December 31, 1997, amounted to $76.2 million. The Company has formed a trust to provide for payment of this long-term fuel obtigation. The total spent fuel fund balance, held by an independent '. ustee, as of December 31, 1997, was $121.3 million (including interest earned) and is included in l Deferred Charges and Other Assets on the accompanying balance sheet.
l The trust is funded by the Company through deposits, which began in December 1985, with current projected annual deposits of approximately
$2.1 million through December 1999. Deposits are expected to total I
approximately $74.6 million. The trust fund deposits plus estimated earnings are projected to meet the total estimated future liability of $139.9 million at December 31, 1999.
l w tization r of Materials and sunnlies: 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 l period ending October 2008 on a monthly basis. Accumulated amortization for 1997 and 1996 was $7.0 million and $6.1 million, respectively.
Allowance for Funds Usef Durina Construction ("AFC") and Allowance for Funds Used for Nuclear Fuel ("AFN"): 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
("CNIP") 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.
l 31
I .
'31ng Yankee Atomic Power Comoany NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table contains the rates used for the most recent three I annual periods:
l AFC AFN l on CWIP on NFIP
, 1997 9.32% 8.83%
! 1996 10.37 10.63 1995 9.94 10.94 Unamortized Gain or Loss on Reaccuired Debt: Gains and losses on bonds reacquired to satisfy sinking fund requirements of First Mort-gage Bonds are deferred and amortized to income over the remaining
>riginal terms of the applicable series as prescribed by the Uniform System of Accounts of the FERC.
- 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, lill 1996 1995 (Dollars in Thousands)
Fef '11 Current $(154) $ 1,922 $ 2,057 Deferred (83) (2,813) (5,638)
Investment tax credits, not (111) (487) 122 (Ili) (1,378) (3,459)
State Current (29) 218 643 Deferred all 721 (165) 191 939 478 Total federal and state income taxes $& $ R) $ (2.dll)
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 tbning differences.
32 l
4 Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 3. INCOME TAX EXPENSE (continued)
In February 1992, the FASB issued 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 method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the year in which the differences are l expected to reverse. The standard had no impact on total income tax l expense for financial reporting purposes. The not regulatcry liability related to income taxes is $8.4 million as of December 31, 1997. This liability is being amortized consistent with the Company's ratemaking.
Accumulated deferred income taxes consisted of the following as of December 31, 1997 and 1996:
1122. 199.6 (Dollars in Thousands)
Liabilities Property $75,138 $57,663 Other (717) (959) 74,421 56,704 Assets Decommissioning 18,609 14,921 N
Regulatory Tax Liability 3,485 3,841 Investment Tax credit 3,885 4,231 Last Core Fuel and Material and Supplies Inventory 7,108 6,302 Other 3,831 3,808 36,918 33,103 Accumulated Deferred Income Taxes, Net $37,503 $1L.f.Q1 A valuation allowance was not recorded at December 31, 1997 and 1996, as the Company expects that all deferred income tax assets will be realized in the future.
Investment tax credits utilized co reduce federal income taxes currently payable are deferred and amortized over the lives of the related assets.
The following table reconciles the statutory federal income tax rate to the effective tax rate for financial reporting purposes.
33
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Maine Yankee Atomic Power Company l
NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 3. INCOME TAX EXPENSE (continued) 1997 1996 1995 (Dollars in Thousands)
Amount i. Amount % Amount % {
statutory federal income j tax rate $ 2,826 34.0 $ 2,288 34.0 $ 1,738 34.0 l Increase (reduction) in taxes resulting from:
Investment tax credits (487) (5.9) (487) (7. 2 ) (2,105) (41.2)
Flowback of excess deferred income taxes (741) (8.9) (738) (11.0) (735) (14.4)
Nontaxable interest income - Spent Fuel Trust (947) (11.4) (2,157) (32.1) (2,062) (40.3) {
Tax Benefits from l Nonqualified Decom-missioning Trust Investments (1,700) (20.4) (640) (9.5) (704) (13.8)
Other 325 . 3. 9 357 . 5. 3 409 _. M l Calculated rate
$ 3) .LLl) $ (Ll21) (M) $ (M11) (M) i
- 4. NOTES PAYABLE TO BANKS The company had bank lines of credit totaling $21 million as of December l l
31, 1996, all of which required an annual fee of 1/4 percent. There l were no outstanding bank notes under the lines of credit as of December 31, 1996. These lines of credit were terminated during 1997.
