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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
001-14786 CMP GROUP, INC. 01-0519429
83 Edison Drive, Augusta, Maine 04336
(207) 623-3521
1-5139 CENTRAL MAINE POWER COMPANY 01-0042740
83 Edison Drive, Augusta, Maine 04336
(207) 623-3521
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Registrant Title of each class on which registered
CMP Group, Inc. Common Stock, $5 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange
Registrant Title of each class on which registered
Central Maine Power Company 6% Preferred Stock -
$100 Par Value (Voting,
Noncallable)
Dividend Series Preferred Stock -
$100 Par Value (Callable)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
CMP Group, Inc. Yes x No _
--
Central Maine Power Company Yes x No
---
This combined Form 10-K is separately filed by CMP Group, Inc., and Central
Maine Power Company. Information contained herein relating to either individual
registrant is filed by such registrant on its own behalf. Each registrant makes
no representation as to information relating to the other registrant.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K
CMP Group, Inc. x
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value of such common
equity held by non-affiliates of the Company was:
CMP Group, Inc. $603,585,605 on March 24,
1999 (based, in the case of the
common stock of CMP Group, Inc., on
the last reported sale price thereof
on the New York Stock Exchange on
March 24, 1999).
Central Maine Power Company $0 (all held by CMP Group, Inc.)
(APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the
number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date.
As of March 24, 1999, the number of shares of Common Stock outstanding for each
registrant was as follows:
Registrant Shares
CMP Group, Inc., Common Stock, $5 Par Value 32,442,552
Central Maine Power Company, Common Stock, $5 Par Value (All
held by CMP Group, Inc.) 31,211,471
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated:(1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933.
Portions of the definitive proxy statement for CMP Group, Inc.'s 1999 Annual
Meeting of Shareholders are incorporated by reference in Part III hereof.
CMP GROUP, INC. and
CENTRAL MAINE POWER COMPANY
INFORMATION REQUIRED IN FORM 10-K
Page
Glossary 1
Item Number Part I
Item 1. Business 5
Item 2. Properties 22
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 31
Item 4.1. Executive Officers of the Registrant 31
Part II
Item 5. Market for the Registrant's Common Equity and Related 33
Stockholder Matters
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations of CMP Group and Central Maine
Power Company 34
Item 7A Quantitative and Qualitative Disclosures About Market Risk 55
Item 8. Financial Statements and Supplementary Data 56
Item 9 Changes in and Disagreements with Accountants on Accounting 108
and Financial Disclosure
Part III
Item 10. Directors and Executive Officers of the Registrant 108
Item 11. Executive Compensation 108
Item 12. Security Ownership of Certain Beneficial Owners and
Management 108
Item 13. Certain Relationships and Related Transactions 108
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 109
Signatures 110
GLOSSARY
The following abbreviations or acronyms are used in the text of this Form 10-K
as defined below:
Term Definition
Form 10-K Annual Report on Form 10-K
ARP Alternative Rate Plan
APB Accounting Principles Board
Assigned Agreements Maine Yankee's Power Contracts,
Additional Power Contracts and Capital Funds
Agreements, as amended, with its Sponsors.
Central Maine Central Maine Power Company, a regulated electric
utility and subsidiary of CMP Group.
Central Securities Central Securities Corporation, a
wholly owned subsidiary of Central Maine which
owns and manages real estate.
CERCLA Comprehensive Environmental Response, Compensa-
tion, and Liability Act.
CMP Group CMP Group, Inc., is the holding company
organized effective September 1, 1998, which owns
all of the common stock of Central Maine Power
Company, Union Water Power Company, MaineCom
Services, CNEX, MainePower, TeleSmart and New
England Gas Development.
CMP Group System CMP Group and its wholly-owned and directly and
indirectly controlled subsidiaries.
CMP Natural Gas CMP Natural Gas, L.L.C., a
limited-liability company owned by subsidiaries
of CMP Group and Energy East to distribute
natural gas in Maine.
CNEX A wholly owned subsidiary of CMP Group,
(previously called CMP International
Consultants), which provides utility consulting
(domestic and international) and research.
Cumberland Securities Cumberland Securities Corporation, a
wholly owned subsidiary of Central Maine which
owns and manages real estate.
Connecticut Yankee Connecticut Yankee Atomic Power Company
D&P Duff & Phelps Credit Rating Co.
DOE United States Department of Energy
DOJ United States Department of Justice
EITF Emerging Issues Task Force of FASB
Energy East Energy East Corporation, a New York holding
company and the parent company of NYSEG effective
May 1, 1998
EPA United States Environmental Protection Agency.
EPS Earnings per share
ERAM Electric Revenue Adjustment Mechanism
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FPL FPL Group, Inc.
Indenture General and Refunding Mortgage Indenture between
Central Maine and State Street Bank and Trust
Company, Trustee, dated as of April 15, 1976, as
amended and supplemented.
IPO Initial Public Offering
IRS United States Internal Revenue Service
ISO Independent System Operator
Kwh Kilowatt-hour
MaineCom MaineCom Services, a CMP Group subsidiary which
arranges fiber-optic data service for bulk
carriers.
MainePower A wholly owned subsidiary of CMP Group created in
September 1998.
MEPCO Maine Electric Power Company, Inc., a 78-percent
owned subsidiary of Central Maine which owns a
345-KV transmission line from Wiscasset, Maine,
to New Brunswick, Canada.
MRS Monitored Retrievable Storage
Moody's Moody's Investors Service
MPUC Maine Public Utilities Commission
Maine Yankee Maine Yankee Atomic Power Company, a 38-percent
owned subsidiary of Central Maine.
NB Power New Brunswick Power Corporation.
NEON NorthEast Optic Network, Inc., a corporation of
which MaineCom owns 38.5-percent of the common
stock, which is building a fiber optic network in
New England and New York.
NEPOOL New England Power Pool
NERC North American Electric Reliability Council
NORVARCO A wholly-owned subsidiary of Central Maine.
NORVARCO is one of two general partners with 50%
interests in Chester SVC Partnership, which owns
a static var compensator facility located in
Chester, Maine.
NPCC Northeast Power Coordinating Council
NRC United States Nuclear Regulatory Commission
NYSEG New York State Electric & Gas Corporation, a
utility subsidiary of Energy East.
NUG Non-utility generator
New England Gas Development New England Gas
Development Corporation, a wholly-owned
subsidiary of CMP Group created in September 1998
to hold up to a 50-percent ownership interest in
CMP Natural Gas.
OASIS Open Access Same-time Information System.
OI Nuclear Regulatory Commission's Office of
Investigations
OPA Maine Office of the Public Advocate
Plant Maine Yankee nuclear generating plant at
Wiscasset, Maine
PURPA Public Utility Regulatory Policies Act of 1978.
RCRA Resource Conservation and Recovery Act.
SAB Securities and Exchange Commission's Staff
Accounting Bulletins.
S&P Standard & Poor's Corp.
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
Secondary Purchasers 28 municipal and cooperative utilities
that had purchased Maine Yankee power under
identical contracts with Maine Yankee sponsors.
SFAS Statement of Financial Accounting Standards
TeleSmart A wholly owned subsidiary of CMP Group which
provides accounts receivable management.
Union Water The Union Water Power Company, a wholly owned
subsidiary of CMP Group.
Vermont Yankee Vermont Yankee Nuclear Power Corporation.
Waste Act Federal Low-level Radioactive Waste Policy
Amendments Act.
Yankee Atomic Yankee Atomic Electric Company
Basis of Presentation. This Annual Report on Form 10-K is a combined report of
CMP Group and Central Maine, a regulated electric-utility subsidiary of CMP
Group whose financial position and results of operations account for
substantially all of CMP Group's consolidated financial position and results of
operations. The Notes to Consolidated Financial Statements apply to both CMP
Group and Central Maine. CMP Group's consolidated financial statements include
the accounts of CMP Group and its wholly owned or controlled subsidiaries, which
are Central Maine, Union Water, CNEX, TeleSmart and MaineCom. Central Maine's
consolidated financial statements include its accounts as well as those of its
wholly owned or controlled subsidiaries, MEPCO, NORVARCO, Cumberland Securities
and Central Securities. Certain immaterial majority owned subsidiaries, which
were previously accounted for on the equity method, were consolidated in
September 1998.
Note re Forward-Looking Statements
This Report on Form 10-K contains forecast information items that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. CMP Group
and Central Maine undertake no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Readers are urged to carefully
review and consider the factors in the succeeding paragraph.
Factors that could cause actual results to differ materially include, among
other matters, the outcome of the FERC proceeding involving Maine Yankee's
rates, decommissioning costs and issues related to the closing of the Maine
Yankee nuclear generating plant; the actual costs of decommissioning the Maine
Yankee plant; failure to resolve any significant aspect of the "Year 2000
problem"; electric utility industry restructuring, including the ongoing state
and federal activities that will determine Central Maine's ability to recover
its stranded costs and establish its revenue requirements and rate design as a
transmission-and-distribution utility commencing March 1, 2000; the results of
Central Maine's planned sale of its generating assets; Central Maine's ability
to recover its costs resulting from the January 1998 ice storms that damaged its
transmission and distribution system; future economic conditions;
earnings-retention and dividend-payout policies; developments in the
legislative, regulatory, and competitive environments in which CMP Group and
Central Maine operate; CMP Group's investment in unregulated businesses; and
other circumstances that could affect anticipated revenues and costs, such as
unscheduled maintenance or repair requirements at nuclear plants and other
facilities, and compliance with laws and regulations.
PART I
Item 1. BUSINESS.
Introduction
General. CMP Group is a holding company organized effective September 1, 1998,
which owns all of the common stock of Central Maine and the former non-utility
subsidiaries of Central Maine. As part of the reorganization, all of the shares
of Central Maine's common stock were converted into an equal number of shares of
CMP Group common stock, which are listed on the New York Stock Exchange under
the symbol CTP. The reorganization was approved by Central Maine's shareholders
on May 21, 1998, and on various dates in 1998 by the appropriate state and
federal regulatory agencies. CMP Group's principal executive offices are located
at 83 Edison Drive, Augusta, Maine, where its general telephone number is (207)
623-3521. For a discussion of business opportunities being pursued by CMP Group,
see "Expansion of Lines of Business," below.
Central Maine is a public utility incorporated in Maine in 1905. Central Maine
is primarily engaged in the business of generating, purchasing, transmitting,
distributing and selling electric energy for the benefit of retail customers in
southern and central Maine and wholesale customers, principally other utilities.
Its principal executive offices are located at 83 Edison Drive, Augusta, Maine
04336, where its general telephone number is (207) 623-3521.
Central Maine is the largest electric utility in Maine, serving approximately
533,000 customers in its 11,000 square-mile service area in southern and central
Maine and having $939 million in consolidated electric operating revenues in
1998 (reflecting consolidation of financial statements with its majority-owned
subsidiary, MEPCO, and with the wholly-owned Cumberland Securities, Central
Securities and NORVARCO. Central Maine's service area contains most of Maine's
industrial and commercial centers, including Portland (the state's largest
city), South Portland, Westbrook, Lewiston, Auburn, Rumford, Bath, Biddeford,
Saco, Sanford, Kittery, Augusta (the state's capital), Waterville, Fairfield,
Skowhegan and Rockland, and approximately 964,000 people, representing about 78
percent of the total population of the state. Central Maine's industrial and
commercial customers include major producers of pulp and paper products,
producers of chemicals, plastics, electronic components, processed food, and
footwear, and shipbuilders. Large pulp-and-paper industry customers account for
approximately 56 percent of Central Maine's industrial sales and approximately
21.6 percent of total service-area sales.
The following topics are discussed under the general heading of Business. Where
applicable, the discussions make reference to the various other Items of this
report.
Topic Page
- ----- ----
Regulation and Rates 7
Alternative Rate Plan 8
Electric-Utility Industry Restructuring 9
Agreement for Sale of Generation Assets 12
Expansion of Lines of Business 14
Permanent Shutdown of Maine Yankee Plant 15
Non-utility Generation 18
Financing and Related Considerations 18
Securities Ratings 19
"Year 2000" Computer Issues 19
Environmental Matters 20
Storm Damage to Central Maine's System 21
Employee Information 21
Regulation and Rates
General. Central Maine is subject to the regulatory authority of the MPUC as to
retail rates, accounting, service standards, territory served, the issuance of
securities maturing more than one year after the date of issuance, certification
of generation and transmission projects and various other matters. Central Maine
is also subject to the jurisdiction of the Federal Energy Regulatory Commission
("FERC") under Parts I, II and III of the Federal Power Act for some phases of
its business, including licensing of its hydroelectric stations, accounting,
rates relating to wholesale sales and to interstate transmission and sales of
energy and certain other matters. Other activities of CMP Group and Central
Maine from time to time are subject to the jurisdiction of various other state
and federal regulatory agencies.
The Maine Yankee Plant and the other nuclear generating facilities in which
Central Maine has an interest are subject to extensive regulation by the federal
Nuclear Regulatory Commission ("NRC"). The NRC is empowered to authorize the
siting, construction, operation and decommissioning of nuclear reactors after
consideration of public health, safety, environmental and antitrust matters.
Under its continuing jurisdiction, the NRC may, after appropriate proceedings,
require modification of units for which operating licenses are in effect, or
impose new conditions on such licenses, and may require that the operation of a
unit cease or that the level of operation of a unit be temporarily or
permanently reduced.
The United States Environmental Protection Agency ("EPA") administers programs
which affect Central Maine's thermal and hydroelectric generating facilities as
well as the nuclear facilities in which it has an interest. The EPA has broad
authority in administering these programs, including the ability to require
installation of pollution-control and mitigation devices. CMP Group and Central
Maine is also subject to regulation by various state, local and other federal
authorities with regard to land use and other environmental matters. For further
discussion of environmental considerations as they affect CMP Group and Central
Maine, see "Environmental Matters", below, and Item 3, "Legal Proceedings"
"Legal and Environmental Matters."
Under the Federal Power Act, Central Maine's hydroelectric projects (including
storage reservoirs) on navigable waters of the United States are required to be
licensed by the FERC. Central Maine is a licensee, either by itself or in some
cases with other parties, for 26 FERC-licensed projects, some of which include
more than one generating unit. Eleven licenses expired in 1993, one expired in
1997, and fourteen expire after 2000. Central Maine filed all applications for
relicensing the projects whose licenses were scheduled to expire in 1993 and
1997 and has been authorized to continue to operate those projects under annual
licenses pending action by the FERC. Central Maine's hydroelectric generating
and storage facilities are included in the generating assets Central Maine has
contracted to sell to FPL Group, Inc. For further discussion of the pending
sale, see "Agreement for Sale of Generating Assets," below.
The United States has the right upon expiration of a license to take over and
thereafter maintain and operate a project upon payment to the licensee of the
lesser of its "net investment" or the fair value of the property taken, and any
severance damages, less certain amounts earned by the licensee in excess of
specified rates of return. If the United States does not exercise its statutory
right, the FERC is authorized to issue a new license to the original licensee,
or to a new licensee upon payment to the original licensee of the amount the
United States would have been obligated to pay had it taken over the project.
The United States has not asserted such a right with respect to any of Central
Maine's licensed projects. The FERC, however, denied a license renewal for a
non-utility-owned hydroelectric project on the Kennebec River in Maine, which
ultimately resulted in an agreement to remove the dam in 1999.
Alternative Rate Plan
On January 1, 1995, Central Maine's ARP was put into effect. Instead of rate
changes based on the level of costs incurred and capital investments, the ARP
provides for one annual adjustment of an inflation-based cap on each of Central
Maine's rates, with no separate reconciliation and recovery of fuel and
purchased-power costs. Under the ARP, the MPUC is continuing to regulate Central
Maine's operations and prices, provide for continued recovery of deferred costs,
and specify a range for its rate of return. The MPUC confirmed in its order
approving the ARP that the ARP is intended to comply with the provisions of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation." As a result, Central Maine will continue to
apply the provisions of SFAS No. 71 to its accounting transactions and its
future financial statements.
The ARP contains a mechanism that provides price-caps on Central Maine's retail
rates to be adjusted annually on each July 1, commencing in 1995, by a
percentage combining (1) a price index, (2) a productivity offset, (3) a sharing
mechanism, and (4) flow-through items and mandated costs. The price cap applies
to all of Central Maine's retail rates, and includes fuel and purchased power
costs that previously had been treated separately. Under the ARP, fuel expense
is no longer subject to reconciliation or specific rate recovery, but is subject
to the annual indexed price-cap changes.
A specified standard inflation index is the basis for each annual price-cap
change. The inflation index is reduced by the sum of two productivity factors, a
general productivity offset of 1.0%, and a second formula-based offset that
started in 1996 and was intended to reflect the limited effect of inflation on
Central Maine's purchased-power costs during the proposed five-year initial term
of the ARP.
The sharing mechanism may adjust the subsequent year's July price-cap change in
the event Central Maine's earnings are outside a range of 350 basis points above
or below Central Maine's allowed return on equity (starting at the 10.55%
allowed return in 1995) and indexed annually for changes in capital costs.
Outside that range, profits and losses could be shared equally by Central Maine
and its customers in computing the price-cap adjustment. The ROE used for
earnings sharing is scheduled to be increased to 11.5% effective with the July
1999 price change.
The ARP also provides for partial flow-through to ratepayers of cost savings
from non-utility generator contract buy-outs and restructuring, recovery of
energy-management costs, and penalties for failure to attain customer-service
and energy-efficiency targets. The ARP also generally defines mandated costs
that would be recoverable by Central Maine notwithstanding the index-based price
cap. To receive such treatment, the annual revenue requirement related to a
mandated cost must exceed $3 million and have a disproportionate effect on
Central Maine or the electric-power industry.
On May 13, 1998, Central Maine submitted its 1998 ARP compliance filing to the
MPUC. In keeping with its pledge of limiting increases to the inflation index,
Central Maine voluntarily limited its request to 1.78%, which was the inflation
rate for 1997 under the ARP. Central Maine also proposed a rate reduction of
approximately ten percent contingent on the consummation of, and ratemaking
associated with, Central Maine's planned sale of generating assets. The filing
also reported information on the costs of restoring service to Central Maine's
customers after the January 1998 ice storm, as required by the earlier MPUC
order allowing Central Maine to defer those costs. Effective July 11, 1998, the
MPUC approved a stipulated 1.33% increase. The amount of the increase remains
subject to change, based on the outcome of the pending FERC proceeding related
to the permanent shutdown of the Maine Yankee plant. Depending on FERC's
decision, the price increase could increase or decrease, ranging from a ceiling
of 1.78% to a floor of 0.22%. However, the Offer of Settlement pending before
the FERC in Maine Yankee's rate case, which has been approved by the MPUC,
provides that the 1998 ARP increase will not be adjusted.
The components of the last three ARP price increases approved by the MPUC are as
follows:
1998 1997 1996
---- ---- ----
Inflation Index 1.78% 2.12% 2.55%
Productivity Offset (1.00) (1.00) (1.00)
Qualifying Facility Offset (.29) (.42) -
Earnings Sharing 1.12 - .32
Flowthrough and Mandated Items (.28) .40 (.61)
---- ----- -----
1.33% 1.10% 1.26%
==== ==== ====
Electric-Utility Industry Restructuring
Stranded Costs. The enactment by Congress of the Energy Policy Act of 1992
accelerated planning by electric utilities, including Central Maine, for a
transition to a more competitive industry. In Maine, legislation that will
restructure the electric-utility industry by March 1, 2000, was enacted by the
Maine Legislature in May 1997, and is discussed in detail under this heading
below. Such a departure from traditional regulation, however, could have a
substantial impact on the value of utility assets and on the ability of electric
utilities to recover their costs through rates. In the absence of full recovery,
utilities would find their above-market costs to be "stranded", or
unrecoverable, in the new competitive setting.
Central Maine has substantial exposure to cost stranding relative to its size.
In general, its stranded costs reflect the excess costs of Central Maine's
purchased-power obligations over the market value of the power, and the costs of
deferred charges and other regulatory assets. The major portion of Central
Maine's stranded costs is related to above-market costs of purchased-power
obligations arising from Central Maine's long-term, noncancelable contracts for
the purchase of capacity and energy from NUGs, with lesser estimated amounts
related to Central Maine's deferred regulatory assets.
There is a high degree of uncertainty that surrounds stranded-cost estimates,
resulting from having to rely on projections and assumptions about future
conditions, including, among others, estimates of the future market for power.
Higher market rates lower stranded-cost exposure, while lower market rates
increase it. In addition to market-related impacts, any estimate of the ultimate
level of stranded costs depends on such factors as state and federal
regulations, the extent, timing and form that competition for electric service
will take, the ongoing level of Central Maine's costs of operations, regional
and national economic conditions, growth of Central Maine's sales, the timing of
any changes that may occur from state and federal initiatives on restructuring,
and the extent to which regulatory policies and decisions ultimately address
recovery of stranded costs, including the application of value from the sale of
Central Maine's generating assets.
The estimated market rate for power is based on anticipated regional market
conditions and future costs of producing power. The present value of future
purchased-power obligations and Central Maine's generating costs reflects the
underlying costs of those sources of generation in place today, with reductions
for contract expirations and continuing depreciation. Deferred regulatory-asset
totals include the current uncollected balances and existing amortization
schedules for purchased-power contract restructuring and buyouts negotiated by
Central Maine to lessen the impact of these obligations, along with energy
management costs, financing costs, and other regulatory commitments.
Maine Restructuring Legislation. The 1997 Maine restructuring legislation
requires the MPUC, when retail access to generation begins on March 1, 2000, to
provide a "reasonable opportunity" to recover stranded costs through the rates
of the transmission-and-distribution company, comparable to the utility's
opportunity to recover stranded costs before the implementation of retail access
under the legislation. Stranded costs are defined as the legitimate, verifiable
and unmitigable costs made unrecoverable as a result of the restructuring
required by the legislation and will be determined by the MPUC as provided in
the legislation. The MPUC has been conducting separate adjudicatory proceedings
to determine the stranded costs for each Maine utility, along with the
corresponding revenue requirements and stranded-cost charges to be charged by
each transmission-and-distribution utility. The first phase of the Central Maine
proceeding was completed in early 1999 and is discussed under the heading "MPUC
Proceeding on Stranded Costs, Revenue Requirements, and Rate Design," below.
In addition, the legislation requires utilities to use all reasonable means to
reduce their potential stranded costs and to maximize the value from generation
assets and contracts. The MPUC must consider a utility's efforts to mitigate its
stranded costs in determining the amount of the utility's stranded costs.
Stranded costs and the related rates charged to customers will be prospectively
adjusted as necessary to correct substantial inaccuracies in the year 2003 and
at least every three years thereafter.
The principal restructuring provisions of the legislation provide for customers
to have direct retail access to generation services and for deregulation of
competitive electric providers, commencing March 1, 2000, with
transmission-and-distribution companies continuing to be regulated by the MPUC.
By that date, subject to possible extensions of time granted by the MPUC to
improve the sale value of generation assets, investor-owned utilities are
required to divest all generation assets and generation-related business
activities, with two major exceptions: (1) non-utility generator contracts with
qualifying facilities and contracts with demand-side management or conservation
providers, brokers or hosts, and (2) ownership interests in nuclear power
plants. However, the MPUC can require Central Maine to divest its interest in
Maine Yankee Atomic Power Company on or after January 1, 2009. As discussed
below under "Agreement for Sale of Generating Assets," Central Maine has
contracted to sell its non-nuclear generating assets and, after a favorable
court decision, is proceeding toward a completion of the sale by April 7, 1999.
The legislation also requires investor-owned utilities, after February 29, 2000,
to sell their rights to the capacity and energy from all generation assets,
including the purchased-power contracts that had not previously been divested
pursuant to the legislation, with certain immaterial exceptions.
Upon the commencement of retail access on March 1, 2000, Central Maine, as a
transmission-and-distribution utility, will be prohibited from selling electric
energy to retail customers. Any competitive electricity provider that is
affiliated with Central Maine would be allowed to sell electricity outside
Central Maine's service territory without limitation as to amount, but within
Central Maine's service territory the affiliate would be limited to providing
not more than 33 percent of the total kilowatt-hours sold within Central Maine's
service territory, as determined by the MPUC. CMP Group does not now intend to
engage in the sale of electric energy after March 1, 2000.