- 5. FIRST MORTGAGE BONDS The annual sinking fund requirements of outstanding Series D, E and F l First Mortgage Bonds for each of the five years ending December 31, l 2001, are as follows:
Sinking Fund 1997 $6,667,000 1998 6,667,000 1999 6,667,000 2000 6,667,000 2001 6,667,000 Under the terms of the Indenture securing the First Mortgage Bonds, substantially all electric plant of the Company is subject to a first mortgage lien. The Company expects to discharge its First Mortgage Indenture upon consummation of its planned debt refinancing in April 1998.
34
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r-Maine Yankee Atomic Power Comeany NOTES TO PINANCIAL STATEMENTS December 31, 1997
- 6. SECURED CREDIT AGREEMENT In 1989, the Company entered into a secured credit agreement with a j group of banks including the Bank of New York ("BNY"), which is also I acting as the agent bank, under which the company could borrow, as of l
December 31, 1997, amounts up to $42 million to finance corporate l expenditures. Borrowings are secured by the Company's nuclear fuel inventory, as defined, and certain rights under the Power Contracts and Capital Funds Agreements. Under the credit agrenment, as amended in 1992, the Company has four rate options for financing its interim requirements: (1) a rate based on the higher of BNY's prime rate or a rate based on overnight federal funds transactions plus 1/4 percent; (2) the LIBOR rate plus 1/2 percent; (3) an adjusted certificate of deposit rate plus 5/8 percent; and (4) a rate established by bid. A quarterly commitment fee of .35 percent per annum is required on the unused portion of the facility. The credit agreement has a three-year term, which may be extended for an additional year on each anniversary by agreement of the company and the banks. The Company expects to discharge this facility upon the consummation of its planned debt l refinancing in April 1998. l Certain other information relating to this loan arrangement is as follows:
Year Ended December 31, i 1997 1996 1211 l (Dollars in Thousands)
Promissory notes outstanding at end of period $42,000 $20,000 $20,000 Average daily outstanding borrowings $39,222 $18,519 $16,997 Highest level of borrowing $50,000 $33,000 $38,000 Annual interest rate at end of period 6.45% 6.07% 6.37%
Effective average annual interest rate 6.29% 6.05% 6.51%
- 7. EURODOLLAR REVOLVING CREDIT AGREEMENT In January 1990, the Company entered into a Eurodollar Revolving Credit Agreement with a group of major international banks including Union Bank of Switzerland, which is also acting as agent bank, under which the Company could borrow, as of December 31, 1997, up to $25 million. Under the facility, each loan is due 364 days after the date of the loan, unless an earlier termination date applies under the agreement, and bears interest at a LIBOR-based rate plus 5/8 percent. A commitment fee of .35 percent on the unused line is payable quarterly. The loans are secured by a second lien on the Company's nuclear fuel inventory I
35
l' I
Maine Yankee Atomic Power Comnany l
NOTES TO FINANCIAL STATEMENTS )
, December 31, 1997 I
- 7. EURODOLLAR REVOLVING CREDIT AGREEMENT (continued) l (excluding fuel in the reactor) and on certain rights under its Power Contracts and Capital Funds Agreements requiring payments or financing of fuel-related costs. The Company expects to discharge this facility upon the consummation of its planned debt refinancing in April 1998.
l The banks gave notice to the Company in February 1997 that their commitments to land to the Company would terminate on February 13, 1998, but that date has effectively been extended to April.15, 1998, under certain waiver agreements entered into by the Company, its lender banks and its bondholders.
Certain other information relating to this loan arrangement is as follows:
! Year Ended Dec==her 31, 1997 (Dollars in Thousands)
Promissory notes outstanding at and of period $25,000 Average daily outstanding borrowings $17,990 l
Highest level of borrowing $25,000 Annual interest rate at and of period 6.52%
Effective average annual interest rate 6.46%
The company had no borrowings under the Eurodollar Revolving Credit i Agreement during the years 1996 and 1995.
8.
REDEEMABLE 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 December 31, 1999, is $600,000. The Company may also redeem, in whole or in part, any additional shares of the 7.48%
Series Preferred Stock upon not less than thirty nor more than fifty days' notice at $100.00 per share plus accrued dividends.
There was no Preferred Stock repurchased for the sinking fund in advance and not canceled at December 31, 1997, 1996 and 1995.
36
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l Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1997 )
l l
- 8. REDEEMABLE PREFERRED STOCK (continued)
, 8.00% series. At the option of the Company, any time on and after
( October 1, 1997, shares of the Cumulative Preferred Stock, 8.00% Series, are redeemable at redemption prices decreasing from $105.33 per share on or af ter October 1,1997, to $100.00 per share as of October 1, 2007.
Mandatory sinking fund redemptions of the 8.00% Series shares begin October 1, 2002, and each October 1 thereaf ter with a noncumulative I optional provision to redeem additional shares at a price of $100.00 per
( share plus dividends accrued.
I
- 9. RETAINED EARNINGS i
l l
In March 1997, the Company's Board of Directors elected to strengthen the common-equity component of the Company's capital structure through l the retention of earnings. Therefore, no common-stock dividend was declared for any quarter in 1997. Dividends of $13.00 per share were j declared for 1996.
l I Under the terms of the most restrictive test in the Company's First l
Mortgage Indenture and the Company's Articles of Incorporation, no dividend may be paid on any class of its stock unless the Company is in compliance with specific equity ratio requirementis. Through i December 31, 1997, the Company was in compliance with these requirements.
l 10. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS l
The methods and assumptions used to estimate the fair value of each class of financial instruments for which it is practicable are discussed below. The carrying amounts of cash and temporary investments approximate fair value because of the short maturity of these investments. The fair value of redeemable preferred stock, other notes j and long-term obligations is based on quoted market prices for the same or similar issues, l j i
i i
l l
l 37 :
i O
Maine Yankee Atomic Power Comeany NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 10. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS (continued) l The estimated fair value of the company's financial instruments as of December 31, 1997, is as follows:
Carrying Fair Amount Value (Dollars in Thousands)
Cash and Cash Equivalents $ 30,247 $ 30,247 Fuel Disposal Trust 121,316 121,425 Plant Decommissioning Trust 199,457 199,457 Redeemable Preferred Stock 18,000 14,336 First Mortgage Bonds 83,332 78,516 Nuclear Fuel Financing Notes 67,000 67,000 Anticipated regulatory treatment of any differences between fair value and carrying value of the company's financial instruments is expected to be considered in the future rates charged by the company.
- 11. DERIVATIVE FINANCIAL INSTRUMENTS As of December 31, 1997 and 1996, the Company held no derivative l financial instrums.its that require disclosure under SFAS 119.
38
1 .
. +, .
Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 12. EMPLOYEE AND POSTRETIREMENT BENEFITS i
The Company has two separate noncontributory defined-benefit pension plans that cover substantially all of its union and nonunion employees.
The Company's funding policy is to contribute amounts to the separate plans which are sufficient to meet the funding requirements set forth in the Employee Retirement Income Security Act, plus such additional amounts as the Company may determine to be appropriate. Total pension expense related to these plans amounted to $9.8 million in 1997, $1.9 million in 1996 and $1.8 million in 1995.