Other features of the legislation include the following:
(a) After the effective date of the legislation, if an entity purchases
10 percent or more of the stock of a distribution utility, including Central
Maine, the purchasing entity and any related entity would be prohibited from
selling generation service to any retail customer in Maine.
(b) The legislation encourages the generation of electricity from
renewable resources by requiring competitive providers, as a condition of
licensing, to demonstrate to the MPUC that no less than 30 percent of their
portfolios of supply sources for retail sales in Maine are accounted for by
renewable resources.
(c) The legislation requires the MPUC to ensure that standard-offer
service is available to all consumers, but any competitive provider affiliated
with Central Maine would be limited to providing such service for only up to 20
percent of the electric load in Central Maine's service territory.
(d) Beginning March 1, 2002, or, by MPUC rule, as early as March 1, 2000,
the providing of billing and metering services will be subject to competition.
(e) A customer who significantly reduces or eliminates consumption of
electricity due to self-generation, conversion to an alternative fuel, or
demand-side management may not be assessed an exit fee or re-entry fee in any
form for such reduction or elimination of consumption or for the
re-establishment of service with a transmission-and-distribution utility.
(f) Finally, the legislation provides for programs for low-income
assistance, energy conservation research and development on renewable resources,
assistance for utility employees laid off as a result of the legislation, and
recovery of nuclear-plant decommissioning costs "[a]s required by federal law,
rule or order", all funded through transmission-and-distribution utility rates
and charges.
Legislative bills that would amend certain provisions of the 1997 legislation
have been submitted to the 1999 session of the Maine Legislature. CMP Group and
Central Maine cannot predict whether any changes to the 1997 legislation will be
enacted.
MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design. The
MPUC has completed the first phase of the proceeding contemplated by Maine's
restructuring legislation that will ultimately determine the recovery of Central
Maine's stranded costs, its revenue requirements, and the design of its rates to
be effective when Central Maine becomes a transmission-and-distribution utility
at the time retail access to generation begins in Maine on March 1, 2000. On
December 23, 1998, the MPUC Hearing Examiners in the proceeding issued their
report, in the form of a recommended decision. Central Maine disagreed with a
number of the individual recommendations in the stranded-costs and
revenue-requirements areas and filed exceptions to those recommendations. The
MPUC deliberated the recommendations on February 10 and 11, 1999, indicated
disagreement with some of the recommendations, and issued its written order on
March 19, 1999.
The MPUC stressed in its order that it was deciding the "principles" by which it
would set Central Maine's transmission-and-distribution rates, effective March
1, 2000, but was not calculating the rates themselves because such calculations
at that time would rely excessively on estimates. The MPUC pointed out that it
would hold a "Phase II" hearing to set the actual rates and determine the
recoverable stranded costs after processing information expected to become
available during 1999.
With respect to stranded costs, the MPUC indicated that it would set the amount
of recoverable stranded costs for Central Maine later in the proceeding pursuant
to its mandate under the restructuring statute to provide
transmission-and-distribution utilities a reasonable opportunity to recover such
costs that is equivalent to the utility's opportunity to recover these costs
prior to the commencement of retail access. The MPUC also reviewed the
prescribed methodology for determining the amount of a utility's stranded costs,
including among other factors the application of excess value from divested
generation assets to offset stranded costs. At the beginning of the proceeding
Central Maine had estimated its total stranded costs to be approximately $1.3
billion.
In the area of revenue requirements, the Phase I order did not include
definitive amounts, but did contain the MPUC's conclusions as to the appropriate
cost of common equity for Central Maine as a transmission-and-distribution
company beginning March 1, 2000. Central Maine had recommended a 12-percent cost
of common equity with a 55-percent common equity component in the capital
structure. The MPUC, after weighing conflicting recommendations, decided on a
common-equity cost of 10.50 percent with a common-equity component of 47
percent, and an overall weighted-average cost of capital of 8.68 percent.
In dealing with rate design, the MPUC limited itself in the first phase of the
proceeding primarily to establishing principles that would guide it in designing
Central Maine's rates to be effective March 1, 2000. The MPUC indicated that it
would focus on (1) facilitating the transition to a competitive market for
generation, and (2) implementing a "no-losers" policy, i.e., that the new rate
design would cause no Central Maine customer's bill to increase on March 1,
2000. Applying the latter principle, the MPUC rejected a newly designed standby
rate for self-generators proposed by Central Maine in favor of a design
generally similar to Central Maine's current rate for the class. The MPUC stated
that it planned to undertake a comprehensive rate design and alternative rate
plan proceeding for Central Maine prior to March 1, 2002, when it could consider
experience gained with the cost structures of other
transmission-and-distribution utilities after the commencement of retail access
to generation.
The Phase I order resulted from an extended proceeding with many points of view
represented and covers a wide variety of rate-related subjects. Definitive
findings by the MPUC in a number of the subject areas await the second phase of
the proceeding, which must be completed before March 1, 2000. CMP Group and
Central Maine cannot predict the definitive amount of stranded costs the MPUC
will determine that Central Maine will be entitled to recover pursuant to the
mandate of the restructuring statute, or the revenue requirements and rate
design that will result from Phase II of the MPUC proceeding.
Agreement for Sale of Generation Assets
On January 6, 1998, Central Maine announced that it had reached agreement to
sell all of its hydro, fossil and biomass power plants with a combined
generating capacity of 1,185 megawatts for $846 million in cash, including
approximately $18 million for assets of Union Water, to Florida-based FPL Group.
The related book value for these assets was approximately $218.9 million at
December 31, 1998. In addition, as part of its agreement with FPL Group, Central
Maine entered into energy buy-back agreements to assist in fulfilling its
obligation to supply its customers with power until March 1, 2000. Subsequently,
an agreement was reached to sell related storage facilities to FPL Group for an
additional $3.6 million ($1.5 million for the assets and $2.1 million for lease
revenue associated with the properties that Central Maine will retain),
including $1.15 million for Union Water assets. The related book value of these
assets was approximately $11.9 million at December 31, 1998.
Central Maine's interests in the power entitlements from approximately 50
power-purchase agreements with non-utility generators representing approximately
488 megawatts, its 2.5-percent interest in the Millstone Unit No. 3 nuclear
generating unit in Waterford, Connecticut, its 3.59-percent interest in the
output of the Vermont Yankee nuclear generating plant in Vernon, Vermont, and
its entitlement in the NEPOOL Phase II interconnection with Hydro-Quebec all
attracted insufficient interest to be included in the pending sale. Central
Maine will continue to seek buyers for those assets. Central Maine did not offer
for sale its interests in the Maine Yankee (Wiscasset, Maine), Connecticut
Yankee (Haddam, Connecticut) and Yankee Atomic (Rowe, Massachusetts) nuclear
generating plants, all of which are in the process of being decommissioned.
Substantially all of the generating assets included in the sale are subject to
the lien of Central Maine's General and Refunding Mortgage Indenture dated as of
April 15, 1976 (the "Indenture"). Therefore, substantially all of the proceeds
from sale must be deposited initially with the trustee under the Indenture at
the closing of the sale to free the generating assets from the lien of the
Indenture. Central Maine plans to use some of the proceeds on deposit with the
trustee to redeem or repurchase bonds under the terms of the Indenture, and may
discharge the Indenture. In addition, the proceeds could provide the flexibility
to redeem or repurchase outstanding equity securities. Central Maine must also
provide for payment of applicable taxes resulting from the sale. The manner and
timing of the ultimate application of the sale proceeds after closing are in any
event subject to various factors, including Indenture provisions, regulatory
requirements, market conditions and terms of outstanding securities.
On November 17, 1998, FPL Group announced that its subsidiary, FPL Energy Maine,
Inc. ("FPL Energy") had filed a civil action in the United States District Court
for the Southern District of New York requesting a declaratory judgment that
Central Maine could not meet essential terms of the January agreement. FPL Group
asserted that based on October 1998 FERC rulings on transmission access, as well
as other issues, it believed that Central Maine could not comply with the
conditions in the purchase contract and that FPL Energy should not be bound to
complete the transaction.
FPL Energy contended in its complaint that the FERC rulings (1) constituted a
material adverse effect under the purchase agreement and substantially lessened
the value of Central Maine's generating assets, and (2) precluded Central Maine
from obtaining all federal, state and local consents and approvals required for
the ownership, operation and maintenance of the generating assets in a manner
substantially consistent with Central Maine's historical ownership, operation,
and maintenance thereof, as required by the purchase agreement. In addition, FPL
Energy asserted that the FERC rulings limited the ability of the prospective
buyer to get power from the Central Maine generating assets to market
unconstrained by transmission limitations resulting from new generators being
added to the NEPOOL system, and therefore, based on the doctrine of frustration
of purpose, FPL Energy should be "excused without further obligation or
liability from effecting the purchase of [Central Maine's] generating assets."
Central Maine, FPL Energy, NEPOOL, and other parties interested in New England
transmission-access issues requested rehearing of the FERC rulings.
On November 23, 1998, the MPUC granted its approval of the sale to FPL Energy of
the generating assets contemplated by the purchase agreement, finding the sale
to be in the public interest. The MPUC also made the findings required as a
prerequisite to a FERC designation of the generating facilities as "exempt
wholesale generators," which had been requested by FPL Energy.
On November 24, 1998, the FERC approved the sale of the Central Maine generating
assets to FPL Energy, after making the required finding that the sale was
consistent with the public interest, and accepted certain implementing
agreements for filing. In discussing an issue raised by an intervenor the FERC
stated that by purchasing the generating assets FPL Energy would be "stepping
into the shoes of Central Maine" with respect to access to the Central Maine and
NEPOOL transmission system, but did not disturb the earlier transmission-access
rulings. The FERC granted its approval of the transfer of hydroelectric and
water storage licenses on December 28, 1998, and the approval by FERC of
exempt-wholesale-generator status for the generating facilities, was granted on
February 24, 1999.
On March 11, 1999, the hearing on FPL Energy's request for a declaratory
judgment was held in the United States District Court for the Southern District
of New York. On the same day the presiding judge ruled that FPL Energy was not
entitled to the declaratory judgment and entered judgment for Central Maine and
its affiliated defendants on all counts of the complaint. Thereafter on that day
FPL Energy announced that it would not appeal the decision, but would proceed to
a closing of the sale on or before April 7, 1999, as required by the sale
agreement, and the parties are preparing for the closing.
Expansion of Lines of Business
General. CMP Group is also preparing for competition by expanding its business
opportunities through investments that capitalize on core competencies. MaineCom
Services is a subsidiary that arranges fiber-optic data service for bulk
carriers, offering support for cable television or "super-cellular" personal
communication vendors, and providing other telecommunications consulting
services. TeleSmart is a wholly-owned accounts receivable management subsidiary.
Another wholly-owned subsidiary, CNEX, formerly CMP International Consultants,
provides utility consulting (domestic and international) and research. The
wholly-owned Union Water Power Company provides management of rivers and
recreational facilities, locating of underground utility facilities and infrared
photography, real estate brokerage and management, modular housing, engineering
and environmental services, integrated energy solutions, and utility
construction services. Union Water's operating divisions include On Target
Utility Services, UnionLand Services, Maine HomeCrafters, E/PRO, and Combined
Energies(TM). These subsidiaries often utilize skills of former Central Maine
employees and regularly compete for business with other companies.
Natural Gas Distribution. CMP Group and Energy East, through subsidiaries, have
entered into a joint-venture agreement to pursue opportunities to distribute
natural gas at retail in many Maine communities that are not currently served
with that fuel. They would offer natural-gas service in several areas of Maine,
primarily the Augusta, Bangor, Bath-Brunswick, Bethel, Windham and Waterville
areas, none of which currently has a natural-gas distribution system in place.
The gas would be drawn from two new gas-pipeline projects now under development
by unrelated parties that would carry Canadian gas through Maine and into the
regional energy market using substantial portions of electric transmission-line
corridors owned by Central Maine and MEPCO. On July 24, 1998, the MPUC
authorized the joint venture to serve the areas it had applied to serve. The new
company (now "CMP Natural Gas, L.L.C.", equally owned by subsidiaries of CMP
Group and Energy East) would face competition from a new gas utility affiliated
with Bangor Hydro-Electric Company in the Bangor area, and in the Bath-Brunswick
area, from an existing gas utility, Northern Utilities, Inc., which has been
serving other areas of Maine, including the Portland and Lewiston-Auburn areas.
CMP Group's level of investment is dependent on the overall economic feasibility
of natural gas as a competitive energy option in Maine, a sufficient expression
of customer interest in gas service from CMP Natural Gas, and the prospects for
achieving an acceptable return on investment.
Fiber Optic Network. CMP Group, through its wholly-owned subsidiary MaineCom
Services, owns 38.5 percent of the common stock of Northeast Optic Network, Inc.
("NEON"), which is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic transmission capacity for communications carriers on
local loop, inter-city and interstate facilities. NEON is currently expanding
its fiber optic network to encompass over 1,000 fiber optic cable route miles,
or more than 65,000 fiber strand miles, in New England and New York, utilizing
primarily electric-utility rights-of-way, including some of Central Maine's in
Maine and some owned by other electric utilities including Northeast Utilities,
another substantial minority stockholder, in Connecticut, Massachusetts and New
Hampshire. As of December 31, 1998, NEON had completed construction of
approximately 600 route miles, or 49,000 fiber miles, of its planned system and
is currently engineering, constructing, or acquiring additional routes with a
goal of creating a continuous fiber optic link between New York City and
Portland, Maine, with access into and around Boston and numerous other major
service areas in the Northeast.
On August 5, 1998, NEON completed initial public offerings of $48.0 million of
common stock and $180.0 million of senior notes, and Central Maine, as part of
the common-stock offering, sold some of the shares in NEON it then owned for
proceeds of approximately $3.1 million. In addition, with some of the proceeds
of the offering NEON repaid approximately $18 million Central Maine had advanced
under an earlier construction loan agreement. CMP Group believes there is a
growing need for such a fiber optic network in the Northeast and that NEON's
outside financing will provide substantial assistance in completing construction
of the network, but cannot predict the results of this venture. The common stock
of NEON is listed on the Nasdaq Stock Market's National Market under the symbol
"NOPT".
Permanent Shutdown of Maine Yankee Plant
On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently
cease power operations at its nuclear generating plant at Wiscasset, Maine (the
"Plant") and to begin decommissioning the Plant. As reported in detail in
Central Maine's Annual Report on Form 10-K for the year ended December 31, 1997,
the Plant had experienced a number of operational and regulatory problems and
did not operate after December 6, 1996. The decision to close the Plant
permanently was based on an economic analysis of the costs, risks and
uncertainties associated with operating the Plant compared to those associated
with closing and decommissioning it. The Plant's operating license from the NRC
was scheduled to expire on October 21, 2008.
FERC Rate Case. On November 6, 1997, Maine Yankee submitted to FERC for filing
certain amendments to the Power Contracts (the "Amendatory Agreements") and
revised rates to reflect the decision to shut down the Plant and to request
approval of an increase in the decommissioning component of its formula rates.
Maine Yankee's submittal also requested certain other rate changes, including
recovery of unamortized investment (including fuel) and certain changes to its
billing formula, consistent with the non-operating status of the Plant. By Order
dated January 14, 1998, the FERC accepted Maine Yankee's new rates for filing,
subject to refund after a minimum suspension period, and set Maine Yankee's
Amendatory Agreements, rates and issues concerning the prudence of the
Plant-shutdown decision for hearing.
By Complaint dated December 9, 1997, the Maine Office of the Public Advocate
("OPA") sought a FERC investigation of Maine Yankee's actions leading to the
decision to shut down the Plant, including actions associated with the
management and operation of Maine Yankee since 1993. The MPUC had initiated an
investigation in Maine earlier, raising generally similar issues. By decision
dated May 4, 1998, the FERC consolidated the OPA Complaint with the
comprehensive rate proceeding. In addition, 28 municipal and cooperative
utilities that had purchased in the aggregate approximately 6.2 percent of the
output of the Plant from Maine Yankee's sponsors (the "Secondary Purchasers")
intervened in the FERC proceeding, raising similar prudence issues and other
issues specific to their status as indirect purchasers from Maine Yankee.
In support of its request for an increase in decommissioning collections, Maine
Yankee submitted with its initial FERC filing a 1997 decommissioning cost study
performed by TLG Services, Inc. ("TLG"). During 1998, Maine Yankee engaged in an
extensive competitive bid process to engage a Decommissioning Operations
Contractor ("DOC") to perform certain major decontamination and dismantlement
activities at the Plant on a fixed-price, turnkey basis. As a result of that
process, a consortium headed by Stone & Webster Engineering Corporation ("Stone
& Webster") was selected to perform such activities under a fixed-price
contract. The contract provides for, among other undertakings, construction of
an independent spent fuel storage installation ("ISFSI") and completion of major
decommissioning activities and site restoration by the end of 2004. The DOC
process resulted in fixing certain costs that had been estimated in the earlier
decommissioning cost estimate performed by TLG.
Since the filing of the rate request, Maine Yankee and the active intervenors,
including among others the MPUC Staff, the OPA, Central Maine and other owners,
the Secondary Purchasers, and a Maine environmental group (the "Settling
Parties"), engaged in extensive discovery and negotiations. Those parties
participated in settlement discussions that resulted in an Offer of Settlement
filed by those parties with the FERC on January 19, 1999. On February 8, 1999,
the FERC Trial Staff recommended that the presiding judge certify the settlement
to the FERC and that the FERC approve it. Upon approval by the FERC, the
settlement would constitute a full settlement of all issues raised in the
consolidated FERC proceeding, including decommissioning-cost issues and issues
pertaining to the prudence of the management, operation, and decision to
permanently cease operation of the Plant. A separately negotiated settlement
filed with the FERC on February 5, 1999, would resolve the issues raised by the
Secondary Purchasers by limiting the amounts they will pay for decommissioning
the Plant and by settling other points of contention affecting individual
Secondary Purchasers. On February 24, 1999, the FERC Trial Staff recommended
certification and approval of the settlement with the Secondary Purchasers. On
March 10, 1999, the presiding judge certified to the FERC that both Offers of
Settlement were uncontested and joined in the Trial Staff's comments that both
were "fair, reasonable and in the public interest."
The Offer of Settlement provides for Maine Yankee to collect $33.6 million in
the aggregate annually, effective January 15, 1998, consisting of (1) $26.8
million for estimated decommissioning costs, and (2) $6.8 million for
ISFSI-related costs. The original filing with FERC on November 6, 1997, called
for an aggregate annual collection rate of $36.4 million for decommissioning and
the ISFSI, based on the TLG estimate. Under the settlement the amount collected
annually could be reduced to approximately $26 million if Maine Yankee is able
to (1) use for construction of the ISFSI funds held in trust under Maine law for
spent-fuel disposal, and (2) access approximately $6.8 million being held by the
State of Maine for eventual payment to the State of Texas pursuant to a compact
for low-level nuclear waste disposal, the future of which is now in question
after rejection of the selected disposal site in west Texas by a Texas
regulatory agency. Both would require authorizing legislation in Maine, which
Maine Yankee is committed to use its best efforts to obtain.
The Offer of Settlement also provides for recovery of all unamortized investment
(including fuel) in the Plant, together with a return on equity of 6.50 percent,
effective January 15, 1998, on equity balances up to maximum allowed equity
amounts. The Settling Parties also agreed in the proposed settlement not to
contest the effectiveness of the Amendatory Agreements submitted to FERC as part
of the original filing, subject to certain limitations including the right to
challenge any accelerated recovery of unamortized investment under the terms of
the Amendatory Agreements after a required informational filing with the FERC by
Maine Yankee. In addition, the settlement contains incentives for Maine Yankee
to achieve further savings in its decommissioning and ISFSI-related costs and
resolves issues concerning restoration and future use of the Plant site and
environmental matters of concern to certain of the intervenors in the
proceeding.
As a separate part of the Offer of Settlement, Central Maine, the other two
Maine utilities which own interests in Maine Yankee, the MPUC Staff, and the OPA
entered into a further agreement resolving retail rate issues and other issues
specific to the Maine parties, including those that had been raised concerning
the prudence of the operation and shutdown of the Plant (the "Maine Agreement").
Under the Maine Agreement Central Maine would continue to recover its Maine
Yankee costs in accordance with its most recent ARP order from the MPUC without
any adjustment reflecting the outcome of the FERC proceeding. To the extent that
Central Maine has collected from its retail customers a return on equity in
excess of the 6.50 percent contemplated by the Offer of Settlement, no refunds
would be required, but such excess amounts would be credited to the customers to
the extent required by the ARP.
The final major provision of the Maine Agreement requires the Maine owners, for
the period from March 1, 2000, through December 1,2004, to hold their Maine
retail ratepayers harmless from the amounts by which the replacement power costs
for Maine Yankee exceed the replacement power costs assumed in the report to the
Maine Yankee Board of Directors that served as a basis for the Plant shutdown
decision, up to a maximum cumulative amount of $41 million. Central Maine's
share of that amount would be $31.16 million for the period. The Maine
Agreement, which was approved by the MPUC on December 22, 1998, also sets forth
the methodology for calculating such replacement power costs.
CMP Group and Central Maine believe that the Offer of Settlement, including the
Maine Agreement, constitutes a reasonable resolution of the issues raised in the
Maine Yankee FERC proceeding, and that approval of the Offer of Settlement by
the FERC would eliminate significant uncertainties concerning CMP Group's and
Central Maine's future financial performance. Although all of the active parties
to the proceeding, including the FERC Trial Staff, support or, with respect to
certain individual provisions, do not oppose, the Offer of Settlement, CMP Group
and Central Maine cannot predict with certainty whether or in what form it will
be approved by the FERC.
Other Maine Yankee Shareholders. Periodically-higher nuclear-related costs have
affected the financial condition of other stockholders of Maine Yankee in
varying degrees. 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. CMP
Group and Central Maine cannot predict, however, what effect, if any, the
financial and regulatory difficulties experienced by some Maine Yankee
stockholders might have on Maine Yankee or Central Maine.
Non-utility Generation
After enactment of the federal Public Utility Regulatory Policies Act of 1978
("PURPA") and companion legislation in Maine, Central Maine became an industry
leader in developing supplies of energy from non-utility generators ("NUGs"),
including cogeneration plants and small power producers. These sources supplied
3.2 billion kilowatt-hours of electricity to Central Maine in 1998, representing
32 percent of total generation, a decrease from 35 percent in 1997. The
Company's contracts with non-utility generators, however, which were entered
into pursuant to the mandates of PURPA and vigorous state implementation of its
policies, contributed the largest part of Central Maine increased costs and
resulting rate increases in the years immediately prior to implementation of the
ARP in 1995, and constitute the largest part of its strandable costs.
PURPA provided substantial economic incentives to NUGs by allowing cogenerators
and small power producers to sell their entire electrical output to an electric
utility at the utility's avoided-cost rate, which has often been substantially
higher than market rates, while purchasing their own electric energy
requirements at the utility's established rate for that customer class. Thus
Central Maine in a number of cases has been required to pay a higher price for
energy purchased from a NUG than the NUG, which in some cases is a large
customer of Central Maine, has paid Central Maine for the NUG's energy
requirements. In addition, prices paid by Central Maine under NUG contracts have
often been well above current wholesale market prices.
Central Maine has reduced its NUG costs by implementing buyouts and
restructurings of its NUG contracts, whenever practicable. As a result, in
accordance with prior MPUC policy and the ARP, since January 1992 $99 million of
buyout or restructuring costs have been included in Deferred Charges and Other
Assets on Central Maine's balance sheet and will be amortized over their
respective fuel savings periods. Central Maine will continue to seek
opportunities to reduce its NUG costs, but cannot predict what level of
additional savings it will be able to achieve. Central Maine offered to sell its
NUG power entitlements as part of the auction of its generating assets, but the
offer attracted insufficient interest to be included in its pending sale.
Financing and Related Considerations
At the annual meeting of the stockholders of Central Maine on May 15, 1997, the
holders of Central Maine's outstanding preferred stock consented to the issuance
of $350 million in principal amount of Central Maine's medium-term notes in
addition to the $150 million in principal amount to which they had previously
consented. This expansion of the medium-term note program to a maximum of $500
million in principal amount outstanding at any one time was implemented to
increase Central Maine's financing flexibility in anticipation of industry
restructuring and increased competition. During 1998, Central Maine issued
medium-term notes totaling $312 million in principal amount and such notes in
the amount of $18 million matured during the year. As of December 31, 1998, $337
million of medium-term notes were outstanding. During 1998, Central Maine
redeemed, repurchased, or paid at maturity a total of approximately $417 million
of mortgage bonds, preferred stock, and other debt. For a discussion of Central
Maine's 1998 financing activity and its available financing facilities, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations"-"Liquidity and Capital Resources," below.
Securities Ratings
The current ratings assigned Central Maine's securities by the three major
securities-rating agencies are shown below:
Mortgage Unsecured Commercial Preferred
Bonds Notes Paper Stock
S&P BBB+ BB+ A-3 BB+
Moody's Baa3 Ba1 P3 Ba1
D&P BBB- BB+ D-3 BB
"Year 2000" Computer Issues
The "Year 2000 problem" arose because many existing computer programs use only
the last two digits to refer to a year. Therefore those computer programs do not
properly recognize a year that begins with "20" instead of the familiar "19". If
not corrected, many computer applications could fail or create erroneous
results, with potentially serious and widespread adverse consequences.
CMP Group, through Central Maine, began its Year 2000 problem remediation
efforts in 1996, and since that time has developed a broad-based and
comprehensive project plan for addressing Year 2000 issues. The plan includes
both Information Technology ("IT") and non-IT systems, addresses both
centralized and distributed systems, and encompasses systems critical to the
generation, transmission, and distribution of electric energy as well as the
traditional business systems necessary to the CMP Group System.
As planned, by the end of 1998 CMP Group had completed much of the work
associated with Year 2000 readiness for IT infrastructure and centralized
business systems. The remaining work in those areas is scheduled to be completed
during the first six months of 1999. All vendors associated with this remaining
work have indicated availability of products and services that CMP Group
believes should permit CMP Group to be Year 2000 ready by June 1999.
CMP Group's target completion date for Year 2000 power generation and delivery
systems is also June 1999, consistent with the DOE's published request in May
1998 and the overall electric-utility industry guidelines prepared by the North
American Electric Reliability Council ("NERC"). CMP Group has contracted with
the appropriate vendors to complete critical generation control system
remediation work by June 1999, and believes it is on schedule to meet this
target.
In addition to the internal Year 2000 readiness activities discussed above, CMP
Group is actively participating in a joint ISO/NEPOOL initiative designed to
assess, and assure, power reliability within the NEPOOL area. This initiative
encompasses all participants, including Central Maine, within the New England
area.
CMP Group also has an active program in place to identify and address issues
associated with third-party providers. The program addresses business
relationships with all third-party providers, but focuses on those suppliers
deemed critical to CMP Group's business. At this time CMP Group has no
indication that any third-party with which CMP Group has a material relationship
is expecting a Year 2000-related business interruption. CMP Group will continue
to monitor and assess its third-party relationships.
CMP Group estimates it will incur approximately $4.0 million of costs associated
with making the necessary modifications identified to date to both the
centralized and non-centralized systems. As of December 31, 1998, approximately
$3.4 million of such costs has been incurred.
CMP Group recognizes that failure to correct problems associated with Year 2000
issues has the potential to result in material operational and financial risks
if the affected systems either cease to function or produce erroneous results.
Such risks could include inability to operate fossil and/or hydro generating
facilities, disruptions in the operation of Central Maine's transmission and
distribution systems, an inability to access interconnections with other
utilities, and disruptions to Central Maine's major business systems (customer
information and service, administrative, financial).
Central Maine believes, however, that the most likely worst case scenario
resulting from these risks would be a temporary, and short-term, disruption of
electric service. This could occur either as a failure on the part of Central
Maine to successfully address all critical Year 2000 issues, as a failure on the
part of a critical third-party provider, or as a failure on the part of other
entities, including ISO-New England, to successfully maintain the short-term
reliability of power supply and delivery on a regional basis. Central Maine does
not expect that any such short-term service disruption would have a material
impact on its operations, liquidity, or financial condition.
In order to minimize these risks, and the potential recovery time, from Year
2000 problems, CMP Group is actively involved in contingency planning. Although
CMP Group has extensive knowledge and specific experience in disaster/recovery
planning and execution, CMP Group recognizes the importance of Year 2000
specific contingency planning. Accordingly, Central Maine is participating in
the integrated contingency planning effort headed by the North American Electric
Reliability Council, and the Northeast Power Coordinating Council. Further,
Central Maine will be developing comprehensive Year 2000 specific contingency
plans for its own independent operations.
CMP Group believes its plans are adequate to attain Year 2000 readiness, and
that the contingency plans currently under development both internally and at a
regional level should substantially mitigate the risks discussed above.
Environmental Matters
Federal, state and local environmental laws and regulations cover air and water
quality, land use, power plant and transmission line siting, noise and
aesthetics, solid and hazardous waste and other environmental matters.
Compliance with these laws and regulations impacts the manner and cost of
electric service by requiring, among other things, changes in the design and
operation of existing facilities and changes or delays in the location, design,
construction and operation of new facilities. These environmental regulations
most significantly affect Central Maine's electric power generating facilities,
which are to be sold to FPL Group, as discussed above. In addition, certain
environmental proceedings under federal and state hazardous substance and
hazardous waste regulations (such as the Comprehensive Environmental Response,
Compensation, and Liability Act ("CERCLA") and the Resource Conservation and
Recovery Act ("RCRA") and similar state statutes) are discussed below under Item
3, "Legal Proceedings" - "Legal and Environmental Matters." Central Maine
estimates that its capital expenditures for improvements needed to comply with
environmental laws and regulations were approximately $14.3 million for the five
years from 1994 through 1998.
Storm Damage to Central Maine's System
On January 7 through 9, 1998, an ice storm of unprecedented breadth and severity
struck Central Maine's service territory, causing power outages for
approximately 280,000 of Central Maine's 528,000 customers, and substantial
widespread damage to Central Maine's transmission and distribution system. To
restore its electrical system, Central Maine supplemented its own crews with
utility and tree-service crews from throughout the northeastern United States
and the Canadian maritime provinces, with assistance from the Maine national
guard. Central Maine's incremental non-capital costs of the repair effort were
$50.7 million, most of which is labor-related. In addition, approximately $1.7
million of carrying costs have been deferred as of December 31, 1998.
On January 15, 1998, the MPUC issued an order allowing Central Maine to defer on
its books the incremental non-capital costs associated with Central Maine's
efforts to restore service in response to the damage resulting from the storm.
The order required Central Maine, as part of its annual filing under the ARP, to
file information on the amounts deferred under the order and to submit a
proposal as to how the costs associated with the order should be recovered under
the ARP. In the 1998 ARP filing Central Maine stated that once the final cost of
the storm was determined and the status of federal assistance was known Central
Maine would propose a plan for recovery of its costs. Based on the MPUC order,
Central Maine has deferred $52.4 million in storm related costs as of December
31, 1998. In October 1998, the MPUC staff issued its draft report of its summary
investigation of the Maine utilities' response to the January ice storm. This
report found no basis for formal adjudicatory investigation into the response
and supports the utilities' actions. On May 1, 1998, President Clinton signed a
Congressional appropriation bill that included $130 million for Presidentially
declared disasters in 1998, including storm-damage cost reimbursement for
electric utilities. On November 5, 1998 the United States Department of Housing
and Urban Development ("HUD") announced that of those funds, $2.2 million had
been awarded to Maine, with none designated for utility infrastructure, which
Central Maine and the Maine Congressional delegation protested as inadequate and
inconsistent with Congressional intent. On March 10, 1999, HUD published a
notice in the Federal Register inviting parties to re-apply for storm-damage
cost reimbursement. Central Maine cannot predict what portion of its ice
storm-related costs it will ultimately recover through federal assistance, if
any, or from its customers, or when any such recovery will take place.
Employee Information
A local union affiliated with the International Brotherhood of Electrical
Workers (AFL-CIO) represents operating and maintenance employees in each of
Central Maine's operating divisions, and certain office and clerical employees.
At December 31, 1998, Central Maine had 1,607 full-time employees, of whom
approximately 45 percent were represented by the union.
In April 1998 Central Maine and the union agreed to a two-year labor contract
extension that provided for an annual wage increase of 2.5 percent on May 1,
1998 and 2.5 percent on May 1, 1999.
On March 2, 1998, Central Maine and the Union reached agreement on a contract
covering 158 employees in power-generation positions. This contract is similar
to the agreement covering other Central Maine employees except that it provided
for a 2.5 percent general wage increase effective March 1, 1998. The contract
will expire on July 31, 1999 and, at the time of the closing of the
generation-asset sale, is expected to be absorbed by FPL Group, along with most
of the generation-related employees.
Item 2. PROPERTIES.
Existing Facilities
Central Maine's electric properties form a single integrated system which is
connected at 345 kilovolts and 115 kilovolts with the lines of Public Service
Company of New Hampshire at the southerly end and at 115 kilovolts with Bangor
Hydro-Electric Company at the northerly end of Central Maine's system. Central
Maine's system is also connected with the system of The New Brunswick Power
Corporation and with Bangor Hydro-Electric Company, in each case through the
345-kilovolt interconnection constructed by MEPCO, a 78 percent-owned subsidiary
of Central Maine. At December 31, 1998, Central Maine had approximately 2,293
circuit-miles of overhead transmission lines, 19,438 pole-miles of overhead
distribution lines and 1,434 miles of underground and submarine cable.
Central Maine operates 32 hydroelectric generating stations, of which 31 are
owned fully by Central Maine, with an estimated net capability of 373 megawatts,
and it purchases an additional 74 megawatts of non-utility hydroelectric
generation in Maine. Central Maine also operates two oil-fired steam-electric
generating stations, William F. Wyman Station in Yarmouth, Maine and Mason
Station in Wiscasset, Maine. Central Maine's share of William F. Wyman Station
has an estimated net capability of 594 megawatts. Mason Station has five units
totaling 145 megawatts although two of the units (42 megawatts) are retired. The
oil-fired stations are located on tidewater, permitting waterborne delivery of
fuel. Central Maine also has internal combustion generating facilities with an
estimated aggregate net capability of 42 megawatts. These facilities are
included in the pending sale of Central Maine's generating assets to FPL Group.
Central Maine also has ownership interests in five nuclear generating facilities
in New England, three of which have permanently ceased operations. The largest
is a 38-percent interest in Maine Yankee Atomic Power Company ("Maine Yankee")
which, as discussed above, has permanently shut down its plant in Wiscasset,
Maine. In addition, the Company owns a 9.5 percent interest in Yankee Atomic
Electric Company ("Yankee Atomic"), discussed below, which has permanently shut
down its plant located in Rowe, Massachusetts, a 6 percent interest in
Connecticut Yankee Atomic Power Company ("Connecticut Yankee"), discussed below,
which has permanently shut down its plant in Haddam, Connecticut, and a 4
percent interest in Vermont Yankee Nuclear Power Corporation ("Vermont Yankee"),
which owns an operating plant in Vernon, Vermont (collectively, with Maine
Yankee, the "Yankee Companies"). In addition to the four Yankee Companies,
pursuant to a joint-ownership agreement, the Company has a 2.5 percent direct
ownership interest in the Millstone 3 nuclear unit ("Millstone 3") in Waterford,
Connecticut.
Maine Yankee Connecticut Vermont Millstone
Yankee Atomic Yankee Yankee Unit 3
------ ------ ---- ------- ------ --- ------
Ownership Share 38% 9.5% 6% 4% 2.5%
Operating Status Permanently shut Permanently shut Permanently shut down Operating Operating
down August 6, down February 26, December 4, 1996
1997 1992
Location Wiscasset, Maine Rowe, Massachusetts Haddam, Vernon, Vermont Waterford,
Connecticut Connecticut
Capacity Share N/A N/A N/A 19 MW 29 MW
Equity Interest at
December 31, 1998 $30.0 Million $1.9 Million $6.3 Million $2.1 Million N/A
Maine Yankee. In August 1997, the Board of Directors of Maine Yankee Atomic
Power Company voted to permanently shut down and decommission the Maine Yankee
plant. The Plant had experienced a number of operational and regulatory problems
and did not operate after December 6, 1996. The decision to close the Plant was
based on an economic analysis of the costs, risks and uncertainties associated
with operating the Plant compared to those associated with closing and
decommissioning it. For a detailed discussion of the issues relating to the
Maine Yankee Plant, see Item 1 "Business" - "Permanent Shutdown of the Maine
Yankee Plant," above.
Connecticut Yankee. In December 1996, the Board of Directors of Connecticut
Yankee Atomic Power Company voted to permanently shut down and decommission the
Connecticut Yankee plant for economic reasons. The plant did not operate after
July 22, 1996. Central Maine estimates its share of the cost of Connecticut
Yankee's continued compliance with regulatory requirements, recovery of its
plant investment, decommissioning and closing the plant to be approximately
$29.9 million and has recorded a corresponding regulatory asset and liability on
the consolidated balance sheet. Central Maine is currently recovering through
rates an amount adequate to recover these expenses. Issues relating to
Connecticut Yankee's decommissioning rates, as well as the prudence of operating
that plant and the decision to cease operations, remain pending before the FERC.
Yankee Atomic. In 1993 the FERC approved a settlement agreement regarding
recovery of decommissioning costs and plant investment, and all issues with
respect to the prudence of the decision to discontinue operation of the Yankee
Atomic plant. Central Maine estimates its remaining share of the cost of Yankee
Atomic's continued compliance with regulatory requirements, recovery of its
plant investment, decommissioning and closing the plant, to be approximately
$7.8 million. This estimate has been recorded by Central Maine as a
corresponding regulatory asset and liability on Central Maine's balance sheet.
Central Maine's current share of costs related to the shutdown of Yankee Atomic
is being recovered through rates.
Vermont Yankee. The Vermont Yankee plant is an operating unit. Its NRC operating
license is scheduled to expire in the year 2012.
Millstone Unit 3. Pursuant to a joint ownership agreement, Central Maine has a
2.5 percent direct ownership interest in the Millstone 3 nuclear unit in
Waterford, Connecticut, which is operated by Northeast Utilities. This facility
was off-line from March 31, 1996, to July 1998, due to NRC concerns regarding
license requirements. For a discussion of a lawsuit and arbitration claim filed
by Central Maine and other minority owners of Millstone 3 against the operators
of the unit, see Item 3 "Legal Proceedings"-"Millstone Unit No. 3 Litigation,"
below.
Central Maine is obligated to pay its proportionate share of the operating
expenses, including depreciation and a return on invested capital, of each of
the Yankee Companies referred to above for periods expiring at various dates to
2012. Pursuant to the joint ownership agreement for Millstone 3, Central Maine
is similarly obligated to pay its proportionate share of the operating costs of
Millstone 3. Central Maine is also required to pay its share of the estimated
decommissioning costs of each of the Yankee Companies and Millstone 3. The
estimated decommissioning costs are paid as a cost of energy in the amounts
allowed in rates by the FERC.
MEPCO. MEPCO owns and operates a 345-kilovolt transmission interconnection,
completed in 1971, extending from Central Maine's substation at Wiscasset to the
Canadian border where it connects with a line of The New Brunswick Power
Corporation ("NB Power") under an interconnection agreement. MEPCO transmits
power between NB Power and various New England utilities pursuant to MEPCO's
Open Access Transmission Tariff.
New England Power Pool Facilities. NEPOOL, of which the Company is a member,
contracted in connection with its Hydro-Quebec projects to purchase power from
Hydro-Quebec. The contracts entitle Central Maine to 44.5 megawatts of capacity
credit in the winter and 127.25 megawatts of capacity credit during the summer.
Central Maine also entered into facilities-support agreements for its share of
the related transmission facilities, with its share of the support
responsibility and of associated benefits being approximately 7 percent of the
totals. Central Maine is making facilities-support payments on approximately
$25.4 million, its share of the construction cost for the transmission
facilities incurred through December 31, 1998.
Maine Yankee Low-Level Waste Disposal. The federal Low-Level Radioactive Waste
Policy Amendments Act (the "Waste Act"), enacted in 1986, required states either
alone or in multistate compacts to provide for the disposal of low-level
radioactive waste generated within their borders. Subsequently, the states of
Maine, Texas and Vermont entered into 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 then-planned facility in
west Texas. In return, Maine would be required to pay $25 million, assessed to
Maine Yankee by the State of Maine, payable in two equal installments, the first
after ratification by Congress and the second upon commencement of operation of
the Texas facility; or, as a possible alternative, the states could agree to a
financing arrangement for the payment, in which case Maine Yankee's share, along
with interest, could be paid out over an extended period of time. In addition,
Maine Yankee would be assessed a total of $2.5 million for the benefit of the
Texas county in which the facility would be located and would also be
responsible for its pro-rata share of the Texas governing commission's operating
expenses.
The bill providing for ratification of the compact was before several sessions
of the Congress before finally being approved on September 2, 1998, and signed
by the President on September 21, 1998. However, on October 22, 1998, the Texas
Natural Resources Conservation Commission voted to deny a permit for the
proposed west Texas site for the facility.
Since the Maine Yankee Plant has permanently stopped operating, the compact is
less beneficial to Maine Yankee than it would have been if the Plant had
remained in operation, due to the new schedule for Maine Yankee's shipments and
the uncertainty associated with the schedule for opening a Texas facility.
Although other potential sites in Texas have been proposed by various parties,
CMP Group and Central Maine cannot predict whether or when a facility in Texas
will be licensed and built. Maine Yankee intends to utilize its on-site storage
facility as well as dispose of low-level waste at an active South Carolina site
or other available sites in the interim and continue to cooperate with the State
of Maine in pursuing all appropriate options. CMP Group and Central Maine are
unable to predict whether or when the state of Maine may assess any payments
required under the compact.
Nuclear Insurance. The Price-Anderson Act is a federal statute providing, among
other things, a limit on the maximum liability for damages resulting from a
nuclear incident. Coverage for the liability is provided for by existing private
insurance and retrospective assessments for costs in excess of those covered by
insurance, up to $88.095 million for each reactor owned, with a maximum
assessment of $10 million per reactor in any year. However, after appropriate
exemptive action by the NRC Maine Yankee, and therefore its sponsors, are not
responsible for retrospective assessments resulting from any event or incident
occurring after January 7, 1999. Based on Central Maine's stock ownership in the
Yankee companies and its 2.5 percent direct ownership interest in the Millstone
3 nuclear unit, Central Maine's retrospective premium for post-January 7, 1999,
events or incidents could be as high as $6 million in any year, for a cumulative
total of $52.9 million.
In addition to the insurance required by the Price-Anderson Act, the nuclear
generating facilities mentioned above carry additional nuclear property-damage
insurance. This additional insurance is provided from commercial sources and
from the nuclear electric utility industry's insurance company through a
combination of current premiums and retrospective premium adjustments. In
recognition of the reduced risk posed by the shutdown of the Maine Yankee Plant
and its defueled reactor, Maine Yankee substantially reduced its property-damage
coverage effective January 19, 1999.
Construction Program
Central Maine's plans for improvements and expansion of its facilities are under
continuing review. Actual construction expenditures depend on the availability
of capital and other resources, load forecasts, customer growth, general
business conditions, and, starting in 1999, the consummation of the sale of its
generating assets. Recent economic and regulatory considerations have led
Central Maine to hold its planned 1999 capital investment outlays, including
deferred demand-side management expenditures, to minimum levels. During the
five-year period ended December 31, 1998, Central Maine's construction and
acquisition expenditures amounted to $219.7 million (including investment in
jointly-owned projects and excluding MEPCO). The program is currently estimated
at approximately $56 million for 1999 and $228 million for 2000 through 2003.
The following table sets forth Central Maine's estimated capital expenditures as
discussed above, assuming completion of the generation asset sale in the spring
of 1999:
2000-
1999 2003 Total
Type of Facilities (Dollars in Millions)
Generating Projects $ 3 $ - $ 3
Transmission 3 22 25
Distribution 32 132 164
General facilities and Other 18 74 92
-- -- --
Total $56 $228 $284
=== === ===
Additionally, Central Maine, in conjunction with the Independent System
Operator-New England, is conducting system impact and facilities studies to
accommodate the interconnection of 19 merchant plants totaling in excess of
6,000 megawatts proposing to interconnect to its system and neighboring systems
over the next three years. One of these facilities has an expected on-line date
in the latter half of 1999. Central Maine anticipates spending approximately
$25,000,000 in 1999 for the construction and/or upgrade of transmission line and
substation facilities associated with this project as well as two other projects
expected to be on-line in 2000. The extent of transmission upgrades necessary to
accommodate the proposed merchant plants, and the entity ultimately responsible
for these costs, depends on the results of the studies mentioned above, the
number of proposed plants that actually are developed, and approval of the
criteria for determining needed transmission upgrades, which are being developed
within the context of NEPOOL's Congestion Management System be filed later in
1999 as required by the FERC.
Demand-side Management
Central Maine's demand-side-management initiatives have included programs aimed
at residential, commercial and industrial customers. Among the residential
efforts have been programs that offer free or low-cost weatherization, water
heater wraps and energy-efficient light bulbs. Among the commercial and
industrial efforts, in addition to operating programs that offer
energy-efficient lighting products and water-heater wraps, Central Maine has
provided incentives to customers who install conservation measures of any kind
that increase the efficiency of the use of electricity.
NEPOOL
Central Maine is a member of the New England Power Pool (NEPOOL), which is open
to electric utilities in New England under a 1971 agreement that provides for
coordinated planning and operation of approximately 99 percent of the electric
power production, purchases and transmission in New England. The NEPOOL
Agreement, which was recently revised to comply with the new regulatory
requirements discussed in the three succeeding paragraphs, imposes obligations
concerning generating capacity reserve and the use of major transmission lines,
and provides for central dispatch of the region's facilities.
On April 24, 1996, the FERC issued Order No. 888, which requires all public
utilities that own, control or operate facilities used for transmitting electric
energy in interstate commerce to file open access non-discriminatory
transmission tariffs that offer both load-based, network and contract-based,
point-to-point service, including ancillary service to eligible customers
containing minimum terms and conditions of non-discriminatory service. This
service must be comparable to the service they provide themselves at the
wholesale level; in fact, these utilities must themselves take the wholesale
transmission service they provide under the filed tariffs. The order also
permits public utilities and transmitting utilities the opportunity to recover
legitimate, prudent and verifiable wholesale stranded costs associated with
providing open access and certain other transmission services. It further
requires public utilities to functionally separate transmission from generation
marketing functions and communications. The intent of this order is to promote
the transition of the electric utility industry to open competition. Order No.
888 also clarifies federal and state jurisdiction over transmission in
interstate commerce and local distribution and provides for deference of certain
issues to state recommendations. The FERC subsequently issued Orders No. 888-A
and 888-B which generally reaffirm Order No.
888 and clarify certain terms.
On July 9, 1996, Central Maine and MEPCO submitted compliance filings to meet
the new pro-forma tariff non-price minimum terms and conditions of
non-discriminatory transmission service and since then have made additional
filings revising their tariffs in response to subsequent FERC and NEPOOL Orders.
Central Maine and MEPCO have been transmitting energy pursuant to their filed
tariffs, subject to refund.
On April 24, 1996, the FERC also issued Order No. 889, which requires public
utilities to functionally separate their wholesale power marketing and
transmission operation functions and to obtain information about their
transmission system for their own wholesale power transactions in the same way
their competitors do through the Open Access Same-time Information System
("OASIS"). The rule also prescribed standards of conduct and protocols for
obtaining the information. The standards of conduct are designed to prevent
employees of a public utility engaged in marketing functions from obtaining
preferential information. In 1998, both Central Maine and MEPCO submitted
standards of conduct filings that further clarified the separation of the
wholesale power marketing and transmission operations functions. The NEPOOL
Agreement and open-access transmission tariff have been revised to reflect the
new regulatory requirements and are pending FERC approval.
Fuel Supply
Central Maine's total kilowatt-hour production by energy source for each of the
last two years and as estimated for 1999, assuming completion of the generation
asset sale in the first half of 1999, is shown below.
Actual Estimated
1998 1997 1999 Source
Nuclear 2% 2% 3%
Hydro 16 16 10
Oil 35 35 4
Non-utility 32 35 35
Other purchases 13 10 37
Biomass 2 2 1
FPL-Hydro Buyback - - 7
FPL-Oil Buyback - - 3
----- ----- ----
100% 100% 100%
--- --- ----
The 1999 estimated kilowatt-hour output from oil and purchased power may vary
depending upon the relative costs of Company-generated power and power purchased
through independent producers and other sources.