Plan benefits under the union retirement plan are based on average career earnings and length of employee service. Plan benefits under the nonunion retirement plan are based on average final earnings, as defined within the plan, and length of employee service.
A summary of the components of not periodic pension cost for the union and nonunion defined benefit plans in 1997, 1996 and 1995 and the total j contributions charged to pension expense is as follows: '
Union Nonunion 1111 1111 1111 1997 1996 1995 (Dollars in Thousands)
Service cost -
Benefits Earned During the Period $ 405 $ 411 $ 334 $ 1,586 $ 1,416 $ 1,180 Interest Cost on Projected Benefit Obligation 384 346 287 1,729 1,469 1,260 l- Return on Plan Assets (1,251) (929) (1,098) (4,311) (2,967) (3,021) l Not Amortization and Deferral 670 ill 699 2,642 1.667 2,117 Not Periodic Pension Cost $ _1QR $ M $ _lla $ lJtif $ L.11,1 $ M Effective January 1, 1994, the :sonunion defined benefit pension plan was amended for its active employees terminating on or after that date. The major changes included an increase in the percentage value of compensation utilized in the final average pay plan, along with a reduction in the social security of fset within the formula; the addition of a career average minimum benefit for participation service after December 31, 1985; the redefinition of pensionable wages to include incentive compensation; and a change to the definition of benefit service within the final average pay formula.
39 L
l Maine Yankee Atomic Power comoany NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 12. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued)
Pension Benefits: The following table sets forth the actuarial present value of pension benefit obligations, the funded status of the plans and the liabilities recognized on the Company's balance sheet at December 31, 1997 and 1996:
Ilnion Nonunion 1997 1116. 1997 1996 (Dollars in Thousands)
Actuarial Present Value of Benefit Obligations Vested Benefit Obligation $fM $W $24,732 $11,137 Accumulated Benefit Obligation $ fE $@ $ M $13,722 Projected Benefit Obligation $ 6,589 $ 4,822 $26,822 $20,597 Plan Assets at Market Value (Primarily, Stocks and Bonds) 8,.764 7.334 28,967 23,236 Funded Status - Projected Benefit Obligation Less Than Plan Assets (2,175) (2,512) (2,145) (2,639)
Unrecognized Prior Service Cost 7 12 (1,395) (2,568)
Unrecognized Net Gain 2,410 954 7,057 2,910 Unrecognized Net Asset 243 265 316 347 Net Pension Liability (Asset)
Recognized in the Balance Sheet $ __18.1 $( M ) $ 3,833 $(1,950)
Assumptions used in accounting for the union and nonunion plans at December 31 were as follows:
1997 1116. 1995 Weighted Average Discount Rate 7.00% 7.50% 7.25%
Rate of Increase in Future Compensation Levels 4.50 5.25 5.25 Expected Long-Term Return on Assets 8.50 8.50 8.50 As a result of early retirement and downsizing related to Plant closure, the Company had a one-time curtailment gain of $2,943,474.
l 40
i ,
,. *. . l l
Maine Yankee Atomic Power comoany NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 12. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued)
Other Post -- .lovmant' Benefits : In addition to providing pension benefits, the company provides certain health care and life insurance benefits for its qualifying retirees ("PBOP"). These benefits are provided through purchased insurance policies, and premiums are based on the benefits paid during the year. The Company recognizes the future cost of providing these benefits through charging expense in the current period. The cost of health care and life insurance benefits, substantially all of which relates to active employees, aggregated approxiraately $2.2 million in 1997, $2.5 million in 1996 and $2.3 million in 1995.
In December 1990, the FASB issued a standard on Employers' Accounting !
for PBOP, such as health care and life insurance. The standard I requires the accrual of the expected cost of such benefits during the I employees' years of service and provides transition rules allowing the impact of the adoption to be included in annual expense over a period not greater than 20 years.