Oil. Central Maine's William F. Wyman Station in Yarmouth, Maine, its Mason
Station in Wiscasset, Maine, and its internal combustion electric generating
units are oil-fired. Central Maine's last contract for the supply of fuel oil
requirements at market prices was allowed to expire in 1993. Since then Central
Maine has been purchasing its fuel-oil requirements on the open market.
The average cost per barrel of fuel oil purchased by Central Maine during the
five calendar years commencing with 1994 was $12.93, $16.16, $18.18, $17.04 and
$12.39, respectively. A substantial portion of the fuel oil burned by Central
Maine and the other member utilities of NEPOOL is imported. The availability and
cost of oil to Central Maine, both under contract and in the open market, could
be adversely affected by policies and events in oil-producing nations and other
factors affecting world supplies and domestic governmental action.
Maine Yankee Spent Fuel. Like other nuclear plant operators, Maine Yankee
entered into a contract with the United States Department of Energy ("DOE") for
disposal of its spent nuclear fuel, as required by the Nuclear Waste Policy Act
of 1982, pursuant to which a fee of one dollar per megawatt-hour was assessed
against net generation of electricity and paid to the DOE quarterly. Under this
Act, the DOE was given the responsibility for disposal of spent nuclear fuel
produced in private nuclear reactors. In addition, Maine Yankee is obligated to
make a payment with respect to generation prior to April 7, 1983 (the date
current DOE assessments began). Maine Yankee elected under terms of its DOE
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. The
payment would consist of $50.4 million (all of which Maine Yankee previously
collected from its customers, but for which a reserve was not funded), which is
the approximate one-time fee charge, plus interest accrued at the 13-week
treasury-bill rate compounded on a quarterly basis from April 7, 1983, through
the date of the actual payment. Current costs incurred by Maine Yankee under
this contract are recoverable under the terms of its Power Contracts with its
sponsoring utilities, including Central Maine. Maine Yankee has accrued and
billed $82.8 million of interest cost for the period April 7, 1983, through
December 31, 1998.
Maine Yankee has formed a trust to provide for payment of its long-term spent
fuel obligation, and is funding the trust with deposits at least semiannually
which began in 1985, with currently projected annual deposits of approximately
$1.3 million through December 2003. Deposits are expected to total approximately
$78.2 million, with the total liability, including interest due at the time of
disposal, estimated to be approximately $168.7 million at December 31, 2003.
Maine Yankee estimates that trust fund deposits plus estimated earnings will
meet this total liability if funding continues without material changes.
Maine Yankee's spent fuel is currently stored in the spent fuel pool at the
Plant site. Federal legislation enacted in December 1987 directed the DOE to
proceed with the studies necessary to develop and operate a permanent high-level
waste (spent fuel) disposal site at Yucca Mountain, Nevada. The legislation also
provided for the possible development of a Monitored Retrievable Storage ("MRS")
facility and abandoned plans to identify and select a second permanent disposal
site. An MRS facility would provide temporary storage for high-level waste prior
to eventual permanent disposal. The DOE has indicated that the permanent
disposal site is not expected to open before 2010, although originally scheduled
to open in 1998.
In 1997 the two branches of the United States Congress approved separate bills
to comprehensively reform the federal spent nuclear fuel program. In the spring
of 1998 House and Senate members resolved differences between the bills, which
would have required the DOE to establish an interim storage facility and begin
accepting spent fuel from nuclear power plants by 2003. On June 2, 1998, the
Senate fell short of the 60 votes needed to end debate on the bill and the bill
was not brought to a vote in the House.
In 1994 several nuclear utilities other than Maine Yankee filed suit against the
DOE. The utilities sought a declaration from the United States Court of Appeals
for the District of Columbia Circuit that the Nuclear Waste Policy Act of 1982
required the DOE to take responsibility for spent nuclear fuel in 1998. In July
1996 the court held that the DOE was obligated "to start disposing of [spent
nuclear fuel] no later than January 31, 1998." The DOE did not appeal the
decision, but announced in December 1996 that it 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.
In November 1997 the U.S. Court of Appeals for the District of Columbia Circuit
confirmed the DOE's obligation. On February 19, 1998, Maine Yankee filed a
petition in the same court seeking to compel the DOE to take Maine Yankee's
spent fuel from the Plant site "as soon as physically possible," alleging that
removing the spent fuel on the DOE's indicated schedule would delay the
decommissioning of the Maine Yankee Plant indefinitely. On May 5, 1998, the
Court dismissed Maine Yankee's lawsuit, as well as that of the other nuclear
utilities and state regulators, saying that petitioners' failure to pursue
remedies under the standard contract rendered their appeal not appropriate at
that time for review. On June 2, 1998, Maine Yankee filed a claim for money
damages in the U.S. Court of Federal Claims for the costs associated with the
DOE's failure to begin to take fuel in 1998. On November 3, 1998, the Court
granted summary judgment in favor of Maine Yankee, ruling that the DOE had
violated its contractual obligations and leaving the amount of damages incurred
by Maine Yankee for later determination by the Court. Maine Yankee expects the
hearing on its claim to take place in late 1999 or early 2000. Maine Yankee
intends to pursue its claim for damages vigorously, but as an alternative to DOE
disposal is considering construction of an independent spent-fuel storage
installation ("ISFSI") on the Plant site.
Item 3. LEGAL PROCEEDINGS.
Generating Asset Sale. For a discussion of a lawsuit involving the sale of
Central Maine's generating assets, see Item 1. "Business"-"Agreement for Sale of
Generation Assets," above.
Legal and Environmental Matters. CMP Group, Central Maine and certain of their
affiliates are subject to regulation by federal and state authorities with
respect to air and water quality, the handling and disposal of toxic substances
and hazardous and solid wastes, and the handling and use of chemical products.
Electric utility companies generally use or generate in their operations a range
of potentially hazardous products and by-products that are the focus of such
regulation. CMP Group and Central Maine believe that their current practices and
operations are in compliance with all existing environmental laws except for
such non-compliance as would not have a material adverse effect on their
financial positions. Central Maine reviews its overall compliance and measures
the liability quarterly by assessing a range of reasonably likely costs for each
identified site using currently available information, including existing
technology, presently enacted laws and regulations, experience gained at similar
sites, and the probable level of involvement and financial condition of other
potentially responsible parties. These estimates include costs for site
investigations, remediation, operation and maintenance, monitoring and site
closure.
New and changing environmental requirements could hinder the construction and/or
modification of generating units, transmission and distribution lines,
substations and other facilities, and could raise operating costs significantly.
As a result, Central Maine may incur significant additional environmental costs,
greater than amounts reserved, in connection with the generation and
transmission of electricity and the storage, transportation and disposal of
by-products and wastes. Central Maine may also encounter significantly increased
costs to remedy the environmental effects of prior waste handling activities.
The cumulative long-term cost impact of increasingly stringent environmental
requirements cannot accurately be estimated.
Central Maine has recorded a liability, based upon currently available
information, for what it believes are the estimated environmental remediation
costs that it expects to incur for identified waste disposal sites. In most
cases, additional future environmental cleanup costs are not reasonably
estimatable due to a number of factors, including the unknown magnitude of
possible contamination, the appropriate remediation methods, the possible
effects of future legislation or regulation and the possible effects of
technological changes. Central Maine cannot predict the schedule or scope of
remediation due to the regulatory process and involvement of non-governmental
parties. At December 31, 1998, the liability recorded by Central Maine for its
estimated environmental remediation costs amounted to $1.9 million, which
management has determined to be the most probable amount within the range of
$1.9 million to $8.6 million. Such costs may be higher if Central Maine is found
to be responsible for cleanup costs at additional sites or identifiable possible
outcomes change.
Millstone Unit No. 3 Litigation. On August 7, 1997, Central Maine and other
minority owners of Millstone Unit No. 3 filed suit in Massachusetts Superior
Court against Northeast Utilities and its trustees, and initiated an arbitration
claim against two of its subsidiaries, alleging mismanagement of the unit by the
defendants. The minority owners are seeking to recover their additional costs
resulting from such mismanagement, including their replacement power costs.
Since August 1997 the parties have been engaged in resolving preliminary issues
and in extensive pre-hearing discovery on a schedule calling for an arbitration
hearing in the fall of 1999. Central Maine cannot predict the outcome of the
litigation and arbitration or whether the current schedule will be maintained.
Proposed Federal Income Tax Adjustments. On September 3, 1997, Central Maine
received from the Internal Revenue Service ("IRS") a Revenue Agent's Report
summarizing all adjustments proposed by the IRS as a result of its audit of
Central Maine's federal income tax returns for the years 1992 through 1994, and
on September 12, 1997, Central Maine received a notice of deficiency relating to
the proposed disallowances. There are two significant disallowances among those
proposed by the IRS. The first is a disallowance of Central Maine's write-off of
the under-collected balance of fuel and purchased-power costs and the
unrecovered balance of its unbilled Electric Revenue Adjustment Mechanism
("ERAM") revenues, both as of December 31, 1994, which were charged to income in
1994 in connection with the adoption of the Alternative Rate Plan ("ARP")
effective January 1, 1995. The second major adjustment would disallow Central
Maine's 1994 deduction of the cost of the buyout of the Fairfield Energy Venture
purchased-power contract by Central Maine in 1994. The aggregate tax impact,
including both federal and state taxes, of the unresolved issues amounts to
approximately $39.0 million, over 90 percent of which is associated with the two
major disallowances. The two major disallowances relate largely to the timing of
the deductions and would not affect income except for the cumulative interest
impact which, through December 31, 1998, amounted to $18.8 million, or a
decrease in net income of $11.1 million, and which could increase interest
expense by approximately $500,000 per month until either the tax deficiency is
paid or the issues are resolved in favor of Central Maine, in which case no
interest would be due. If the IRS were to prevail, Central Maine believes the
deductions would be amortized over periods of up to twenty, post-1994, tax
years. Central Maine believes its tax treatment of the unresolved issues was
proper and as a result the potential interest has not been accrued. On December
10, 1997, Central Maine filed a petition in the United States Tax Court
contesting the entire amount of the deficiencies and sought review of the
asserted deficiencies by an IRS Appeals Officer to determine whether all or part
of the dispute could be resolved in advance of a court determination. As of
March 17, 1999, four of the seven issues in dispute had been resolved, but not
the two major disallowances. Central Maine will continue to work toward
resolving the remaining issues, but a trial may be necessary for one or more of
those issues. Absent such a resolution, Central Maine plans to pursue vigorously
the Tax Court litigation, but cannot predict the result.
Shareholder Suit. On September 25, 1997, a lawsuit was filed in the United
States District Court for the Southern District of New York by a New Jersey
resident claiming to be a shareholder of Central Maine against the members of
Central Maine's board of directors, including the then President and Chief
Executive Officer, and three former directors. The complaint contained a
derivative claim that the defendants recklessly mismanaged the oversight and
operation of the Maine Yankee Plant and an individual claim that the defendants
had failed to make timely and adequate disclosures of information in connection
with issues surrounding the Plant. The complaint did not seek damages against
Central Maine, but requested that the defendants disgorge the compensation they
had received during the period of alleged mismanagement, pay to Central Maine
costs incurred allegedly as a result of the claimed actions, and cause Central
Maine to take steps to prevent such actions.
The defendants moved to dismiss the suit for failure of the plaintiff to make a
pre-suit demand on Central Maine's board of directors, as required by Maine law,
and on February 18, 1998, the suit was dismissed. On April 2, 1998, the board
received such a demand from the plaintiff. On December 17, 1998, after
investigation of plaintiff's allegations, the board rejected the demand.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
Item 4.1 EXECUTIVE OFFICERS OF THE REGISTRANT.
CMP Group, Inc. The following are the present executive officers of CMP Group
with all positions and offices held. There are no family relationships between
any of them, nor are there any arrangements or understandings pursuant to which
any were selected as officers.
Name, Age, and Year First Became Officer Office
David M. Jagger, 57, 1998 Chairman of the Board of Directors
Charles H. Abbott, 63, 1998 Vice Chairman of the Board of Directors
David T. Flanagan, 51, 1998 President and Chief Executive Officer
Arthur W. Adelberg, 47, 1998 Executive Vice President
David E. Marsh, 51, 1998 Chief Financial Officer
Gerald C. Poulin, 57, 1999 Vice President, Generation
F. Michael McClain, 49, 1998 Vice President, Corporate Development
Anne M. Pare, 45, 1998 Treasurer, Corporate Counsel and Secretary
Central Maine Power Company. The following are the present executive officers of
Central Maine with all positions and offices held. There are no family
relationships between any of them, nor are there any arrangements or
understandings pursuant to which any were selected as officers.
Name, Age, and Year First Became Officer Office
David M. Jagger, 57, 1996 Chairman of the Board of Directors
Charles H. Abbott, 63, 1996 Vice Chairman of the Board of Directors
Sara J. Burns, 43, 1997 President
Michael R. Cutter, 45, 1997 Vice President
Curtis I. Call, 45, 1997 Treasurer
Anne M. Pare, 45, 1996 Secretary and Clerk
Each of the executive officers of CMP Group and Central Maine has for the past
five years been an officer or employee of CMP Group, Central Maine, or an
affiliate company, except Messrs. Jagger and Abbott, who have been non-employee
directors since 1988, and Mr. McClain. Mr. McClain joined Central Maine February
23, 1998. Prior to his employment with Central Maine, he was Group Vice
President and Chief Operating Officer, Petroleum Group, Dead River Company from
1981 to 1996.
PART II
Item 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
CMP Group's common stock has been traded on the New York Stock Exchange since
September 1, 1998. Prior to that date the numbers in the table below refer to
Central Maine's common stock. As of December 31, 1998, there were 32,590 holders
of record of CMP Group common stock.
Price Range of and Dividends on Common Stock
Market Price Dividends
High Low Declared
1998
First Quarter $17-13/16 $15-1/4 $0.225
Second Quarter 20-3/8 17-1/16 0.225
Third Quarter 20-1/2 16-15/16 0.225
Fourth Quarter 20 16-3/4 0.225
1997
First Quarter $11-5/8 10-1/2 $0.225
Second Quarter 12-3/4 10 0.225
Third Quarter 13-9/16 12-1/16 0.225
Fourth Quarter 15-1/2 12-7/8 0.225
Under the most restrictive terms of the Indenture securing Central Maine's
General and Refunding Mortgage Bonds and of Central Maine Articles of
Incorporation, no dividend may be paid on the common stock of Central Maine if
such dividend would reduce retained earnings below $29.6 million. At December
31, 1998, Central Maine's retained earnings were $76.3 million, of which $46.7
million was not so restricted. There are currently no such restrictions on the
payment of dividends by CMP Group. Future dividend decisions will be subject to
future earnings levels and the financial condition of CMP Group and Central
Maine and will reflect the evaluation by their Board of Directors of then
existing circumstances.
Item 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated financial data of CMP Group
and Central Maine for the five years ended December 31, 1994 through 1998. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the consolidated
financial statements and related notes thereto included in Items 7 and 8 hereof.
The selected consolidated financial data for the years ended December 31, 1994
through 1998 are derived from the audited consolidated financial statements of
Central Maine.
Selected Consolidated Financial Data
(Dollars in Thousands, Except Per Share Amounts)
CMP Group Central
Maine
1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ----
Electric operating revenue $ 938,739 $ 938,561 $ 954,176 $ 967,046 $ 916,016 $ 904,883
Net income (loss) 52,910 54,823 13,422 60,229 37,980 (23,265)
Long-term obligations 346,281 343,834 400,923 587,987 622,251 638,841
Redeemable preferred stock 18,910 18,910 39,528 53,528 67,528 80,000
Total assets 2,262,884 2,223,480 2,298,966 2,010,914 1,992,919 2,046,007
Earnings (loss) per common share $ 1.63 $ 1.56 $0.16 $1.57 $0.86 $(1.04)
Dividends declared per common share
$0.90 $0.675* $0.90 $0.90 $0.90 $0.90
*1998 fourth quarter dividend of $0.225 per share was declared and paid in
January 1999.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF CMP GROUP AND CENTRAL MAINE POWER COMPANY
This is a combined Report on Form 10-K of CMP Group and Central Maine.
Therefore, our Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) applies to both CMP Group and Central Maine. CMP
Group's consolidated financial statements include the accounts of CMP Group and
its wholly owned and controlled subsidiaries, including Central Maine
(collectively, the CMP Group System). Central Maine's consolidated financial
statements include its accounts as well as those of its wholly owned and
controlled subsidiaries. The MD&A should be read in conjunction with the
consolidated financial statements included herein.
Note re Forward-Looking Statements
This Report on Form 10-K contains forecast information items that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. CMP Group
and Central Maine undertake no obligation to republish revised forward-looking
statements to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events. Readers are urged to carefully
review and consider the factors in the succeeding paragraph.
Factors that could cause actual results to differ materially include, among
other matters, the outcome of the FERC proceeding involving Maine Yankee's
rates, decommissioning costs and issues related to the closing of the Maine
Yankee nuclear generating plant; the actual costs of decommissioning the Maine
Yankee plant; failure to resolve any significant aspect of the "Year 2000
problem"; electric utility industry restructuring, including the ongoing state
and federal activities that will determine Central Maine's ability to recover
its stranded costs and establish its revenue requirements and rate design as a
transmission-and-distribution utility commencing March 1, 2000; the results of
Central Maine's planned sale of its generating assets; Central Maine's ability
to recover its costs resulting from the January 1998 ice storms that damaged its
transmission and distribution system; future economic conditions;
earnings-retention and dividend-payout policies; developments in the
legislative, regulatory, and competitive environments in which CMP Group and
Central Maine operate; CMP Group's investment in unregulated businesses; and
other circumstances that could affect anticipated revenues and costs, such as
unscheduled maintenance or repair requirements at nuclear plants and other
facilities; and compliance with laws and regulations.
Formation of Holding Company
General. CMP Group is a holding company organized effective September 1, 1998,
which owns all of the common stock of Central Maine and the former non-utility
subsidiaries of Central Maine. As part of the reorganization, all of the shares
of Central Maine's common stock were converted into an equal number of shares of
CMP Group common stock, which are listed on the New York Stock Exchange under
the symbol CTP. The reorganization was approved by Central Maine's shareholders
on May 21, 1998, and on various dates in 1998 by the appropriate state and
federal regulatory agencies.
Results of Operations
CMP
Group Central Maine
(dollars in millions)
Net income (loss) Twelve months ended:
December 31, 1998 $52.9 $1.63/share $54.8
December 31, 1997 5.2 $0.16/share 13.4
----- ----
Increase $47.7 $41.4
Earnings (loss) applicable to common
stock
Twelve months ended:
December 31, 1998 N/A $50.0 $1.56/share
December 31, 1997 N/A 5.2 $0.16/share
-----
Increase $44.8
The 1998 results benefited significantly from a net benefit of $25 million
related to the expiration of a high-cost non-utility power contract; a $27.5
million decrease in purchased power capacity costs, chiefly due to the closing
of the Maine Yankee nuclear plant and a $4 million decrease in fuel cost for
Central Maine generation reflecting lower oil prices. In addition, the following
major, non-operating, non-recurring events had a significant impact on earnings:
1) MaineCom, a subsidiary of CMP Group, sold its 40-percent interest in New
England Fibre Communications. The sale resulted in a net after-tax gain of
approximately $5.7 million or $0.18 per share. 2) Central Maine sold shares then
owned directly in NEON, now a 38.5-percent-owned equity investment of MaineCom,
as part of the initial public offering of NEON common stock. The net after-tax
gain was approximately $1.9 million, or $0.06 per share. 3) Central Maine
finalized the sale of transmission-line easements and land. The net after-tax
gain of approximately $5.6 million resulted in increased earnings of
approximately $0.17 per share.
CMP Group electric operating revenue decreased by $15.4 million or 1.6 percent
to $938.7 million in 1998, and decreased by $12.9 million or 1.3 percent in 1997
to $954.2. Lower sales volume due to the January ice storm, warmer weather,
weaker sales to the pulp and paper industry, and the impact of the Asian
economic crisis, were the major reasons for the decreased revenue in 1998. The
major components of the change in electric operating revenue are as follows:
1998 1997
Revenue from Central Maine service-area kwh sales $(20.2) $ 17.9
Revenues from non-territorial sales 6.2 (27.1)
Other operating revenue 4.5 (1.5)
MEPCO fuel cost recovery (5.9) (2.2)
---- ----
$(15.4) $(12.9)
Service Area Kwh Sales. Central Maine's service area sales of electricity
totaled approximately 9.05 billion kilowatt-hours for the year ended December
31, 1998, down slightly from the 9.4 billion kilowatt-hour level of a year ago.
Central Maine's service-area sales for the years 1998, 1997 and 1996 are shown
in the following table:
(Kilowatt-hours in millions)
1998 1997 1996
---- ---- ----
% % %
KWH change KWH change KWH change
Residential 2,761 (2.0)% 2,817 (0.4)% 2,829 1.0%
Commercial 2,563 1.3 2,529 1.6 2,489 0.5
Industrial 3,487 (7.8) 3,784 2.6 3,689 4.0
Wholesale and
lighting 242 6.1 228 5.3 217 58.9
------ ----- ------
Total Service-
Area Sales 9,053 (3.2)% 9,358 1.5 % 9,224 2.9%
===== ===== =====
The primary factors in the service-area kilowatt-hour sales overall decrease in
1998 were the reduction in residential sales due to warm winter temperatures,
customer outages resulting from the January 1998 ice storm and lost sales in the
paper industry within the industrial sector.
The primary factors in the service-area kilowatt-hour sales increases in 1997
were the growth experienced by the paper mills and strong sales to other
industrial sectors. Nearly half of that growth directly related to an expansion
by a large industrial customer. The increase in 1996 was residential customers'
taking advantage of Central Maine's water-heating programs, increased sales in
the pulp and paper industry, and the addition of a wholesale customer.
The average number of residential customers increased by 4,607 in 1998, 4,822 in
1997 and 5,157 in 1996, while average usage per residential customer declined
3.0 percent in 1998, 1.5 percent in 1997 and 0.15 percent in 1996.
The 1998 increase in commercial sales reflects increased sales in the retail and
service sectors, which rebounded strongly after the warm winter temperatures and
the ice storm experienced early in 1998, due to the relatively healthy economy
and a strong tourist season in Central Maine's service territory.
Industrial sales levels are significantly affected by sales to the
pulp-and-paper industry, which accounts for approximately 56 percent of
industrial sales and approximately 22 percent of total service-area sales. Sales
to the pulp-and-paper sector decreased by 14.4 percent in 1998, 0.8 percent in
1997 and increased by 3.7 percent in 1996. The decrease in 1998 was due
primarily to the closing of two pulp and paper mills and the expiration of a
buy-sell contract with a third paper mill. In addition, the weakness in Asian
economies progressively impacted Maine's manufacturing sector in 1998, resulting
in lower than expected kwh sales in the industrial sector. The decrease in 1997
was due primarily to the permanent shutdown of one of the paper mills in 1997.
The increase in 1996 reflects special arrangements Central Maine has made with
several paper companies to back down some of their self-generation and buy
electricity from Central Maine at a discounted rate. Refer to "Alternative Rate
Plan" and "Competition and Economic Development," below, and Note 4 to
Consolidated Financial Statements, "Commitments and Contingencies -
Competition," for additional information regarding Central Maine's actions to
preserve its remaining large-industrial-customer base and other customer groups.
Sales to all other industrial customers as a group increased 2.2 percent in
1998, 8.2 percent in 1997 and 4.5 percent in 1996.
Operating Expenses
Central Maine's purchased power-energy expense decreased by $50 million in 1998.
The decrease is due primarily to the buyout, restructuring, and expiration of
contracts with non-utility generators. Central Maine's purchased power-capacity
expense decreased $27.5 million in 1998 due primarily to the permanent shutdown
of the Maine Yankee Plant in August 1997.
Central Maine incurred additional expenses of $46.0 million in 1997 over 1996 to
replace Maine Yankee energy and pay its share of capacity charges at the plant.
In addition, shutdowns at Millstone Unit No. 3 and Connecticut Yankee Plants
increased 1997 replacement-power cost by $5.0 million.
CMP Group maintenance expense increased $7.1 million for the year ended December
31, 1998 compared to 1997. This increase was due primarily to Central Maine's
operations personnel working in maintenance capacities as a result of the ice
storm in the first quarter, and to subsequent cleanup efforts.
Federal and state income taxes fluctuate with the level of pre-tax earnings and
the regulatory treatment of taxes by the MPUC. This expense increased by $33.5
million in 1998 as compared to 1997, as a result of higher pre-tax earnings for
the year ended December 31, 1998. The decrease of $23.9 million in 1997 from
1996 is a reflection of lower pre-tax earnings for the year ended December 31,
1997.
Other Income and Expense
Equity in Earnings of Associated Companies for CMP Group decreased by $6.3
million for the year ended December 31, 1998, compared to 1997. The decrease is
due primarily to losses recognized due to start-up costs of NEON. See "Expansion
of Lines of Business" below for further discussion.
CMP Group's gain on sale of investments and properties increased in 1998 by
$22.5 million and by $12.9 million for Central Maine. The increase is due
primarily to the following:
CMP Group Central Maine
Sale of New England Fibre by MaineCom $ 9.5 $ -
Sale of stock in NEON 3.1 3.1
Gas pipeline easement sales 6.4 6.4
Sale of land 3.6 3.6
Other - miscellaneous (.1) (.2)
------ ------
$22.5 $12.9
==== ====
CMP Group Other Interest Expense increased by $0.7 million for the year 1998 as
compared to 1997. The increase was due primarily to higher levels of borrowing
on Central Maine's revolving credit facility to meet working capital needs.
Other interest expense increased in 1997 over 1996 primarily due to additional
interest incurred for tax audit settlements and amended returns interest.
In July 1997, Central Maine redeemed $14 million of its 8 7/8% Series Preferred
Stock at par, under the mandatory and optional sinking-fund provisions of that
series. On July 1, 1998, Central Maine redeemed the final $7 million of its 8
7/8% Preferred Stock under the mandatory sinking-fund provision, reducing
dividends in total by approximately $932 thousand for 1998 compared to 1997. On
April 1, 1998 Central Maine redeemed all of its 7 7/8% Preferred Stock ($30
million), reducing dividends by approximately $1.8 million for the year ended
December 31, 1998, compared to 1997. On June 8, 1998, $11.6 million of the
outstanding 7.99% Preferred Stock was repurchased, further reducing dividends by
approximately $697 thousand for the year ended December 31, 1998, compared to
1997.
Alternative Rate Plan
On January 1, 1995, Central Maine's ARP was put into effect. Instead of rate
changes based on the level of costs incurred and capital investments, the ARP
provides for one annual adjustment of an inflation-based cap on each of Central
Maine's rates, with no separate reconciliation and recovery of fuel and
purchased-power costs. Under the ARP, the MPUC is continuing to regulate Central
Maine's operations and prices, provide for continued recovery of deferred costs,
and specify a range for its rate of return. The MPUC confirmed in its order
approving the ARP that the ARP is intended to comply with the provisions of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation." As a result, Central Maine will continue to
apply the provisions of SFAS No. 71 to its accounting transactions and its
future financial statements. See Note 3, "Regulatory matters," of Notes to
Consolidated Financial Statements - "Meeting the Requirements of SFAS No. 71,"
below.
The ARP contains a mechanism that provides price-caps on Central Maine's retail
rates to be adjusted annually on each July 1, commencing in 1995, by a
percentage combining (1) a price index, (2) a productivity offset, (3) a sharing
mechanism, and (4) flow-through items and mandated costs. The price cap applies
to all of Central Maine's retail rates, and includes fuel and purchased power
costs that previously had been treated separately. Under the ARP, fuel expense
is no longer subject to reconciliation or specific rate recovery, but is subject
to the annual indexed price-cap changes.
A specified standard inflation index is the basis for each annual price-cap
change. The inflation index is reduced by the sum of two productivity factors, a
general productivity offset of 1.0%, and a second formula-based offset that
started in 1996 and was intended to reflect the limited effect of inflation on
Central Maine's purchased-power costs during the proposed five-year initial term
of the ARP.
The sharing mechanism may adjust the subsequent year's July price-cap change in
the event Central Maine's earnings are outside a range of 350 basis points above
or below Central Maine's allowed return on equity (starting at the 10.55%
allowed return in 1995) and indexed annually for changes in capital costs.
Outside that range, profits and losses could be shared equally by Central Maine
and its customers in computing the price-cap adjustment. The ROE used for
earnings sharing is scheduled to be increased to 11.5% effective with the July
1999 price change.
The ARP also provides for partial flow-through to ratepayers of cost savings
from non-utility generator contract buy-outs and restructuring, recovery of
energy-management costs, and penalties for failure to attain customer-service
and energy-efficiency targets. The ARP also generally defines mandated costs
that would be recoverable by Central Maine notwithstanding the index-based price
cap. To receive such treatment, the annual revenue requirement related to a
mandated cost must exceed $3 million and have a disproportionate effect on
Central Maine or the electric-power industry.
On May 13, 1998, Central Maine submitted its 1998 ARP compliance filing to the
MPUC. In keeping with its pledge of limiting increases to the inflation index,
Central Maine voluntarily limited its request to 1.78%, which was the inflation
rate for 1997 under the ARP. Central Maine also proposed a rate reduction of
approximately ten percent contingent on the consummation of, and ratemaking
associated with, Central Maine's planned sale of generating assets. The filing
also reported information on the costs of restoring service to Central Maine's
customers after the January 1998 ice storm, as required by the earlier MPUC
order allowing Central Maine to defer those costs. Effective July 11, 1998, the
MPUC approved a stipulated 1.33% increase. The amount of the increase remains
subject to change, based on the outcome of the pending FERC proceeding related
to the permanent shutdown of the Maine Yankee plant. Depending on FERC's
decision, the price increase could increase or decrease, ranging from a ceiling
of 1.78% to a floor of 0.22%. However, the Offer of Settlement pending before
the FERC in Maine Yankee's rate case, which has been approved by the MPUC,
provides that the 1998 ARP increase will not be adjusted.
The components of the last three ARP price increases approved by the MPUC are as
follows:
1998 1997 1996
---- ---- ----
Inflation Index 1.78% 2.12% 2.55%
Productivity Offset (1.00) (1.00) (1.00)
Qualifying Facility Offset (.29) (.42) -
Earnings Sharing 1.12 - .32
Flowthrough and Mandated Items (.28) .40 (.61)
---- ----- -----
1.33% 1.10% 1.26%
==== ==== ====
Electric-Utility Industry Restructuring
Stranded Costs. The enactment by Congress of the Energy Policy Act of 1992
accelerated planning by electric utilities, including Central Maine, for a
transition to a more competitive industry. In Maine, legislation that will
restructure the electric-utility industry by March 1, 2000, was enacted by the
Maine Legislature in May 1997, and is discussed in detail under this heading
below. Such a departure from traditional regulation, however, could have a
substantial impact on the value of utility assets and on the ability of electric
utilities to recover their costs through rates. In the absence of full recovery,
utilities would find their above-market costs to be "stranded", or
unrecoverable, in the new competitive setting.
Central Maine has substantial exposure to cost stranding relative to its size.
In general, its stranded costs reflect the excess costs of Central Maine's
purchased-power obligations over the market value of the power, and the costs of
deferred charges and other regulatory assets. The major portion of Central
Maine's stranded costs is related to above-market costs of purchased-power
obligations arising from Central Maine's long-term, noncancelable contracts for
the purchase of capacity and energy from NUGs, with lesser estimated amounts
related to Central Maine's deferred regulatory assets.
There is a high degree of uncertainty that surrounds stranded-cost estimates,
resulting from having to rely on projections and assumptions about future
conditions, including, among others, estimates of the future market for power.
Higher market rates lower stranded-cost exposure, while lower market rates
increase it. In addition to market-related impacts, any estimate of the ultimate
level of stranded costs depends on such factors as state and federal
regulations, the extent, timing and form that competition for electric service
will take, the ongoing level of Central Maine's costs of operations, regional
and national economic conditions, growth of Central Maine's sales, the timing of
any changes that may occur from state and federal initiatives on restructuring,
and the extent to which regulatory policies and decisions address recovery of
stranded costs, including the application of value from the sale of Central
Maine's generating assets.
The estimated market rate for power is based on anticipated regional market
conditions and future costs of producing power. The present value of future
purchased-power obligations and Central Maine's generating costs reflects the
underlying costs of those sources of generation in place today, with reductions
for contract expirations and continuing depreciation. Deferred regulatory-asset
totals include the current uncollected balances and existing amortization
schedules for purchased-power contract restructuring and buyouts negotiated by
Central Maine to lessen the impact of these obligations, along with energy
management costs, financing costs, and other regulatory commitments.
Maine Restructuring Legislation. The 1997 Maine restructuring legislation
requires the MPUC, when retail access to generation begins on March 1, 2000, to
provide a "reasonable opportunity" to recover stranded costs through the rates
of the transmission-and-distribution company, comparable to the utility's
opportunity to recover stranded costs before the implementation of retail access
under the legislation. Stranded costs are defined as the legitimate, verifiable
and unmitigable costs made unrecoverable as a result of the restructuring
required by the legislation and will be determined by the MPUC as provided in
the legislation. The MPUC has been conducting separate adjudicatory proceedings
to determine the stranded costs for each Maine utility, along with the
corresponding revenue requirements and stranded-cost charges to be charged by
each transmission-and-distribution utility. The first phase of the Central Maine
proceeding was completed in early 1999 and is discussed under the heading "MPUC
Proceeding on Stranded Costs, Revenue Requirements, and Rate Design," below.
In addition, the legislation requires utilities to use all reasonable means to
reduce their potential stranded costs and to maximize the value from generation
assets and contracts. The MPUC must consider a utility's efforts to mitigate its
stranded costs in determining the amount of the utility's stranded costs.
Stranded costs and the related rates charged to customers will be prospectively
adjusted as necessary to correct substantial inaccuracies in the year 2003 and
at least every three years thereafter.
The principal restructuring provisions of the legislation provide for customers
to have direct retail access to generation services and for deregulation of
competitive electric providers, commencing March 1, 2000, with
transmission-and-distribution companies continuing to be regulated by the MPUC.
By that date, subject to possible extensions of time granted by the MPUC to
improve the sale value of generation assets, investor-owned utilities are
required to divest all generation assets and generation-related business
activities, with two major exceptions: (1) non-utility generator contracts with
qualifying facilities and contracts with demand-side management or conservation
providers, brokers or hosts, and (2) ownership interests in nuclear power
plants. However, the MPUC can require Central Maine to divest its interest in
Maine Yankee Atomic Power Company on or after January 1, 2009. As discussed
below under "Agreement for Sale of Generating Assets," Central Maine has
contracted to sell its non-nuclear generating assets and, after a favorable
court decision, is proceeding toward completing the sale by April 7, 1999. The
legislation also requires investor-owned utilities, after February 29, 2000, to
sell their rights to the capacity and energy from all generation assets,
including the purchased-power contracts that had not previously been divested
pursuant to the legislation, with certain immaterial exceptions.
Upon the commencement of retail access on March 1, 2000, Central Maine, as a
transmission-and-distribution utility, will be prohibited from selling electric
energy to retail customers. Any competitive electricity provider that is
affiliated with Central Maine would be allowed to sell electricity outside
Central Maine's service territory without limitation as to amount, but within
Central Maine's service territory the affiliate would be limited to providing
not more than 33 percent of the total kilowatt-hours sold within Central Maine's
service territory, as determined by the MPUC. CMP Group does not now intend to
engage in the sale of electric energy after March 1, 2000.
Other features of the legislation include the following:
(a) After the effective date of the legislation, if an entity purchases
10 percent or more of the stock of a distribution utility, including Central
Maine, the purchasing entity and any related entity would be prohibited from
selling generation service to any retail customer in Maine.
(b) The legislation encourages the generation of electricity from
renewable resources by requiring competitive providers, as a condition of
licensing, to demonstrate to the MPUC that no less than 30 percent of their
portfolios of supply sources for retail sales in Maine are accounted for by
renewable resources.
(c) The legislation requires the MPUC to ensure that standard-offer
service is available to all consumers, but any competitive provider affiliated
with Central Maine would be limited to providing such service for only up to 20
percent of the electric load in Central Maine's service territory.
(d) Beginning March 1, 2002, or, by MPUC rule, as early as March 1, 2000,
the providing of billing and metering services will be subject to competition.
(e) A customer who significantly reduces or eliminates consumption of
electricity due to self-generation, conversion to an alternative fuel, or
demand-side management may not be assessed an exit fee or re-entry fee in any
form for such reduction or elimination of consumption or for the
re-establishment of service with a transmission-and-distribution utility.
(f) Finally, the legislation provides for programs for low-income
assistance, energy conservation research and development on renewable resources,
assistance for utility employees laid off as a result of the legislation, and
recovery of nuclear-plant decommissioning costs "[a]s required by federal law,
rule or order", all funded through transmission-and-distribution utility rates
and charges.
Legislative bills that would amend certain provisions of the 1997 legislation
have been submitted to the 1999 session of the Maine Legislature. CMP Group and
Central Maine cannot predict whether any changes to the 1997 legislation will be
enacted.
MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design. The
MPUC has completed the first phase of the proceeding contemplated by Maine's
restructuring legislation that will ultimately determine the recovery of Central
Maine's stranded costs, its revenue requirements, and the design of its rates to
be effective when Central Maine becomes a transmission-and-distribution utility
at the time retail access to generation begins in Maine on March 1, 2000. On
December 23, 1998, the MPUC Hearing Examiners in the proceeding issued their
report, in the form of a recommended decision. Central Maine disagreed with a
number of the individual recommendations in the stranded-costs and
revenue-requirements areas and filed exceptions to those recommendations. The
MPUC deliberated the recommendations on February 10 and 11, 1999, indicated
disagreement with some of the recommendations, and issued its written order on
March 19, 1999.
The MPUC stressed in its order that it was deciding the "principles" by which it
would set Central Maine's transmission-and-distribution rates, effective March
1, 2000, but was not calculating the rates themselves because such calculations
at that time would rely excessively on estimates. The MPUC pointed out that it
would hold a "Phase II" hearing to set the actual rates and determine the
recoverable stranded costs after processing information expected to become
available during 1999.
With respect to stranded costs, the MPUC indicated that it would set the amount
of recoverable stranded costs for Central Maine later in the proceeding pursuant
to its mandate under the restructuring statute to provide
transmission-and-distribution utilities a reasonable opportunity to recover such
costs that is equivalent to the utility's opportunity to recover these costs
prior to the commencement of retail access. The MPUC also reviewed the
prescribed methodology for determining the amount of a utility's stranded costs,
including among other factors the application of excess value from divested
generation assets to offset stranded costs. At the beginning of the proceeding
Central Maine had estimated its total stranded costs to be approximately $1.3
billion.
In the area of revenue requirements, the Phase I order did not include
definitive amounts, but did contain the MPUC's conclusions as to the appropriate
cost of common equity for Central Maine as a transmission-and-distribution
company beginning March 1, 2000. Central Maine had recommended a 12-percent cost
of common equity with a 55-percent common equity component in the capital
structure. The MPUC, after weighing conflicting recommendations, decided on a
common-equity cost of 10.50 percent with a common-equity component of 47
percent, and an overall weighted-average cost of capital of 8.68 percent.
In dealing with rate design, the MPUC limited itself in the first phase of the
proceeding primarily to establishing principles that would guide it in designing
Central Maine's rates to be effective March 1, 2000. The MPUC indicated that it
would focus on (1) facilitating the transition to a competitive market for
generation, and (2) implementing a "no-losers" policy, i.e., that the new rate
design would cause no Central Maine customer's bill to increase on March 1,
2000. Applying the latter principle, the MPUC rejected a newly designed standby
rate for self-generators proposed by Central Maine in favor of a design
generally similar to Central Maine's current rate for the class. The MPUC stated
that it planned to undertake a comprehensive rate design and alternative rate
plan proceeding for Central Maine prior to March 1, 2002, when it could consider
experience gained with the cost structures of other
transmission-and-distribution utilities after the commencement of retail access
to generation.
The Phase I order resulted from an extended proceeding with many points of view
represented and covers a wide variety of rate-related subjects. Definitive
findings by the MPUC in a number of the subject areas await the second phase of
the proceeding, which must be completed before March 1, 2000. CMP Group and
Central Maine cannot predict the definitive amount of stranded costs the MPUC
will determine that Central Maine will be entitled to recover pursuant to the
mandate of the restructuring statute, or the revenue requirements and rate
design that will result from Phase II of the MPUC proceeding.
Agreement for Sale of Generation Assets
On January 6, 1998, Central Maine announced that it had reached agreement to
sell all of its hydro, fossil and biomass power plants with a combined
generating capacity of 1,185 megawatts for $846 million in cash, including
approximately $18 million for assets of Union Water, to Florida-based FPL Group.
The related book value for these assets was approximately $218.9 million at
December 31, 1998. In addition, as part of its agreement with FPL Group, Central
Maine entered into energy buy-back agreements to assist in fulfilling its
obligation to supply its customers with power until March 1, 2000. Subsequently,
an agreement was reached to sell related storage facilities to FPL Group for an
additional $3.6 million ($1.5 million for the assets and $2.1 million for lease
revenue associated with the properties that CMP will retain), including $1.15
million for Union Water assets. The related book value of these assets was
approximately $11.9 million at December 31, 1998.
Central Maine's interests in the power entitlements from approximately 50
power-purchase agreements with non-utility generators representing approximately
488 megawatts, its 2.5-percent interest in the Millstone Unit No. 3 nuclear
generating unit in Waterford, Connecticut, its 3.59-percent interest in the
output of the Vermont Yankee nuclear generating plant in Vernon, Vermont, and
its entitlement in the NEPOOL Phase II interconnection with Hydro-Quebec all
attracted insufficient interest to be included in the pending sale. Central
Maine will continue to seek buyers for those assets. Central Maine did not offer
for sale its interests in the Maine Yankee (Wiscasset, Maine), Connecticut
Yankee (Haddam, Connecticut) and Yankee Atomic (Rowe, Massachusetts) nuclear
generating plants, all of which are in the process of being decommissioned.
Substantially all of the generating assets included in the sale are subject to
the lien of Central Maine's General and Refunding Mortgage Indenture dated as of
April 15, 1976 (the "Indenture"). Therefore, substantially all of the proceeds
from sale must be deposited initially with the trustee under the Indenture at
the closing of the sale to free the generating assets from the lien of the
Indenture. Central Maine plans to use some of the proceeds on deposit with the
trustee to redeem or repurchase bonds under the terms of the Indenture, and may
discharge the Indenture. In addition, the proceeds could provide the flexibility
to redeem or repurchase outstanding equity securities. Central Maine must also
provide for payment of applicable taxes resulting from the sale. The manner and
timing of the ultimate application of the sale proceeds after closing are in any
event subject to various factors, including Indenture provisions, regulatory
requirements, market conditions and terms of outstanding securities.
On November 17, 1998, FPL Group announced that its subsidiary, FPL Energy Maine,
Inc. ("FPL Energy") had filed a civil action in the United States District Court
for the Southern District of New York requesting a declaratory judgment that
Central Maine could not meet essential terms of the January agreement. FPL Group
asserted that based on October 1998 FERC rulings on transmission access, as well
as other issues, it believed that Central Maine could not comply with the
conditions in the purchase contract and that FPL Energy should not be bound to
complete the transaction.
FPL Energy contended in its complaint that the FERC rulings (1) constituted a
material adverse effect under the purchase agreement and substantially lessened
the value of Central Maine's generating assets, and (2) precluded Central Maine
from obtaining all federal, state and local consents and approvals required for
the ownership, operation and maintenance of the generating assets in a manner
substantially consistent with Central Maine's historical ownership, operation,
and maintenance thereof, as required by the purchase agreement. In addition, FPL
Energy asserted that the FERC rulings limited the ability of the prospective
buyer to get power from the Central Maine generating assets to market
unconstrained by transmission limitations resulting from new generators being
added to the NEPOOL system, and therefore, based on the doctrine of frustration
of purpose, FPL Energy should be "excused without further obligation or
liability from effecting the purchase of [Central Maine's] generating assets."
Central Maine, FPL Energy, NEPOOL, and other parties interested in New England
transmission-access issues requested rehearing of the FERC rulings.
On November 23, 1998, the MPUC granted its approval of the sale to FPL Energy of
the generating assets contemplated by the purchase agreement, finding the sale
to be in the public interest. The MPUC also made the findings required as a
prerequisite to a FERC designation of the generating facilities as "exempt
wholesale generators," which had been requested by FPL Energy.
On November 24, 1998, the FERC approved the sale of the Central Maine generating
assets to FPL Energy, after making the required finding that the sale was
consistent with the public interest, and accepted certain implementing
agreements for filing. In discussing an issue raised by an intervenor the FERC
stated that by purchasing the generating assets FPL Energy would be "stepping
into the shoes of Central Maine" with respect to access to the Central Maine and
NEPOOL transmission system, but did not disturb the earlier transmission-access
rulings. The FERC granted its approval of the transfer of hydroelectric and
water storage licenses on December 28, 1998, and the approval by FERC of
exempt-wholesale-generator status for the generating facilities, was granted on
February 24, 1999.
On March 11, 1999, the hearing on FPL Energy's request for a declaratory
judgment was held in the United States District Court for the Southern District
of New York. On the same day the presiding judge ruled that FPL Energy was not
entitled to the declaratory judgment and entered judgment for Central Maine and
its affiliated defendants on all counts of the complaint. Thereafter on that day
FPL Energy announced that it would not appeal the decision, but would proceed to
a closing of the sale on or before April 7, 1999, as required by the sale
agreement, and the parties are preparing for the closing.
Expansion of Lines of Business
General. CMP Group is also preparing for competition by expanding its business
opportunities through investments that capitalize on core competencies. MaineCom
Services is a subsidiary that arranges, through other investments fiber-optic
data service for bulk carriers, offering support for cable television or
"super-cellular" personal communication vendors, and providing other
telecommunications consulting services. TeleSmart is a wholly-owned accounts
receivable management subsidiary. Another wholly-owned subsidiary, CNEX,
formerly CMP International Consultants, provides utility consulting (domestic
and international) and research. The wholly-owned Union Water Power Company
provides management of rivers and recreational facilities, locating of
underground utility facilities and infrared photography, real estate brokerage
and management, modular housing, engineering and environmental services,
integrated energy solutions, and utility construction services. Union Water's
operating divisions include On Target Utility Services, UnionLand Services,
Maine HomeCrafters, E/PRO, and Combined Energies(TM). These subsidiaries often
utilize skills of former Central Maine employees and regularly compete for
business with other companies.
Natural Gas Distribution. CMP Group and Energy East, through subsidiaries, have
entered into a joint-venture agreement to pursue opportunities to distribute
natural gas at retail in many Maine communities that are not currently served
with that fuel. They would offer natural-gas service in several areas of Maine,
primarily the Augusta, Bangor, Bath-Brunswick, Bethel, Windham and Waterville
areas, none of which currently has a natural-gas distribution system in place.
The gas would be drawn from two new gas-pipeline projects now under development
by unrelated parties that would carry Canadian gas through Maine and into the
regional energy market using substantial portions of electric transmission-line
corridors owned by Central Maine and MEPCO. On July 24, 1998, the MPUC
authorized the joint venture to serve the areas it had applied to serve. The new
company (now "CMP Natural Gas, L.L.C.", equally owned by subsidiaries of CMP
Group and Energy East) would face competition from a new gas utility affiliated
with Bangor Hydro-Electric Company in the Bangor area, and in the Bath-Brunswick
area, from an existing gas utility, Northern Utilities, Inc., which has been
serving other areas of Maine, including the Portland and Lewiston-Auburn areas.
CMP Group's level of investment is dependent on the overall economic feasibility
of natural gas as a competitive energy option in Maine, a sufficient expression
of customer interest in gas service from CMP Natural Gas, and the prospects for
achieving an acceptable return on investment.
Fiber Optic Network. CMP Group, through its wholly-owned subsidiary MaineCom
Services, owns 38.5 percent of the common stock of Northeast Optic Network, Inc.