The following table sets forth the plan's funded status:
1997 1996 (Dollars in Thousands)
Fair Value of Plan Assets $10.980 $ 9,037 Accumulated Postratirement Benefit Obligation:
Current Retirees and Beneficiaries 6,415 870 Active Employees Fully Eligible for Benefits - 225 Other Active Employees 5,132 9,156 Total Accumulated Benefit Obligation 11,547 10,251 Accumulated Benefit Obligation in Excess of Plan Assets (567) (1,214)
FERC-Approved Expense Adjustment (30) 224 Unrecognized Amounts:
Trt.nsition Obligation 1,103 1,905 Net Gain (1,097) (413)
Prepaid (Accrued) Postratirement Benefit Cost $ (591) $ 502 41
l Maing Yankee btomic Power Comeany NOTES TO FINANCIAL STATEMENTS I December 31, 1997
- 12. EMPLOYEE AND POSTRETIREMENT BENEFITS (continued) l The not periodic postratirement benefit cost expensed for 1997 and 1996 included the following components:
1211 1996 (Dollars in Thousands)
Service Cost $ 592 $ 626 Interest Cost 762 718 Actual Return on Assets (1,586) (979)
Deferral of Asset Loss During the Year 953 337 Not Amortization 154 159 )
FERC-Approved Expense Adjustment 30 (22.1) l Not Periodic Postratirement Benefit Cost $ _1Q.5. $M l The current covered health care benefits assume for 1997 an 8. 50 l percent annual rate of increase in cost trend rates. The health care cost trend rate is assumed to decrease annually through the year 1999 to an ultimate rate of 5.50 percent. Increasing the assumed health care cost trend rates by 1 percent would increase the accumulated posMetirement benefit obligation as of December 31, 1997, by $1.62 million.
Additional assumptions used in accounting for postratirement plans at December 31 were as follows:
1211 1215.
Weighted Average Discount Rate 7.00% 7.50%
Rate of Return on Plan Assets 7.50
- 7.50 *
- Rate of return on plan assets for nonunion medical Voluntary Employes Beneficiary Association is 5.0 percent.
As a result of early retirement and downsizing related to Plmt closure, the company had a one-time curtailment gain of $1,771,444.
l 13. COMMITMENTS AND CONTINGENCIES I
l Maine Yankee Shareholders: Higher nuclear-related costs, when combined with the Sponsors' own replacement-power costs, are affecting the stockholders of Maine Yankee in varying degrees. CMP, which is I responsible for 38 percent of Maine Yankee's operating costs, has I
stated that the impact of nuclear-related costs was the major obstacle to achieving satisf actory results in 1997. Bangor Hydro-Electric Company, a Maine-based 7 percent stockholder, cited its
" deteriorating" financial condition, suspended its common-stock 42
0 8's O l
Maine Yankee Atomic Power Company l NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 13. COMMITMENTS AND CONTINGENCIES (continued) dividend, and eventually obtained rate relief. Maine Public Service company, a 5 percent stockholder, cited problems in satisfying financial covenants in loan documents, reduced its common-stock dividend substantially in early March 1997 and obtained rate relief.
Northeast Utilities (a 20 percent stockholder through three subsidiaries), which is also adversely affected by the substantial additional costs associated with the three shut-down Millstone nuclear units and the permanently shut-down Connecticut Yankee unit, as well as significant regulatory issues in Connecticut and New Hampshire, has implemented an indefinite suspension of its quarterly common-stock dividends. Largely as a result of nuclear-related costs, Northeast Utilities reported a loss of $135 million for 1997 and continues to experience difficulty in satisfying loan covenants. A default by a Maine Yankee stockholder in making payments under its Power Contract or Capital Funds Agreement could have a material adverse effect on Maine Yankee, depending on the magnitude of the default, and would constitute a default under Maine Yankee's bond indenture and its two major credit agreements, which the company is planning to discharge ;
and terminate by April 15, 1998, upon consummation of the refinancing i discussed above, unless cured within applicable grace periods by the defaulting stockholder or other stockholders. The company -cannot !
predict, however, whst effect, if any, the financial dif ficulties i being experienced by some Maine Yankee stockholders will have on the !