("NEON"), which is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic transmission capacity for communications carriers on
local loop, inter-city and interstate facilities. NEON is currently expanding
its fiber optic network to encompass over 1,000 fiber optic cable route miles,
or more than 65,000 fiber strand miles, in New England and New York, utilizing
primarily electric-utility rights-of-way, including some of Central Maine's in
Maine and some owned by other electric utilities including Northeast Utilities,
another substantial minority stockholder, in Connecticut, Massachusetts and New
Hampshire. As of December 31, 1998, NEON had completed construction of
approximately 600 route miles, or 49,000 fiber miles, of its planned system and
is currently engineering, constructing, or acquiring additional routes with a
goal of creating a continuous fiber optic link between New York City and
Portland, Maine, with access into and around Boston and numerous other major
service areas in the Northeast.
On August 5, 1998, NEON completed initial public offerings of $48.0 million of
common stock and $180.0 million of senior notes, and Central Maine, as part of
the common-stock offering, sold some of the shares in NEON it then owned for
proceeds of approximately $3.1 million. In addition, with some of the proceeds
of the offering NEON repaid approximately $18 million Central Maine had advanced
under an earlier construction loan agreement. CMP Group believes there is a
growing need for such a fiber optic network in the Northeast and that NEON's
outside financing will provide substantial assistance in completing construction
of the network, but cannot predict the results of this venture. The common stock
of NEON is listed on the Nasdaq Stock Market's National Market under the symbol
"NOPT".
Permanent Shutdown of Maine Yankee Plant
On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently
cease power operations at its nuclear generating plant at Wiscasset, Maine (the
"Plant") and to begin decommissioning the Plant. As reported in detail in
Central Maine's Annual Report on Form 10-K for the year ended December 31, 1997,
the Plant had experienced a number of operational and regulatory problems and
did not operate after December 6, 1996. The decision to close the Plant
permanently was based on an economic analysis of the costs, risks and
uncertainties associated with operating the Plant compared to those associated
with closing and decommissioning it. The Plant's operating license from the NRC
was scheduled to expire on October 21, 2008.
FERC Rate Case. On November 6, 1997, Maine Yankee submitted to FERC for filing
certain amendments to the Power Contracts (the "Amendatory Agreements") and
revised rates to reflect the decision to shut down the Plant and to request
approval of an increase in the decommissioning component of its formula rates.
Maine Yankee's submittal also requested certain other rate changes, including
recovery of unamortized investment (including fuel) and certain changes to its
billing formula, consistent with the non-operating status of the Plant. By Order
dated January 14, 1998, the FERC accepted Maine Yankee's new rates for filing,
subject to refund after a minimum suspension period, and set Maine Yankee's
Amendatory Agreements, rates and issues concerning the prudence of the
Plant-shutdown decision for hearing.
By Complaint dated December 9, 1997, the Maine Office of the Public Advocate
("OPA") sought a FERC investigation of Maine Yankee's actions leading to the
decision to shut down the Plant, including actions associated with the
management and operation of Maine Yankee since 1993. The MPUC had initiated an
investigation in Maine earlier, raising generally similar issues. By decision
dated May 4, 1998, the FERC consolidated the OPA Complaint with the
comprehensive rate proceeding. In addition, 28 municipal and cooperative
utilities that had purchased in the aggregate approximately 6.2 percent of the
output of the Plant from Maine Yankee's sponsors (the "Secondary Purchasers")
intervened in the FERC proceeding, raising similar prudence issues and other
issues specific to their status as indirect purchasers from Maine Yankee.
In support of its request for an increase in decommissioning collections, Maine
Yankee submitted with its initial FERC filing a 1997 decommissioning cost study
performed by TLG Services, Inc. ("TLG"). During 1998, Maine Yankee engaged in an
extensive competitive bid process to engage a Decommissioning Operations
Contractor ("DOC") to perform certain major decontamination and dismantlement
activities at the Plant on a fixed-price, turnkey basis. As a result of that
process, a consortium headed by Stone & Webster Engineering Corporation ("Stone
& Webster") was selected to perform such activities under a fixed-price
contract. The contract provides for, among other undertakings, construction of
an independent spent fuel storage installation ("ISFSI") and completion of major
decommissioning activities and site restoration by the end of 2004. The DOC
process resulted in fixing certain costs that had been estimated in the earlier
decommissioning cost estimate performed by TLG.
Since the filing of the rate request, Maine Yankee and the active intervenors,
including among others the MPUC Staff, the OPA, Central Maine and other owners,
the Secondary Purchasers, and a Maine environmental group (the "Settling
Parties"), engaged in extensive discovery and negotiations. Those parties
participated in settlement discussions that resulted in an Offer of Settlement
filed by those parties with the FERC on January 19, 1999. On February 8, 1999,
the FERC Trial Staff recommended that the presiding judge certify the settlement
to the FERC and that the FERC approve it. Upon approval by the FERC, the
settlement would constitute a full settlement of all issues raised in the
consolidated FERC proceeding, including decommissioning-cost issues and issues
pertaining to the prudence of the management, operation, and decision to
permanently cease operation of the Plant. A separately negotiated settlement
filed with the FERC on February 5, 1999, would resolve the issues raised by the
Secondary Purchasers by limiting the amounts they will pay for decommissioning
the Plant and by settling other points of contention affecting individual
Secondary Purchasers. On February 24, 1999, the FERC Trial Staff recommended
certification and approval of the settlement with the Secondary Purchasers. On
March 10, 1999, the presiding judge certified to the FERC that both Offers of
Settlement were uncontested and joined in the Trial Staff's comments that both
were "fair, reasonable and in the public interest."
The Offer of Settlement provides for Maine Yankee to collect $33.6 million in
the aggregate annually, effective January 15, 1998, consisting of (1) $26.8
million for estimated decommissioning costs, and (2) $6.8 million for
ISFSI-related costs. The original filing with FERC on November 6, 1997, called
for an aggregate annual collection rate of $36.4 million for decommissioning and
the ISFSI, based on the TLG estimate. Under the settlement the amount collected
annually could be reduced to approximately $26 million if Maine Yankee is able
to (1) use for construction of the ISFSI funds held in trust under Maine law for
spent-fuel disposal, and (2) access approximately $6.8 million being held by the
State of Maine for eventual payment to the State of Texas pursuant to a compact
for low-level nuclear waste disposal, the future of which is now in question
after rejection of the selected disposal site in west Texas by a Texas
regulatory agency. Both would require authorizing legislation in Maine, which
Maine Yankee is committed to use its best efforts to obtain.
The Offer of Settlement also provides for recovery of all unamortized investment
(including fuel) in the Plant, together with a return on equity of 6.50 percent,
effective January 15, 1998, on equity balances up to maximum allowed equity
amounts. The Settling Parties also agreed in the proposed settlement not to
contest the effectiveness of the Amendatory Agreements submitted to FERC as part
of the original filing, subject to certain limitations including the right to
challenge any accelerated recovery of unamortized investment under the terms of
the Amendatory Agreements after a required informational filing with the FERC by
Maine Yankee. In addition, the settlement contains incentives for Maine Yankee
to achieve further savings in its decommissioning and ISFSI-related costs and
resolves issues concerning restoration and future use of the Plant site and
environmental matters of concern to certain of the intervenors in the
proceeding.
As a separate part of the Offer of Settlement, Central Maine, the other two
Maine utilities which own interests in Maine Yankee, the MPUC Staff, and the OPA
entered into a further agreement resolving retail rate issues and other issues
specific to the Maine parties, including those that had been raised concerning
the prudence of the operation and shutdown of the Plant (the "Maine Agreement").
Under the Maine Agreement Central Maine would continue to recover its Maine
Yankee costs in accordance with its most recent ARP order from the MPUC without
any adjustment reflecting the outcome of the FERC proceeding. To the extent that
Central Maine has collected from its retail customers a return on equity in
excess of the 6.50 percent contemplated by the Offer of Settlement, no refunds
would be required, but such excess amounts would be credited to the customers to
the extent required by the ARP.
The final major provision of the Maine Agreement requires the Maine owners, for
the period from March 1, 2000, through December 1, 2004, to hold their Maine
retail ratepayers harmless from the amounts by which the replacement power costs
for Maine Yankee exceed the replacement power costs assumed in the report to the
Maine Yankee Board of Directors that served as a basis for the Plant shutdown
decision, up to a maximum cumulative amount of $41 million. Central Maine's
share of that amount would be $31.16 million for the period. The Maine
Agreement, which was approved by the MPUC on December 22, 1998, also sets forth
the methodology for calculating such replacement power costs.
CMP Group and Central Maine believe that the Offer of Settlement, including the
Maine Agreement, constitutes a reasonable resolution of the issues raised in the
Maine Yankee FERC proceeding, and that approval of the Offer of Settlement by
the FERC would eliminate significant uncertainties concerning CMP Group's and
Central Maine's future financial performance. Although all of the active parties
to the proceeding, including the FERC Trial Staff, support or, with respect to
certain individual provisions, do not oppose, the Offer of Settlement, CMP Group
and Central Maine cannot predict with certainty whether or in what form it will
be approved by the FERC.
Other Maine Yankee Shareholders. Periodically-higher nuclear-related costs have
affected the financial condition of other stockholders of Maine Yankee in
varying degrees. 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. CMP
Group and Central Maine cannot predict, however, what effect, if any, the
financial and regulatory difficulties experienced by some Maine Yankee
stockholders might have on Maine Yankee or Central Maine.
Interests in Other Nuclear Plants
In December 1996, the Board of Directors of Connecticut Yankee Atomic Power
Company voted to permanently shut down and decommission the Connecticut Yankee
plant for economic reasons. The plant did not operate after July 22, 1996.
Central Maine estimates its share of the cost of Connecticut Yankee's continued
compliance with regulatory requirements, recovery of its plant investment,
decommissioning and closing the plant to be approximately $29.9 million and has
recorded a corresponding regulatory asset and liability on the consolidated
balance sheet. Central Maine is currently recovering through rates an amount
adequate to recover these expenses. Issues relating to Connecticut Yankee's
decommissioning rates, as well as the prudence of operating that plant and the
decision to cease operations, remain pending before the FERC.
In 1993 the FERC approved a settlement agreement regarding recovery of
decommissioning costs and plant investment, and all issues with respect to the
prudence of the decision to discontinue operation of the Yankee Atomic plant.
Central Maine estimates its remaining share of the cost of Yankee Atomic's
continued compliance with regulatory requirements, recovery of its plant
investment, decommissioning and closing the plant, to be approximately $7.8
million. This estimate has been recorded by Central Maine as a corresponding
regulatory asset and liability on Central Maine's balance sheet. Central Maine's
current share of costs related to the shutdown of Yankee Atomic is being
recovered through rates.
The Vermont Yankee plant is an operating unit. Its NRC operating license is
scheduled to expire in the year 2012.
Pursuant to a joint ownership agreement, Central Maine has a 2.5 percent direct
ownership interest in the Millstone 3 nuclear unit in Waterford, Connecticut,
which is operated by Northeast Utilities. This facility was off-line from March
31, 1996, to July 1998, due to NRC concerns regarding license requirements.
On August 7, 1997, Central Maine and other minority owners of Millstone Unit No.
3 filed suit in Massachusetts Superior Court against Northeast Utilities and its
trustees, and initiated an arbitration claim against two of its subsidiaries,
alleging mismanagement of the unit by the defendants. The minority owners are
seeking to recover their additional costs resulting from such mismanagement,
including their replacement power costs. Since August 1997 the parties have been
engaged in resolving preliminary issues and in extensive pre-hearing discovery
on a schedule calling for an arbitration hearing in the fall of 1999. Central
Maine cannot predict the outcome of the litigation and arbitration or whether
the current schedule will be maintained.
Central Maine is obligated to pay its proportionate share of the operating
expenses, including depreciation and a return on invested capital, of each of
the Yankee Companies referred to above for periods expiring at various dates to
2012. Pursuant to the joint ownership agreement for Millstone 3, Central Maine
is similarly obligated to pay its proportionate share of the operating costs of
Millstone 3. Central Maine is also required to pay its share of the estimated
decommissioning costs of each of the Yankee Companies and Millstone 3. The
estimated decommissioning costs are paid as a cost of energy in the amounts
allowed in rates by the FERC.
Non-Utility Generators
In accordance with prior MPUC policy and the ARP, $99 million of power-purchase
contract buy-out or restructuring costs incurred since January 1992 are included
in Deferred Charges and Other Assets on Central Maine's balance sheet and will
be amortized over their respective fuel savings periods. Central Maine has
restructured 43 contracts representing 389 megawatts of capacity that should
result in approximately $231 million in fuel savings over the next five years.
During 1998 Central Maine purchased or restructured two power-purchase contracts
which it expects will result in savings to its customers the equivalent of
approximately $40.5 million in net present value.
On February 12, 1999, Central Maine restructured a power-purchase contract with
a NUG in Livermore, Maine, which it expects will save its customers the
equivalent of $20.4 million in net present value.
On December 31, 1998, two contracts with NUGs from which Central Maine was
obligated to purchase electricity at substantially above-market prices expired.
As a result, Central Maine expects to reduce power purchases by approximately
$2.7 million.
Open-Access Transmission Service Ruling
On April 24, 1996, the FERC issued Order No. 888, which requires all public
utilities that own, control or operate facilities used for transmitting electric
energy in interstate commerce to file open access non-discriminatory
transmission tariffs that offer both load-based, network and contract-based,
point-to-point service, including ancillary service to eligible customers
containing minimum terms and conditions of non-discriminatory service. This
service must be comparable to the service they provide themselves at the
wholesale level; in fact, these utilities must themselves take the wholesale
transmission service they provide under the filed tariffs. The order also
permits public utilities and transmitting utilities the opportunity to recover
legitimate, prudent and verifiable wholesale stranded costs associated with
providing open access and certain other transmission services. It further
requires public utilities to functionally separate transmission from generation
marketing functions and communications. The intent of this order is to promote
the transition of the electric utility industry to open competition. Order No.
888 also clarifies federal and state jurisdiction over transmission in
interstate commerce and local distribution and provides for deference of certain
issues to state recommendations. The FERC subsequently issued Orders No. 888-A
and 888-B which generally reaffirm Order No. 888 and clarify certain terms.
On July 9, 1996, Central Maine and MEPCO submitted compliance filings to meet
the new pro-forma tariff non-price minimum terms and conditions of
non-discriminatory transmission service and since then have made additional
filings revising their tariffs in response to subsequent FERC and NEPOOL Orders.
Central Maine and MEPCO have been transmitting energy pursuant to their filed
tariffs, subject to refund.
On April 24, 1996, the FERC also issued Order No. 889, which requires public
utilities to functionally separate their wholesale power marketing and
transmission operation functions and to obtain information about their
transmission system for their own wholesale power transactions in the same way
their competitors do through the Open Access Same-time Information System
("OASIS"). The rule also prescribed standards of conduct and protocols for
obtaining the information. The standards of conduct are designed to prevent
employees of a public utility engaged in marketing functions from obtaining
preferential information. In 1998, both Central Maine and MEPCO submitted
standards of conduct filings that further clarified the separation of the
wholesale power marketing and transmission operations functions. The NEPOOL
Agreement and open-access transmission tariff have been revised to reflect the
new regulatory requirements and are pending FERC approval.
Competition and Economic Development
Central Maine faces competition in several aspects of its traditional business
and anticipates that competition will continue to put pressure on both sales and
the prices Central Maine can charge for its product. Alternative fuels and
modifications to regulations that in the past had restricted competition from
suppliers outside of Central Maine's service territory have expanded customers'
energy options, even before the commencement of retail competition on March 1,
2000. As a result, Central Maine continues to pursue retention of its customer
base. This increasingly competitive environment has resulted in Central Maine's
entering into arrangements with its wholesale customers, as well as with certain
industrial, commercial, and residential customers, to provide their energy needs
at prices and margins lower than the current averages.
Pursuant to the pricing-flexibility provisions of the ARP, Central Maine offers
special prices for high-use residential customers and for industrial and
commercial customers with the capacity to change fuel sources.
Economic-Development price contracts and the Maine-Made Incentive Program
support Central Maine's business-development initiatives. In 1994, the Company
lowered tariffs for its large general-service customers and executed separate
five-year definitive agreements with 18 individual customers providing
additional reductions. Approximately 44 percent of annual service area
kilowatt-hour sales and 31 percent of annual revenues are covered under special
tariffs allowed under the pricing flexibility provisions of the ARP. These
reductions in rates were offered to customers after consideration of associated
NUG cost reductions, savings from further NUG consolidations and other general
cost reductions.
"Year 2000" Computer Issues
The "Year 2000 problem" arose because many existing computer programs use only
the last two digits to refer to a year. Therefore those computer programs do not
properly recognize a year that begins with "20" instead of the familiar "19". If
not corrected, many computer applications could fail or create erroneous
results, with potentially serious and widespread adverse consequences.
CMP Group, through Central Maine, began its Year 2000 problem remediation
efforts in 1996, and since that time has developed a broad-based and
comprehensive project plan for addressing Year 2000 issues. The plan includes
both Information Technology ("IT") and non-IT systems, addresses both
centralized and distributed systems, and encompasses systems critical to the
generation, transmission, and distribution of electric energy as well as the
traditional business systems necessary to the CMP Group System.
As planned, by the end of 1998 CMP Group had completed much of the work
associated with Year 2000 readiness for IT infrastructure and centralized
business systems. The remaining work in those areas is scheduled to be completed
during the first six months of 1999. All vendors associated with this remaining
work have indicated availability of products and services that CMP Group
believes should permit CMP Group to be Year 2000 ready by June 1999.
CMP Group's target completion date for Year 2000 power generation and delivery
systems is also June 1999, consistent with the DOE's published request in May
1998 and the overall electric-utility industry guidelines prepared by the North
American Electric Reliability Council ("NERC"). CMP Group has contracted with
the appropriate vendors to complete critical generation control system
remediation work by June 1999, and believes it is on schedule to meet this
target.
In addition to the internal Year 2000 readiness activities discussed above, CMP
Group is actively participating in a joint ISO/NEPOOL initiative designed to
assess, and assure, power reliability within the NEPOOL area. This initiative
encompasses all participants, including Central Maine, within the New England
area.
CMP Group also has an active program in place to identify and address issues
associated with third-party providers. The program addresses business
relationships with all third-party providers, but focuses on those suppliers
deemed critical to CMP Group's business. At this time CMP Group has no
indication that any third-party with which CMP Group has a material relationship
is expecting a Year 2000-related business interruption. CMP Group will continue
to monitor and assess its third-party relationships.
CMP Group estimates it will incur approximately $4.0 million of costs associated
with making the necessary modifications identified to date to both the
centralized and non-centralized systems. As of December 31, 1998, approximately
$3.4 million of such costs has been incurred.
CMP Group recognizes that failure to correct problems associated with Year 2000
issues has the potential to result in material operational and financial risks
if the affected systems either cease to function or produce erroneous results.
Such risks could include inability to operate fossil and/or hydro generating
facilities, disruptions in the operation of Central Maine's transmission and
distribution systems, an inability to access interconnections with other
utilities, and disruptions to Central Maine's major business systems (customer
information and service, administrative, financial).
Central Maine believes, however, that the most likely worst case scenario
resulting from these risks would be a temporary, and short-term, disruption of
electric service. This could occur either as a failure on the part of Central
Maine to successfully address all critical Year 2000 issues, as a failure on the
part of a critical third-party provider, or as a failure on the part of other
entities, including ISO-New England, to successfully maintain the short-term
reliability of power supply and delivery on a regional basis. Central Maine does
not expect that any such short-term service disruption would have a material
impact on its operations, liquidity, or financial condition.
In order to minimize these risks, and the potential recovery time, from Year
2000 problems, CMP Group is actively involved in contingency planning. Although
CMP Group has extensive knowledge and specific experience in disaster/recovery
planning and execution, CMP Group recognizes the importance of Year 2000
specific contingency planning. Accordingly, Central Maine is participating in
the integrated contingency planning effort headed by the North American Electric
Reliability Council, and the Northeast Power Coordinating Council. Further,
Central Maine will be developing comprehensive Year 2000 specific contingency
plans for its own independent operations.
CMP Group believes its plans are adequate to attain Year 2000 readiness, and
that the contingency plans currently under development both internally and at a
regional level should substantially mitigate the risks discussed above.
Liquidity and Capital Resources
Increases in Central Maine's retail rates are limited by Central Maine's ARP.
For a discussion of the ARP, including a 1.33-percent rate increase effective
July 11, 1998, and a proposed rate reduction contingent on the consummation of
Central Maine's planned sale of generating assets in 1999, see Note 3,
"Regulatory Matters" - "Alternative Rate Plan."
Approximately $158.3 million and $159.8 million of cash was provided during the
year ended December 31, 1998 for CMP Group and Central Maine, respectively, from
net income before non-cash items, primarily depreciation, amortization and
deferred income taxes. During that period approximately $66.8 million and $73.5
million of cash was used for fluctuations in certain assets and liabilities and
from other operating activities for CMP Group and Central Maine, respectively.
Included in net income is $19.1 million for CMP Group and $9.5 million for
Central Maine representing gains associated with the sale of investments and
properties.
Investing activities, primarily construction expenditures, utilized $17.4
million in cash during 1998 for generation, transmission, distribution, and
general construction expenditures for CMP Group and $9.1 for Central Maine. In
order to accommodate existing and future loads on its electric system Central
Maine, CMP Group's major subsidiary, is engaged in a continuing construction
program. Central Maine's plans for improvements and expansions, its load
forecast and its power-supply sources are under a process of continuing review.
Actual construction expenditures depend upon the availability of capital and
other resources, load forecasts, the timing of its divestiture of its generating
assets, customer growth and general business conditions. The ultimate nature,
timing and amount of financing for Central Maine's total construction programs,
refinancing and energy-management capital requirements will be determined in
light of market conditions, earnings and other relevant factors.
CMP Group received proceeds of approximately $21.3 million from the sale of
investments and properties. In addition, Central Maine received approximately
$20.1 million resulting from the sale of four subsidiaries to CMP Group.
During 1998 CMP Group paid dividends on common stock of $28.9 million, while
preferred-stock dividends, paid by Central Maine, utilized $6.7 million of cash.
In addition, Central Maine reacquired 1.2 million shares of stock from CMP Group
for $19 million following the holding company formation.
Central Maine's Articles of Incorporation limit certain unsecured indebtedness
that may be outstanding to 20% of capitalization, as defined without the consent
of the holders of Central Maine's preferred stock; 20% of defined capitalization
amounted to $143 million as of December 31, 1998. Unsecured indebtedness, as
defined, amounted to $131 million as of December 31, 1998. Central Maine's $500
million medium-term note program, having received the consent of Central Maine's
preferred stockholders in May 1997, is not included in "unsecured indebtedness"
for purposes of the 20-percent limitation.
At the annual meeting of the stockholders of Central Maine on May 15, 1997, the
holders of Central Maine's outstanding preferred stock consented to the issuance
of $350 million in principal amount of Central Maine's medium-term notes in
addition to the $150 million in principal amount to which they had previously
consented. This expansion of the medium-term note program was implemented to
increase Central Maine's financing flexibility in anticipation of restructuring
and increased competition.
During 1998 Central Maine issued $312 million principal amount of its
medium-term notes and paid $18 million at maturity, making a total of $337 of
medium-term notes outstanding at December 31, 1998 of which $10 million was
short-term. During the year Central Maine redeemed, repurchased or paid at
maturity the following General and Refunding Mortgage Bonds (stated in principal
amounts) and Dividend Series Preferred Stock (in par value), a total of $351
million:
March 30 Series R Bonds, 7-7/8% ($50 million)
March 30 Series N Bonds, 8.50% ($11 million)
April 1 Preferred Stock, 7-7/8% Series ($30 million)
April 15 Series U Bonds, 7.54% ($25 million)
June 8 Preferred Stock, 7.99% Series ($11.6 million)
June 15 Series P Bonds, 7.66% ($31.3 million)
July 1 Preferred Stock, 8 7/8% Series ($7 million)
August 15 Series S Bonds, 6.03% ($60 million)
November 1 Series T Bonds, 6.25% ($75 million)
December 31 Series O Bonds, 7-3/8% ($50 million)
For further details on the financing activities of Central Maine and CMP Group
during 1998, see Item 8, "Notes to Consolidated Financial Statements" - Note 10,
"Capitalization and Interim Financing," below.
To support its short-term capital requirements, in October 1996, Central Maine
entered into a $125 million Credit Agreement with several banks, with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders. The
arrangement originally had two credit facilities: a $75 million, 364-day
revolving credit facility and a $50-million, 3-year revolving credit facility.
Effective December 15, 1998, the banks' commitments under the 364-day facility
were reduced from $75 million to $25 million by agreement of the parties, and
other provisions were amended to reflect the reorganization of Central Maine
into a holding-company structure and recognize other changed circumstances. Both
credit facilities require annual fees on the total credit lines. The fees are
based on Central Maine's credit ratings and allow for various borrowing options
including LIBOR-priced, base-rate-priced and competitive-bid-priced loans.
Access to commercial paper markets has been substantially precluded based upon
Central Maine's past credit ratings. The amount of outstanding short-term
borrowing will fluctuate with day-to-day operational needs, the timing of
long-term financing, and market conditions. Central Maine had $55 million in
outstanding notes as of December 31, 1998 under the credit facilities.
On August 5, 1998, the MPUC approved Central Maine's application to purchase up
to 11 million shares of its outstanding common stock over a three-year period,
with a limitation of three million shares that may be repurchased prior to the
closing of the sale of Central Maine's generating assets. The amount of any
stock purchases and their timing by Central Maine or CMP Group will depend on
the need for equity in the respective Company's capital structure, investment
opportunities and other considerations. Neither Central Maine nor CMP Group has
adopted a formal stock-purchase plan.
Environmental Matters
CMP Group and its subsidiaries assess compliance with laws and regulations
related to hazardous substance remediation on an ongoing basis. At December 31,
1998, Central Maine had an accrued liability of $1.9 million for remediation
costs at various sites. The costs at identified sites may be significantly
higher if, among other things, other potentially responsible parties are not
financially able to contribute to these costs or identified possible outcomes
change. See Note 4, "Commitments and Contingencies." - "Legal and Environmental
Matters" for further discussion of this matter.
Storm Damage Central Maine's System
On January 7 through 9, 1998, an ice storm of unprecedented breadth and severity
struck Central Maine's service territory, causing power outages for
approximately 280,000 of Central Maine's 528,000 customers, and substantial
widespread damage to Central Maine's transmission and distribution system. To
restore its electrical system, Central Maine supplemented its own crews with
utility and tree-service crews from throughout the northeastern United States
and the Canadian maritime provinces, with assistance from the Maine national
guard. Central Maine's incremental non-capital costs of the repair effort were
$50.7 million, most of which is labor-related. In addition, approximately $1.7
million of carrying costs have been deferred as of December 31, 1998.
On January 15, 1998, the MPUC issued an order allowing Central Maine to defer on
its books the incremental non-capital costs associated with Central Maine's
efforts to restore service in response to the damage resulting from the storm.
The order required Central Maine, as part of its annual filing under the ARP, to
file information on the amounts deferred under the order and to submit a
proposal as to how the costs associated with the order should be recovered under
the ARP. In the 1998 ARP filing Central Maine stated that once the final cost of
the storm was determined and the status of federal assistance was finalized
Central Maine would propose a plan for recovery of its costs. Based on the MPUC
order, Central Maine has deferred $52.4 million in storm related costs as of
December 31, 1998. In October 1998, the MPUC staff issued its draft report of
its summary investigation of the Maine utilities' response to the January ice
storm. This report found no basis for formal adjudicatory investigation into the
response and supports the utilities' actions. On May 1, 1998, President Clinton
signed a Congressional appropriation bill that included $130 million for
Presidentially declared disasters in 1998, including storm-damage cost
reimbursement for electric utilities. On November 5, 1998 the United States
Department of Housing and Urban Development ("HUD") announced that of those
funds, $2.2 million had been awarded to Maine, with none designated for utility
infrastructure, which Central Maine and the Maine Congressional delegation
protested as inadequate and inconsistent with Congressional intent. On March 10,
1999, HUD published a notice in the Federal Register inviting parties to
re-apply for storm-damage cost reimbursement. Central Maine cannot predict what
portion of its ice storm-related costs it will ultimately recover through
federal assistance, if any, or from its customers, or when any such recovery
will take place.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
CMP Group is exposed to interest rate risk through the use of fixed-rate and
variable-rate debt and preferred stock as sources of capital. Its exposure to
changes in applicable interest rates has increased during 1998, due to its
issuance of $312 million of medium-term notes during the year, $227 million of
which bear floating, LIBOR-based, rates. Most of the floating-rate medium-term
notes issued during 1998 replaced fixed-rate mortgage bonds or other fixed-rate
securities.
Variable Long Term Fixed Long Term
Weighted Average Rates 6.63% 7.46%
Balance at December 31, 1998 $278,704 $321,476
Maturity Period 1999 - 2018 1999 - 2023
Item 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA.
Index to Financial Statements and Financial Statement Schedules
Management report on responsibility for financial reporting 57
Report of Independent Accountants 58
Consolidated Financial Statements 59
CMP Group, Inc.
Consolidated Statement of Earnings for the three years ended
December 31, 1998, 1997 and 1996 59
Consolidated Balance Sheet as of December 31, 1998 and 1997 60
Consolidated Statement of Capitalization and Interim
Financing as of December 31, 1998 and 1997 62
Consolidated Statement of Changes in Stockholders' Equity
for the three years ended December 31, 1998, 1997 and 1996 63
Consolidated Statement of Cash Flows for the three years ended
December 31, 1998, 1997 and 1996 64
Central Maine Power Company
Consolidated Statement of Earnings for the three years ended
December 31, 1998, 1997 and 1996 65
Consolidated Balance Sheet as of December 31, 1998 and 1997 66
Consolidated Statement of Capitalization and Interim
Financing as of December 31, 1998 and 1997 68
Consolidated Statement of Changes in Stockholders' Equity
for the three years ended December 31, 1998, 1997 and 1996 69
Consolidated Statement of Cash Flows for the three years ended
December 31, 1998, 1997 and 1996 70
Notes to Consolidated Financial Statements - CMP Group, Inc.
and Central Maine Power Company 71
Financial Statement Schedule:
Central Maine Power Company
Schedule II - Valuation and Qualifying Accounts 128
Report of Management
The Managements of CMP Group and its subsidiaries ("CMP Group") and Central
Maine Power Company and its subsidiaries ("Central Maine") are responsible for
the consolidated financial statements and the related financial information
appearing in this annual report. The financial statements are prepared in
conformity with generally accepted accounting principles and include amounts
based on informed estimates and judgments of management. The financial
information included elsewhere in this report is consistent, where applicable,
with the financial statements.
CMP Group and Central Maine maintain a system of internal accounting controls
that are designed to provide reasonable assurance that the respective assets are
safeguarded, transactions are executed in accordance with management's
authorization, and the financial records are reliable for preparing the
financial statements. While no system of internal accounting controls can
prevent the occurrence of errors or irregularities with absolute assurance,
management's objective is to maintain a system of internal accounting controls
that meets their goals in a cost-effective manner.
CMP Group and Central Maine have policies and procedures in place to support and
document the internal accounting controls that are revised on a continuing
basis. Internal auditors conduct reviews, provide ongoing assessments of the
effectiveness of selective internal controls, and report their findings and
recommendations for improvement to management.
The Board of Directors of CMP Group have established an Audit Committee,
composed entirely of outside directors, which oversees the financial reporting
process on behalf of the Board of Directors. The Audit Committee meets
periodically with management, internal auditors, and the independent public
accountants to review accounting, auditing, internal accounting controls, and
financial reporting matters. The internal auditors and the independent public
accountants have full and free access to meet with the Audit Committee, with or
without management present, to discuss auditing or financial reporting matters.
PricewaterhouseCoopers LLP, independent public accountants, has been retained to
audit CMP Group and Central Maine's consolidated financial statements. The
accompanying report of independent public accountants is based on their audit,
conducted in accordance with generally accepted auditing standards, including a
review of selected internal accounting controls and tests of accounting
procedures and records.
David T. Flanagan Sara J. Burns
CMP Group, Inc. Central Maine Power Company
President and Chief Executive Officer President
David E. Marsh Curtis I. Call
CMP Group, Inc. Central Maine Power Company
Chief Financial Officer Treasurer
Report of Independent Accountants
To the Shareholders and Directors of
CMP Group, Inc. and the Shareholders and
Directors of Central Maine Power Company
In our opinion, the accompanying consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the consolidated
financial position of CMP Group, Inc. and its subsidiaries ("CMP Group") at
December 31, 1998 and 1997, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998 and the consolidated financial position of Central Maine Power Company and
its subsidiaries ("Central Maine") at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of management of CMP
Group and Central Maine; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Maine
January 26, 1999
CONSOLIDATED FINANCIAL STATEMENTS
CMP Group, Inc. and Subsidiaries
Consolidated Statement Of Earnings
For the years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per-share amounts)
1998 1997 1996
Revenues (Notes 1 and 3)
Electric operating revenues $938,739 $954,176 $967,046
Other non-utility revenues 11,588 2,070 859
-------- --------- ----------
Total Revenues 950,327 956,246 967,905
------- ------- -------
Operating Expenses
Fuel used for company generation (Notes 1 and 9) 30,898 34,946 16,827
Purchased power
Energy (Notes 1 and 9) 369,411 419,144 407,926
Other (capacity) (Note 9) 85,321 112,810 108,720
Other operation 213,489 210,513 183,688
Maintenance 41,051 33,973 37,537
Depreciation and amortization (Note 1) 56,493 54,132 53,694
Taxes other than income taxes 27,783 28,303 27,861
-------- -------- --------
Total Operating Expenses 824,446 893,821 836,253
------- ------- -------
Operating Income 125,881 62,425 131,652
------- ------- -------
Other Income (Expense)
Equity in earnings of associated companies (Note 9) (60) 6,260 6,138
Allowance for equity funds used during construction (Note 1) 653 642 851
Other, net 1,383 3,639 4,709
Minority interest in consolidated net income (205) (233) (48)
Gain on sale of investments and properties 22,912 418 601
-------- --------- ----------
Total Other Income (Expense) 24,683 10,726 12,251
-------- ------- --------
Interest Charges
Long-term debt (Note 10) 43,276 44,346 47,966
Other interest (Note 10) 8,366 7,660 4,341
Allowance for borrowed funds used during construction (Note 1) (495) (439) (655)
--------- --------- -----------
Total Interest Charges 51,147 51,567 51,652
------- ------- --------
Income Before Income Taxes and Preferred Dividends 99,417 21,584 92,251
Income taxes (Notes 2 and 3) 41,698 8,162 32,022
Dividends on Preferred Stock of Subsidiary 4,809 8,209 9,452
------- -------- ---------
Net Income $52,910 $ 5,213 $ 50,777
====== ======== ========
Weighted Average Number Of Shares Of Common
Stock Outstanding 32,442,685 32,442,752 32,442,752
Earnings Per Share Of Common Stock (Basic and Diluted) $1.63 $0.16 $1.57
Dividends Declared Per Share Of Common Stock $0.90 $0.90 $0.90
The accompanying notes are an integral part of these financial statements
CMP Group, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1998 and 1997
(Dollars in thousands)
ASSETS 1998 1997
---- ----
Current Assets
Cash and cash equivalents $ 30,540 $ 20,841
Accounts receivable, less allowance for uncollectible accounts of
$3,136 in 1998 and $2,400 in 1997
Service - billed 81,169 84,323
- unbilled (Notes 1 and 3) 53,296 46,807
Other accounts receivable 13,753 15,247
Inventories, at average cost
Fuel oil 5,879 5,390
Materials and supplies 13,126 11,779
Funds on deposit with trustee (Note 10) 1 61,694
Prepayments and other current assets 10,268 9,110
----------- ------------
Total Current Assets 208,032 255,191
---------- ----------
Electric Property, at original cost (Notes 9 and 10) 1,750,837 1,674,876
Less: Accumulated depreciation (Notes 1 and 9) 694,410 634,384
---------- ----------
Net electric property in service 1,056,427 1,040,492
--------- ---------
Construction work in progress (Note 4) 19,538 15,105
Nuclear fuel, less accumulated amortization of $9,316 in 1998 and
$9,035 in 1997 1,147 1,157
------------ ------------
Total net electric property 1,077,112 1,056,754
Investments In Associated Companies, at equity (Notes 1 and 9) 71,880 76,509
----------- -----------
Total Net Electric Property and Investments in Associated Companies
1,148,992 1,133,263
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects, net (Note 1)
78,539 84,026
Yankee Atomic purchased-power contract (Note 9) 7,761 13,056
Connecticut Yankee purchased-power contract (Note 9) 29,913 36,877
Maine Yankee purchased-power contract (Note 9) 273,895 329,206
Regulatory assets - deferred taxes (Note 2) 235,451 236,632
Other deferred charges and other assets (Notes 1 and 3) 280,301 210,715
---------- ----------
Deferred Charges and Other Assets, Net 905,860 910,512
---------- ----------
Total Assets $2,262,884 $2,298,966
========= =========
The accompanying notes are an integral part of these financial statements.
CMP Group, Inc. and Subsidiaries
Consolidated Balance Sheet
December 31, 1998 and 1997
(Dollars in thousands)
STOCKHOLDERS' EQUITY AND LIABILITIES 1998 1997
---- ----
Current Liabilities and Interim Financing
Interim financing (see separate statement) (Note 10) $ 298,356 $ 238,000
Sinking-fund requirements (Note 10) 11,455 9,411
Accounts payable 90,960 97,080
Dividends payable 7,304 9,202
Accrued interest 7,524 11,201
Accrued income taxes (Note 2) 19,911 3,001
Miscellaneous current liabilities 15,909 15,762
----------- -----------
Total Current Liabilities and Interim Financing 451,419 383,657
---------- ----------
Commitments and Contingencies (Notes 4 and 9)
Reserves and Deferred Credits
Accumulated deferred income taxes (Note 2) 376,043 350,912
Unamortized investment tax credits (Note 2) 29,064 30,533
Yankee Atomic purchased-power contract (Note 9) 7,761 13,056
Connecticut Yankee purchased-power contract (Note 9) 29,913 36,877
Maine Yankee purchased-power contract (Note 9) 273,895 329,206
Regulatory liabilities - deferred taxes (Note 2) 58,376 56,852
Other reserves and deferred credits (Note 5) 116,805 104,257
---------- ----------
Total Reserves and Deferred Credits 891,857 921,693
---------- ----------
Long-Term Debt (see separate statement) (Note 10)
Mortgage debt 117,683 259,563
Other long-term obligations 228,598 141,360
---------- ----------
Total Long-Term Obligations 346,281 400,923
---------- ----------
Redeemable Preferred Stock 18,910 39,528
----------- -----------
Stockholders' Equity (see separate statement) (Note 10)
Common-stock 162,213 162,214
Other paid in capital 285,835 277,168
Reacquired common stock (827) -
Retained earnings 71,668 48,212
Preferred stock 35,528 65,571
----------- -----------
Total Stockholders' Equity 554,417 553,165
---------- ----------
Total Stockholders' Equity and Liabilities $2,262,884 $2,298,966
========= =========
The accompanying notes are an integral part of these financial statements.
CMP Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CAPITALIZATION AND INTERIM FINANCING
(Dollars in thousands)
December 31
-----------
1998 1997
---- ----
Amount % Amount %
Capitalization (Note 10)
Common-Stock Investment:
Common stock, par value $5 per share:
Authorized - 80,000,000 shares
Outstanding - 32,442,552 shares in 1998 and
32,442,752 in 1997 $ 162,213 $ 162,214
Other paid-in capital 285,835 277,168
Reacquired common stock, at cost (55,510 shares) (827)
Retained earnings 71,668 48,212
----------- -----------
Total Common-Stock Investment 518,889 42.6% 487,594 39.6
---------- ------ ---------- ------
Preferred Stock - not subject to mandatory redemption
35,528 2.9 65,571 5.3
----------- ------ ----------- ------
Redeemable Preferred Stock - subject to mandatory
redemption 27,910 46,528
Less: current sinking fund requirements 9,000 7,000
------------ ------------
Redeemable Preferred Stock - subject to mandatory
redemption 18,910 1.6 39,528 3.2
----------- ------ ----------- ------
Long-Term Obligations:
Mortgage bonds 118,717 421,000
Less: unamortized debt discount 1,034 1,437
------------ ------------
Total Mortgage Bonds 117,683 419,563
---------- ----------
Total Medium-Term Notes 327,000 43,000
---------- -----------
Other Long-Term Obligations:
Lease obligations 32,773 34,517
Pollution-control facility and other notes 153,280 84,254
---------- -----------
Total Other Long-Term Obligations 186,053 118,771
---------- ----------
Less: Current Sinking Fund Requirements and Current
Maturities 284,455 180,411
---------- ----------
Total Long-Term Obligations 346,281 28.4 400,923 32.6
---------- ------ ---------- ------
Total Capitalization 919,608 75.5 993,616 80.7
---------- ------ ---------- ------
Interim Financing (Note 10):
Short-term obligations 15,000 60,000
Current maturities of long-term obligations 283,356 178,000
---------- -----------
Total Interim Financing 298,356 24.5 238,000 19.3
---------- ------ ----------- ------
Total Capitalization and Interim Financing $1,217,964 100.0% $1,231,616 100.0%
========= ===== ========= =====
The accompanying notes are an integral part of these financial statements
CMP Group, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
For the three years ended December 31, 1998
Amount at Other Reacquired
par paid-in common Retained Preferred
Shares value capital stock earnings Shares Stock Total
------ --------- ------- -------- -------- ------ ---------
Balance - December 31, 1995 32,442,752 $162,214 $276,287 $51,504 655,713 $65,571 $555,576
----------
Net Income 60,229 60,229
Dividends declared:
Common stock (29,199) (29,199)
Preferred stock (9,452) (9,452)
Reacquired preferred stock 536 (536) -
Capital stock expense
(5) (5)
Balance - December 31, 1996 32,422,752 162,214 276,818 - 72,546 655,713 65,571 577,149
---------- ------- ------- ------- ------ ------- ------ -------
Net Income 13,422 13,422
Dividends declared:
Common stock (29,199) (29,199)
Preferred stock (8,209) (8,209)
Reacquired preferred stock 348 (348) -
Capital stock expense
2 2
- - - - - -
Balance - December 31, 1997 32,422,752 162,214 277,168 - 48,212 655,713 65,571 553,165
---------- ------- ------- ------- ------ ------- ------ -------
Net Income 57,718 57,718
Dividends declared:
Common stock (29,198) (29,198)
Preferred stock (4,809) (4,809)
Common stock (200) (1) (2) (1) (4)
Reacquired common stock (827) (827)
Increase in equity of investee 9,413 9,413
(Note 8)
Preferred stock (300,430) (30,043) (30,043)
Reacquired preferred stock (771) (254) (1,025)
Capital stock expense 27 27
------------------------------------ ------- ----------- ---------------------- ----------
Balance - December 31, 1998 32,442,552 $162,213 $285,835 $(827) $71,668 355,283 $35,528 $554,417
---------- ======= ======= ==== ====== ======= ====== =======
The accompanying notes are an integral part of these financial statements.
CMP Group, Inc.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year ended December 31
1998 1997 1996
CASH FROM OPERATION
Net income $ 52,910 $ 5,213 $ 50,777
Items not requiring (not providing) cash:
Depreciation 47,130 44,170 44,104
Amortization 38,873 34,291 34,881
Deferred income taxes and investment tax credits, net 20,016 (2,204) 3,318
Allowance for equity funds used during construction (653) (642) (851)
Preferred stock dividends of subsidiary 4,809 8,209 9,452
Gain on sale of investments and properties (19,108) - -
Changes in certain assets and liabilities:
Accounts receivable (2,999) 1,257 (3,565)
Other current assets (1,158) 390 (308)
Inventories (1,836) 4,259 (4,884)
Accounts payable (9,785) 4,617 (16,862)
Accrued taxes and interest 13,233 2,856 (4,970)
Miscellaneous current liabilities 147 (5,580) 7,472
Deferred ice storm cost (52,433) - -
Deferred energy-management costs (2,615) (1,940) (5,222)
Maine Yankee outage accrual - (10,350) 8,280
Purchased power contracts (22,500) - (75)
Other, net 13,194 7,664 3,961
------- -------- ---------
Net Cash Provided by Operating Activities 77,225 92,210 125,508
------- ------- -------
INVESTING ACTIVITIES
Construction expenditures (42,405) (40,306) (46,922)
Investments in and loans to affiliates (17,800) (4,769) (12,059)
Repayment of loan by affiliates 17,800 - -
Proceeds from sale of investments and properties 21,347 - -
Changes in accounts payable - investing activities 3,665 (734) 1,889
-------- --------- ----------
Net Cash Used by Investing Activities (17,393) (45,809) (57,092)
------- -------- ---------
FINANCING ACTIVITIES
Issuances:
Revolving credit agreement 50,000 52,500 7,500
Medium-term notes 302,000 - 10,000
Other long-term obligations - - 870
Short-term obligations, net 10,000 - -
Redemptions:
Mortgage bonds (302,283) - (11,500)
Preferred stock (48,618) (14,000) (14,000)
Medium-term notes (18,000) (25,000) (34,000)
Finance Authority of Maine (7,400) (6,800) (6,300)
Other long-term obligations (6,049) (645) (1,780)
Short-term obligations, net (55,000) - -
Funds on deposit with trustee 61,693 (2,182) (29,593)
Purchase of treasury stock (827) - -
Dividends:
Common stock (28,943) (29,220) (29,220)
Preferred stock of subsidiary (6,706) (8,520) (9,763)
--------- -------- -----------
Net Cash Used by Financing Activities (50,133) (33,867) (117,786)
-------- ------- ---------
Net Increase (Decrease) in Cash 9,699 12,534 (49,370)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 20,841 8,307 57,677
------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 30,540 $ 20,841 $ 8,307
======= ======= =========
Supplemental Cash-Flow Information:
Cash paid during the year for:
Interest (net of amounts capitalized) $ 50,256 $ 47,551 $ 47,835
Income taxes $ 6,581 $ 7,105 $ 32,632
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased having a maturity of three months or less to be
cash equivalents.
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED FINANCIAL STATEMENTS
Central Maine Power Company and Subsidiaries
Consolidated Statement Of Earnings
For the years ended December 31, 1998, 1997 and 1996
(Dollars in thousands, except per-share amounts)
1998 1997 1996
---- ---- ----
Revenues (Notes 1 and 3)
Electric operating revenues $938,561 $954,176 $967,046
Other non-utility revenues 2,969 2,070 859
--------- --------- ----------
Total Revenues 941,530 956,246 967,905
------- ------- -------
Operating Expenses
Fuel used for company generation (Notes 1 and 9) 30,898 34,946 16,827
Purchased power
Energy (Notes 1 and 9) 369,411 419,144 407,926
Other (capacity) (Note 9) 85,321 112,810 108,720
Other operation 204,286 210,513 183,688
Maintenance 40,961 33,973 37,537
Depreciation and amortization (Note 1) 56,257 54,132 53,694
Taxes other than income taxes 27,747 28,303 27,861
-------- -------- --------
Total Operating Expenses 814,881 893,821 836,253
------- ------- -------
Operating Income 126,649 62,425 131,652
------- -------- -------
Other Income (Expense)
Equity in earnings of associated companies (Note 9) 1,762 6,260 6,138
Allowance for equity funds used during construction (Note 1) 653 642 851
Other, net 2,097 3,639 4,709
Minority interest in consolidated net income (205) (233) (48)
Gain on sale of investments and properties 13,314 418 601
-------- ---------- ----------
Total Other Income (Expense) 17,621 10,726 12,251
-------- -------- --------
Interest Charges
Long-term debt (Note 10) 43,223 44,346 47,966
Other interest (Note 10) 8,286 7,660 4,341
Allowance for borrowed funds used during construction (Note 1) (495) (439) (655)
---------- ---------- -----------
Total Interest Charges 51,014 51,567 51,652
-------- -------- --------
Income Before Income Taxes 93,256 21,584 92,251
Income taxes (Notes 2 and 3) 38,433 8,162 32,022
-------- --------- --------
Net Income 54,823 13,422 60,229
Dividends on Preferred Stock 4,809 8,209 9,452
--------- --------- ---------
Earnings Applicable to Common Stock $ 50,014 $ 5,213 $ 50,777
======== ========= ========
Weighted Average Number Of Shares Of Common
Stock Outstanding 32,113,357 32,442,752 32,442,752
Earnings Per Share Of Common Stock (Basic and Diluted) $1.56 $0.16 $1.57
Dividends Declared Per Share Of Common Stock $0.675* $0.90 $0.90
*1998 fourth quarter dividend of $0.225 per share was declared and paid in
January 1999.