Company.
Nuclear Fuel Storace: Federal legislation enacted in 1987 directed the DOE to proceed with the studies necessary to develop and operate a permanent high-level waste (spent fuel) disposal site at Yucca Mountain, Nevada. The '. egislation also provided for the possible development of a Monitored Retrievable Storage ("MRS") facility and abandoned plans to identtfy and select a second permanent disposal site. An MRS facility would provide temporary storage for high-level waste prior to eve.stual permanent disposal. The DOE has indicated that the permanent disposal site is not expected to open before 2010, although origiaally scheduled to open in 1998.
On April 15, 1997, the Uniued States Senate approved the " Nuclear Maste Policy Act of 1997" (9. 104), which would reform the federal policy for managing spent nuclear fuel and instruct the DOE to develop an integrated management system, including a central storage facility, for such fuel. The bill wot1d require the DOE to accept such nuclear fuel from commercial nuc?. ear power plants and would establish a ,
licensing process that wov.1d result in the storage of such fuel at a central federal facility beginning no later than June 30, 2003, if all 43
,. m .
Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 13. COMMITMENTS AND CONTINGENCIES (continued) the necessary approvals are obtained. The DOE would also be required to continue site characterization work at Yucca Mountain as a permanent disposal site. On October. 30, 1997, the House of Representatives approved a bill (H.R. 1270) with generally similar objectives.
Action to resolve the differences in the two bills was deferred to 1998.
In June 1994, saveral nuclear utilities other than Maine Yankee filed suit against the DOE. The utilities sought a declaration from the United States Court of Appeals for the District of Columbia that the Nuclear Waste Policy Act of 1982 required the DOE to take responsibility for spent nuclear fuel in 1998. On July 23, 1996, the court held that the DOE is obligated "to start disposing of (spent nuclear fuel] no later than January 31, 1998." The DOE did not appeal the decision, but announced in December 1996 that it anticipated it would be unable to start accepting spent nuclear fuel for disposal by January 31, 1998. A large number of nuclear, utilities and state regulators filed a new lawsuit against the DOE in January 1997 seeking to force the DOE to honor its obligation to store spent nuclear fuel and seeking other appropriate relief. On November 14, 1997, the U.S.
Court of Appeals for the District of Columbia circuit confirmed the DOE 8s obligation. On February 19, 1998, Maine Yankee filed a petition in the same court seeking to compel the DOE to take Maine Yankee's spent fuel from the Plant site "as soon as physically possible,"
alleging that removing the spent fuel on the DOE's indicated schedule would delay the decommissioning of the Maine Yankee Plant indefinitely. The Company cannot predict the ultimate results of the lawsuits.
Nuclear Insurance: In accordance with the Price-Anderson Act, the limit of liability for a nuclear-related accident is approximately
- $8.9 billion. The primary layer of insurance for the liability is
$200 mill!on of coverage provided by the commercial insurance market.
The secondary coverage is approximately $8.7 billion, based on 110 licensed reactors. The secondary layer is based on a retrospective premium assessment of $79.275 million per nuclear accident per licensed reactor, payable at a rate not exceeding $10 million per year per accident. In addition, the retrospective premium is subject to inflation-based indexing at five-year intervals and, if the sum of all public liability claims and legal costs arising from any nuclear accident exceeds the maximum amount of financial protection, each licensee can be assessed an additional 5 percent ($3.775 million) of the maximum retrospective assessment.
44
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Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 13. COMMITMENTS AND CONTINGENCIES (continued)
In addition to the insurance required by the Price-Anderson Act, the company carries all-risk nuclear property damage insurance in the amount of $500 million plus additional excess nuclear property insurance. The company, in recognition of the reduced risk posed by the shutdown and defueled nuclear reactor, reduced the amount of excess nuclear property damage insurance purchased from the nuclear electric utility insurance company, effective September 15, 1997, from
$2.25 billion to $560 million. This reduced the total amount of nuclear property damage coverage to $1.06 billion, the minimum amount of nuclear property damage insurance then required by regulation. The all-risk nuclear property damage insurance of $500 million is obtained from the commercial insurance market and is not subject to retrospective premium assessments. The excess insurance of $560 million is provided by a nuclear electric utility industry insurance company through a combination of current premiums, retrospective premium assessments and reinsurance. Each participating utility may be assessed a retrospective premium of up to 5 times its premium with respect to industry losses in any policy year.
Low-Level Waste Diseosal: The federal Low-Level Radioactive Waste Policy Amendments Act (the " Waste Act") , enacted in 1986, required operating disposal facilities to accept low-level nuclear waste from other states until December 31, 1992. Maine did not satisfy its milestone obligation under the Waste Act requiring submission of a site license application by the end of 1991, and therefore became subject to surcharges on its waste and did not have access to ,
regulated disposal facilities after the end of 1992. Maine Yankee i then began storing all low-level waste generated at an on-site storage facility. On July 1, 1995, however, the State of South Carolina restored access to its facility and Maine Yankee has been shipping its ;
low-level waste to the South Carolina facility for disposal.
The states of Maine, Texas and Vermont have been pursuing the implementation of a compact for the disposal of low-level waste at a site in Texas. The compact provides for Texas to take Maine's low-level waste over a 30-year period for disposal'at a planned facility in west Texas. In return, Maine would be required to pay $25 million, assessed to the Company by the State of Maine, payable in two equal installments, the first after ratification by Congress and the second upon commencement of operation of the Texas facility. In addition, the Company would be assessed a total of $2.5 million for the benefit of the Texas county in which the facility would be located and would also be responsible for its pro-rata share of the Texas governing comunission's operating expenses. The Maine Low-Level Radioactive 45
Maine Yankee Atomic Power Company NOTES TO FINANCIAL STATEMENTS December 31, 1997
- 13. COMMITMENTS AND CONTINGENCIES (continued)
Waste Authority suspended its search for a suitable disposal site in Maine and ceased operations in 1994. ,
The compact is before the Congress for ratification and was approved by the House of Representatives in October 1997. The Senate has deferred action on the bill until 1998. Since the Plant has permanently stopped operating, the compact is less beneficial to the company than it would have been if the Plant had remained in operation, due to the new schedule for the Company's chipments and the anticipated schedule for opening the Texas facility. The company cannot predict whether the final required ratification of the Texas compact or other regulatory approvals will be obtained, but the Company intends to utilize its on-site storage facility as well as dispose of low-level waste at the South Carolina site or other available sites in the interim and continue to cooperate with the State of Maine in pursuing all appropriate options.
Hawardous Substave Site: Maine Yankee has been notified by the Maine Department of Environmental Protection ("DEP") that it is one of many potentially responsible parties under the Maine Uncontrolled Hazardous substance Sites law for having arranged for the transport of hazardous substances to sites owned by the Portland Bangor Waste Oil Company I that have been designated uncontrolled hazardous substance sites by I the DEP. Under the Maine law, each responsible party is jointly and severally liable for costs associated with the abatement, cleanup or mitigation of the hazards at such a site. Since the investigations by the DEP and the Company are in their early stages and a large number of potentially responsible parties is involved, the company cannot now predict the amount of costs it will ultimately be required to assume. Environmental costs that are unrelated to the decommissioning and dismantlement of the Plant site could generally j be considered to be operation and maintenance costs to be recovered through the Company's billing process.
Site characterization work at the Plant site, an initial part of the j decommissioning process, and related activities could give rise to '
additional environmental issues.
l 46
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Maine Yankee Atomic Power Connany l
NOTES TO FINANCIAL STATEMENTS December 31, 1997 l
- 14. UNAUDITED QUARTERLY FINANCIAL DATA Unaudited quarterly financial data are shown below. Results of l operations vary between quarters, primarily because of scheduled and unscheduled plant outages.
Quarter Ended j March 31 June 30 Sent==her 30 Dec==her 31 (Dollars in Thousands, Except Per Share Amounts) 12.P7 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 j of Common Stock 3.53 3.72 3.66 4.32 l l
l II.IJL I Electric Operating )
Revenues 41,812 43,068 47,532 53,249 Operating Income 4,484 4,213 4,305 4,148 Net Income 2,154 2,127 1,807 2,018 Earnings Per Share of Common Stock 3.57 3.52 2.88 3.30
- 15. TRANSACTIONS WITH ASSOCIATED COMPANIES During 1997, 1996 and 1995, the Company paid $22.9 million, $14.0 million and $12.3 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. CMP has furnished the Company certain engineering, administrative and legal services, and furnished certain facilities at cost, and electric service at its filed rates. During 1997, 1996 and 1995, CMP was reimbursed in the amount of $6.5 million, $4.9 million and
$4.4 million, respectively, for such services. It is expected that Duke and CMP will continue to perfom services for the Company in the future, for which they will be reimbursed by the Company.
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1 DIRECTORS AND EXECUTIVE OFFICERS Directors J
The directors of the company and their principal occupations and all l l positions and offices with the company are as follows: i i 1
- 1 Hama Princinal Occunation l
l David T. Flanagan President and Chief Executive l Chairman of the Board of Officer, Central Maine Power l
Directors company :
Arthur W. Adelberg Executive Vice President, Director Central Maine Power Company Robert S. Briggs Chairman of the Board, Director President and Chief Executive Officer, Bangor Hydro-Electric Company Kent R. Brown Senior Vice President, Director Engineering and Operations, Central Vermont Public Service Corporation Paul R. Cariani President and Chief Executive Director Officer, Maine Public Service company Lillian M. Cuoco Senior Nuclear Counsel, Director Northeast Utilities Service Company Ted C. 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 l
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's
. e *A e DIRECTORS AND EXECUTIVE OFFICERS (continued)
Directors (continued)
HABa Princioal Occunation John B. Keane Vice President and Treasurer, Director Northeast Utilities l Carroll R. Lee Senior Vice President and Chief I
Director Operating Officer, Bangor Hydro-Electric Company David E. Marsh Chief Financial Officer, Director Central Maine Power Company Thomas E. Murley Nuclear Safety and Management Director Consultant; former Director of Nuclear Reactor Regulation, l
United States Nuclear Regulatory Commission Donald G. Pardus Chairman and Chief Executive Director Officer, Eastern Ut311 ties Associates l
Gerald C. Poulin Chief Operating Officer, Energy Director Services, Central Maine Power Company l Kirk L. Ramsauer Associate General Counsel, Director New England Electric System James S. Robinson Manager of Nuclear Investments Director and Administration, New England Power Company I
l F. Allen Wiley Managing Director of l Director Generation, Central Maine Power Company Frederick Woodruff Managing Director, Energy Director Trading and Marketing, Central Maine Power Company Russell D. Wright President and Chief Operating Director Officer, Cambridge Electric l Light Company i
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l . - - . - - ., . . . .
1
,o yn DIRECTORS AND EXECUTIVE OFFICERS (continued)_
Executive Officers 1
The following are the executive officers of the Company with all l positions and offices held:
Name Office David T. Flanagan Chairman of the Board of Directors Michael J. Meisner President Mary Ann Lynch Vice President, Law and Governmental Affairs, Clerk and Assistant Secretary Michael E. Thomas Vice President and Treasurer William M. Finn Secretary i
l r
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March 26, 1998 Date Michael E. Thomas Vice President and Treasurer 1
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