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
December 31, 1998 and 1997
(Dollars in thousands)
ASSETS 1998 1997
---- ----
Current Assets
Cash and cash equivalents $ 22,628 $ 20,841
Accounts receivable, less allowance for uncollectible accounts of
$3,136 in 1998 and $2,400 in 1997
Service - billed 81,082 84,323
- unbilled (Notes 1 and 3) 53,110 46,807
Other accounts receivable 12,698 15,247
Inventories, at average cost
Fuel oil 5,879 5,390
Materials and supplies 12,755 11,779
Funds on deposit with trustee (Note 10) 1 61,694
Prepayments and other current assets 10,161 9,110
----------- ------------
Total Current Assets 198,314 255,191
---------- ----------
Electric Property, at original cost (Notes 9 and 10) 1,750,777 1,674,876
Less: Accumulated depreciation (Notes 1 and 9) 694,463 634,384
---------- ----------
Net electric property in service 1,056,314 1,040,492
--------- ---------
Construction work in progress (Note 4) 19,483 15,105
Nuclear fuel, less accumulated amortization of $9,316 in 1998 and 1,147 1,157
------------ ------------
$9,035 in 1997
Total net electric property 1,076,944 1,056,754
Investments In Associated Companies, at equity (Notes 1 and 9) 48,406 76,509
----------- -----------
Total Net Electric Property and Investments in Associated Companies
1,125,350 1,133,263
Deferred Charges And Other Assets
Recoverable costs of Seabrook 1 and abandoned projects, net (Note 1)
78,539 84,026
Yankee Atomic purchased-power contract (Note 9) 7,761 13,056
Connecticut Yankee purchased-power contract (Note 9) 29,913 36,877
Maine Yankee purchased-power contract (Note 9) 273,895 329,206
Regulatory assets - deferred taxes (Note 2) 235,451 236,632
Other deferred charges and other assets (Notes 1 and 3) 274,257 210,715
---------- ----------
Deferred Charges and Other Assets, Net 899,816 910,512
---------- ----------
Total Assets $2,223,480 $2,298,966
========= =========
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company and Subsidiaries
Consolidated Balance Sheet
December 31, 1998 and 1997
(Dollars in thousands)
STOCKHOLDERS' EQUITY AND LIABILITIES 1998 1997
---- ----
Current Liabilities and Interim Financing
Interim financing (see separate statement) (Note 10) $ 298,183 $ 238,000
Sinking-fund requirements (Note 10) 11,455 9,411
Accounts payable 93,012 97,080
Dividends payable 5 9,202
Accrued interest 7,491 11,201
Income taxes payable to parent company (Note 2) 20,822 3,001
Miscellaneous current liabilities 15,455 15,762
----------- -----------
Total Current Liabilities and Interim Financing 446,423 383,657
---------- ----------
Commitments and Contingencies (Notes 4 and 9)
Reserves and Deferred Credits
Accumulated deferred income taxes (Note 2) 372,243 350,912
Unamortized investment tax credits (Note 2) 29,064 30,533
Yankee Atomic purchased-power contract (Note 9) 7,761 13,056
Connecticut Yankee purchased-power contract (Note 9) 29,913 36,877
Maine Yankee purchased-power contract (Note 9) 273,895 329,206
Regulatory liabilities - deferred taxes (Note 2) 58,376 56,852
Other reserves and deferred credits (Note 5) 111,506 104,257
---------- ----------
Total Reserves and Deferred Credits 882,758 921,693
---------- ----------
Long-Term Debt (see separate statement) (Note 10)
Mortgage debt 117,683 259,563
Other long-term obligations 226,151 141,360
---------- ----------
Total Long-Term Obligations 343,834 400,923
---------- ----------
Redeemable Preferred Stock 18,910 39,528
----------- -----------
Stockholders' Equity (see separate statement) (Note 10)
Common-stock 162,213 162,214
Other paid in capital 276,422 277,168
Reacquired common stock (19,000) -
Retained earnings 76,349 48,212
Preferred stock 35,571 65,571
----------- -----------
Total Stockholders' Equity 531,555 553,165
---------- ----------
Total Stockholders' Equity and Liabilities $2,223,480 $2,298,966
========= =========
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company and Subsidiaries
CONSOLIDATED STATEMENT OF CAPITALIZATION AND INTERIM FINANCING
(Dollars in thousands)
December 31
-----------
1998 1997
---- ----
Amount % Amount %
Capitalization (Note 10)
Common-Stock Investment:
Common stock, par value $5 per share:
Authorized - 80,000,000 shares
Outstanding - 31,211,471 shares in 1998 and
32,442,752 in 1997 $ 162,213 $ 162,214
Other paid-in capital 276,422 277,168
Reacquired common stock (1,231,081 shares) (19,000) -
Retained earnings 76,349 48,212
----------- -----------
Total Common-Stock Investment 495,984 41.6% 487,594 39.6
---------- ------ ---------- ------
Preferred Stock - not subject to mandatory redemption
35,571 3.0 65,571 5.3
----------- ------ ----------- ------
Redeemable Preferred Stock - subject to mandatory
redemption 27,910 46,528
Less: current sinking fund requirements 9,000 7,000
------------ ------------
Redeemable Preferred Stock - subject to mandatory
redemption 18,910 1.6 39,528 3.2
----------- ------ ----------- ------
Long-Term Obligations:
Mortgage bonds 118,717 421,000
Less: unamortized debt discount 1,034 1,437
------------ ------------
Total Mortgage Bonds 117,683 419,563
---------- ----------
Total Medium-Term Notes 327,000 43,000
---------- -----------
Other Long-Term Obligations:
Lease obligations 32,773 34,517
Pollution-control facility and other notes 150,833 84,254
---------- -----------
Total Other Long-Term Obligations 183,606 118,771
---------- ----------
Less: Current Sinking Fund Requirements and Current
Maturities 284,455 180,411
---------- ----------
Total Long-Term Obligations 343,834 28.8 400,923 32.6
---------- ------ ---------- ------
Total Capitalization 894,299 75.0 993,616 80.7
---------- ------ ---------- ------
Interim Financing (Note 10):
Short-term obligations 15,000 60,000
Current maturities of long-term obligations 283,183 178,000
---------- -----------
Total Interim Financing 298,183 25.0 238,000 19.3
---------- ------ ----------- ------
Total Capitalization and Interim Financing $1,192,482 100.0% $1,231,616 100.0%
========= ===== ========= =====
The accompanying notes are an integral part of these financial statements
Central Maine Power Company
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands)
For the three years ended December 31, 1998
Other Reacquired
Amount at paid-in common Retained Preferred
Shares par value capital stock earnings Shares Stock Total
Balance - December 31, 1995 32,442,752 $162,214 $276,287 $ $ 51,504 655,713 $65,571 $555,576
Net income 60,229 60,229
Dividends declared:
Common stock (29,199) (29,199)
Preferred stock (9,452) (9,452)
Reacquired preferred stock 536 (536) -
Capital stock expense (5)
------------------------------------ ------------------------ ---------------------- ------------
(5)
Balance - December 31, 1996 32,442,752 162,214 276,818 72,546 655,713 65,571 577,149
---------- ------- ------- ------------ ------- ------- ------ -------
Net income 13,422 13,422
Dividends declared:
Common stock (29,199) (29,199)
Preferred stock (8,209) (8,209)
Reacquired preferred stock 348 (348) -
Capital stock expense 2
------------------------------------- ----------------------- ---------------------- ------------
2
Balance - December 31, 1997 32,442,752 162,214 277,168 48,212 655,713 65,571 553,165
---------- ------- ------- ------------ ------ ------- ------ -------
Net income 54,823 54,823
Dividends declared:
Common stock (21,622) (21,622)
Preferred stock (4,809) (4,809)
Common stock - Retired (200) (1) (2) (1) (4)
Reacquired common stock (1,231,081) (19,000) (19,000)
Preferred stock (300,000 (30,000) (30,000)
Reacquired preferred stock (771) (254) (1,025)
Capital stock expense 27 27
------------------------------------- ----------------------- ---------------------- -----------
Balance - December 31, 1998 31,211,471 $162,213 $276,422 $(19,000) $76,349 355,713 $35,571 $531,555
========== ======= ======= ======= ====== ======= ====== =======
The accompanying notes are an integral part of these financial statements.
Central Maine Power Company
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in thousands)
Year ended December 31
1998 1997 1996
CASH FROM OPERATION
Net income $ 54,823 $ 13,422 $ 60,229
Items not requiring (not providing) cash:
Depreciation 47,130 44,170 44,104
Amortization 38,868 34,291 34,881
Deferred income taxes and investment tax credits, net 19,653 (2,204) 3,318
Allowance for equity funds used during construction (653) (642) (851)
Gain on sale of investments and properties (9,545) - -
Changes in certain assets and liabilities:
Accounts receivable (513) 1,257 (3,565)
Other current assets (1,051) 390 (308)
Inventories (1,465) 4,259 (4,884)
Accounts payable (7,764) 4,617 (16,862)
Accrued taxes and interest 14,111 2,856 (4,970)
Miscellaneous current liabilities (307) (5,580) 7,472
Deferred Ice storm costs (52,433) - -
Deferred energy-management costs (2,615) (1,940) (5,222)
Maine Yankee outage accrual - (10,350) 8,280
Purchased power contracts (22,500) - (75)
Other, net 1,016 7,664 3,961
--------- --------- ---------
Net Cash Provided by Operating Activities 76,755 92,210 125,508
-------- -------- -------
INVESTING ACTIVITIES
Construction expenditures (42,384) (40,306) (46,922)
Investments in loans to affiliates (18,661) (4,769) (12,059)
Repayment of loan by affiliates 17,800 - -
Sale of subsidiaries to CMP Group, Inc. 20,093 - -
Proceeds from sale of investments and properties 10,347 - -
Changes in accounts payable - investing activities 3,696 (734) 1,889
--------- ---------- ----------
Net Cash Used by Investing Activities (9,109) (45,809) (57,092)
--------- --------- ---------
FINANCING ACTIVITIES
Issuances:
Revolving credit agreement 50,000 52,500 7,500
Medium-term notes 302,000 - 10,000
Other long-term obligations - 870
Short-term obligations, net 10,000 - -
Redemptions:
Mortgage bonds (302,283) - (11,500)
Preferred stock (48,618) (14,000) (14,000)
Medium-term notes (18,000) (25,000) (34,000)
Finance Authority of Maine (7,400) (6,800) (6,300)
Other long-term obligations (3,602) (645) (1,780)
Short-term obligations, net (55,000) - -
Funds on deposit with trustee 61,693 (2,182) (29,593)
Treasury stock (19,000) - -
Dividends:
Common stock (28,943) (29,220) (29,220)
Preferred stock (6,706) (8,520) (9,763)
---------- --------- -----------
Net Cash Used by Financing Activities (65,859) (33,867) (117,786)
--------- -------- ---------
Net Increase (Decrease) in Cash 1,787 12,534 (49,370)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,841 8,307 57,677
-------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 22,628 $ 20,841 $ 8,307
======== ======== =========
Supplemental Cash-Flow Information Cash paid during the year for:
Interest (net of amounts capitalized) $ 50,251 $ 47,551 $ 47,835
Income taxes $ 6,563 $ 7,105 $ 32,632
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments purchased having a maturity of three months or less to be
cash equivalents.
The accompanying notes are an integral part of these financial statements
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
General Description
CMP Group was organized effective September 1, 1998, at which time all of the
shares of Central Maine were converted into an equal number of shares of CMP
Group. CMP Group owns all of the shares of Central Maine and the former
non-utility subsidiaries of Central Maine (TeleSmart, MaineCom, CNEX and Union
Water Power Company) in addition to New England Gas Development Corporation, a
newly formed subsidiary.
Central Maine is a public utility primarily engaged in the sale of electric
energy at the wholesale and retail levels to residential, commercial,
industrial, and other classes of customers in the State of Maine.
Financial Statements
The consolidated financial statements include CMP Group and Central Maine, a
regulated electric utility subsidiary of CMP Group. CMP Group's consolidated
financial statements include the accounts of CMP Group and its wholly owned and
controlled subsidiaries, including Central Maine. Central Maine's consolidated
financial statements include its accounts as well as those of its wholly owned
and controlled subsidiaries. Certain immaterial majority owned subsidiaries,
which were previously accounted for on the equity method, have been consolidated
for the year ended December 31, 1998. Central Maine's financial position and
results of operations account for substantially all of CMP Group's consolidated
financial position and results of operations. For all periods prior to September
1, 1998, the historical financial position and results of operations of CMP
Group reflect the activity of Central Maine. All intercompany accounts and
transactions have been eliminated in the consolidated financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation
CMP Group accounts for employee stock-based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation". This statement encourages
companies to adopt a fair value approach to valuing stock options that would
require compensation cost to be recognized based on the fair value of stock
options granted. CMP Group has elected, as permitted by the standard, to
continue to follow its intrinsic value based method of accounting for stock
options consistent with APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the intrinsic method, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the company's
stock at the measurement date over the exercise price.
Earnings per Share
Stock options and performance shares granted to date under CMP Group's long-term
incentive plan resulted in potential incremental shares of common stock
outstanding for purposes of computing both basic and diluted earnings per share
for the twelve months ending December 31, 1998. These incremental shares were
not material in the periods presented and did not cause diluted earnings per
share to differ from basic earnings per share.
Reclassification
Certain amounts from prior years financial statements have been reclassified to
conform to the current year presentation.
Impact of New Accounting Standards
FAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information" became effective for periods beginning after December 15, 1997.
This pronouncement provides disclosure requirements as well as guidance for
determining reportable segments. Based on the operating results regularly
reviewed by the entities' chief operating decision-makers, CMP Group and Central
Maine have determined that there are no material reportable segments.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivatives and
Hedging Activities. The new standard applies to all entities and is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999, with
earlier adoption encouraged. It requires companies to record derivatives on the
balance sheet at their fair value depending on the intended use of the
derivative. Based on CMP Group and Central Maine's current business practices
the adoption of this standard is not anticipated to have a significant impact on
their financial statements.
Regulation
The rates, operations, accounting, and certain other practices of Central Maine
and MEPCO are subject to the regulatory authority of the MPUC and the FERC.
Electric Operating Revenues
Electric operating revenues include amounts billed to customers and an estimate
of unbilled sales, for services rendered but not yet billed.
Utility Plant
Utility plant is stated at original cost of construction. The costs of
replacements of property units are capitalized. Maintenance and repairs and
replacements of minor items are expensed as incurred. The original cost of
property retired, net of salvage value, and the related costs of removal are
charged to accumulated depreciation.
Central Maine and its subsidiaries utility plant in service as of December 31
was comprised as follows:
Average
Average Remaining
Service Service Life
1998 1997 Life* 12/31/98
---- ---- ------ ------------
Generation $ 535,550 $ 514,815 37.6 years 20.0 years
Transmission 282,677 250,109 41.6 years 24.2 years
Distribution 724,224 704,345 37.7 years 28.5 years
General 208,326 205,607 18.6 years 12.8 years
$1,750,777 $1,674,876
========= =========
*Based on Central Maine's last depreciation represcription study as of December
31, 1992.
Depreciation
Depreciation of electric property is calculated using the straight-line method.
The weighted average composite rate was 3.1 percent in 1998 and 3.0 percent in
1997 and 1996.
Allowance for Funds Used During Construction (AFC)
Central Maine and its subsidiaries capitalize AFC as part of construction costs.
AFC represents the composite interest and equity costs of capital funds used to
finance that portion of construction costs not yet eligible for inclusion in
rate base. AFC is capitalized in "Utility plant" with offsetting noncash credits
to "Other income" and "Interest." The composite AFC rates were 8.8 percent, 9.7
percent, and 8.7 percent in 1998, 1997, and 1996, respectively.
Deferred Charges and Other Assets
CMP Group defers and amortizes certain costs in a manner consistent with
authorized or probable ratemaking treatment. CMP Group capitalizes carrying
costs as a part of certain deferred charges, principally energy-management
costs, and classifies such carrying costs as other income. The following table
depicts the components of deferred charges and other assets at December 31,
1998, and 1997:
(Dollars in thousands) 1998 1997
---- ----
NUG contract buy-outs and restructuring (Note 9) $ 98,752 $ 92,946
1998 ice storm costs 52,433 -
Energy-management costs 28,418 31,995
Postretirement benefits (Note 5) 19,604 20,900
Financing costs 17,121 18,560
Environmental site clean-up costs (Note 4) 8,766 7,891
Non-operating property, net 7,427 7,624
Workers Compensation 4,650 5,350
Other 37,086 25,449
-------- -------
Sub-Total Central Maine 274,257 210,715
CMP Group - Other 6,044 -
-------- -------
Total - CMP Group $280,301 $210,715
======= =======
Certain costs are being amortized and recovered in rates over periods ranging
from three to 30 years. Amortization expense for the next five years is shown
below:
(Dollars in thousands) Amount
1999 $28,811
2000 27,664
2001 23,896
2002 22,749
2003 13,414
Recoverable Costs of Seabrook I and Abandoned Projects
The recoverable after-tax investments in Seabrook I and abandoned projects are
reported as assets, pursuant to May 1985 and February 1991 MPUC rate orders. CMP
Group is allowed a current return on these assets based on Central Maine's
authorized rate of return. In accordance with these rate orders, the deferred
taxes related to these recoverable costs are amortized over periods of four to
10 years. As of December 31, 1998, substantially all deferred taxes related to
Seabrook I have been amortized. The recoverable investments as of December 31,
1998, and 1997 are as follows:
December 31 Recovery
(Dollars in thousands) 1998 1997 periods ending
---- ---- --------------
Recoverable costs of:
Seabrook I $141,084 $141,084 2015
Other Projects 57,491 57,491 2001
------- -------
198,575 198,575
------- -------
Less: accumulated amortization 119,861 114,035
Less: related income taxes 175 514
--------- ---------
Total Net Recoverable Investment $ 78,539 $ 84,026
======= =======
Note 2: Income Taxes
The components of federal and state income-tax provisions reflected in CMP
Group's Consolidated Statement of Earnings are as follow:
Year ended December 31
(Dollars in thousands) 1998 1997 1996
----- ---- ----
Federal:
Current $17,640 $ 8,534 $21,682
Deferred 14,837 (5,922) 5,751
Investment tax credits, net (1,469) (1,455) (464)
Regulatory deferred 2,054 5,390 (623)
------- ----- -------
Total Federal Taxes 33,062 6,547 26,346
------ ----- ------
State:
Current $ 4,052 $ 1,831 $ 7,022
Deferred 3,933 (1,720) (10)
Regulatory deferred 651 1,504 (1,336)
-------- ----- -------
Total State Taxes 8,636 1,615 5,676
------- ----- -------
Total Federal and State Income Taxes $41,698 $8,162 $32,022
====== ===== ======
Federal income tax, excluding federal regulatory deferred taxes, differs from
the amount of tax computed by multiplying income before federal tax by the
statutory federal rate. The following table reconciles the statutory federal
rate to a rate determined by dividing the total federal income-tax expense by
income before that expense:
Year ended December 31
1998 1997 1996
---- ---- ----
Amount % Amount % Amount %
(Dollars in thousands)
Income tax expense at statutory federal
rate $30,090 35.0% $ 6,990 35.0% $30,301 35.0%
------ ----- ----- ---- ------ ----
Permanent differences:
Investment tax-credit amortization
(1,469) (1.7) (1,469) (7.3) (1,482) (1.7)
Dividend-received deduction
and equity in earnings (losses) of
associated companies 2,077 2.5 (1,911) (9.6) (1,895) (2.2)
Other, net 168 0.2 (80) (.4) (293) (0.3)
-------- ----- ------- ----- ------- ----
30,866 36.0 3,530 17.7 26,631 30.8
------ ---- ----- ---- ------ ----
Effect of timing differences for items
which receive flow through treatment:
Tax-basis repairs (559) (0.7) (1,020) (5.1) (1,229) (1.4)
Depreciation differences flowed through
in prior years 3,127 3.6 2,923 14.6 2,327 2.7
Accelerated flowback of deferred taxes
on loss on abandoned generating projects
1,700 2.0 1,700 8.5 1,708 1.9
Benefits related to Section 1245 Losses
(1,210) (1.4) (1,818) (9.1) - -
IRS audit resolution regarding
depreciation methods - - 852 4.3 (3,230) (3.7)
Loss on Reacquired Debt 436 0.5 540 2.7 537 0.6
Flowback of Excess Federal Deferred
Taxes due to TRA86 (1,129) (1.3) (1,005) (5.0) (520) (0.6)
Other, net (169) (0.2) 845 4.2 122 0.1
-------- ---- ------ ---- ------- -----
Federal Income Tax Expense and
Effective Rate $33,062 38.5 $6,547 32.8% $26,346 30.4%
CMP Group and Central Maine record deferred income-tax expense in accordance
with regulatory authority; it also defers investment and energy tax credits and
amortizes them over the estimated lives of the assets that generated the
credits.
A valuation allowance has not been recorded at December 31, 1998, and 1997, as
CMP Group expects that all deferred income tax assets will be realized in the
future.
Accumulated deferred income taxes consisted of the following in 1998 and 1997:
(Dollars in thousands) 1998 1997
---- ----
Deferred tax assets resulting from:
Investment tax credits, net $ 20,034 $ 21,047
Regulatory liabilities 29,081 25,188
Alternative minimum tax 6,135 6,053
All other 35,073 27,072
-------- -------
90,323 79,360
Deferred tax liabilities resulting from:
Property 300,996 295,293
Abandoned plant 54,138 57,921
Regulatory assets 111,407 77,572
------- --------
466,541 430,786
Accumulated deferred income taxes, end of year, net $376,218 $351,426
======= =======
Accumulated deferred income taxes, recorded as:
Accumulated deferred income taxes $376,043 $350,912
Recoverable costs of Seabrook 1 and abandoned projects,
net 175 514
--------- ---------
$376,218 $351,426
Note 3: Regulatory Matters
Alternative Rate Plan
On January 1, 1995, Central Maine's ARP was put into effect. Instead of rate
changes based on the level of costs incurred and capital investments, the ARP
provides for one annual adjustment of an inflation-based cap on each of Central
Maine's rates, with no separate reconciliation and recovery of fuel and
purchased-power costs. Under the ARP, the MPUC is continuing to regulate Central
Maine's operations and prices, provide for continued recovery of deferred costs,
and specify a range for its rate of return. The MPUC confirmed in its order
approving the ARP that the ARP is intended to comply with the provisions of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation." As a result, Central Maine will continue to
apply the provisions of SFAS No. 71 to its accounting transactions and its
future financial statements. See "Meeting the Requirements of SFAS No. 71,"
below.
The ARP contains a mechanism that provides price-caps on Central Maine's retail
rates to be adjusted annually on each July 1, commencing in 1995, by a
percentage combining (1) a price index, (2) a productivity offset, (3) a sharing
mechanism, and (4) flow-through items and mandated costs. The price cap applies
to all of Central Maine's retail rates, and includes fuel and purchased power
costs that previously had been treated separately. Under the ARP, fuel expense
is no longer subject to reconciliation or specific rate recovery, but is subject
to the annual indexed price-cap changes.
A specified standard inflation index is the basis for each annual price-cap
change. The inflation index is reduced by the sum of two productivity factors, a
general productivity offset of 1.0%, and a second formula-based offset that
started in 1996 and was intended to reflect the limited effect of inflation on
Central Maine's purchased-power costs during the proposed five-year initial term
of the ARP.
The sharing mechanism may adjust the subsequent year's July price-cap change in
the event Central Maine's earnings are outside a range of 350 basis points above
or below Central Maine's allowed return on equity (starting at the 10.55%
allowed return in 1995) and indexed annually for changes in capital costs.
Outside that range, profits and losses could be shared equally by Central Maine
and its customers in computing the price-cap adjustment. The ROE used for
earnings sharing is scheduled to be increased to 11.5% effective with the July
1999 price change.
The ARP also provides for partial flow-through to ratepayers of cost savings
from non-utility generator contract buy-outs and restructuring, recovery of
energy-management costs, and penalties for failure to attain customer-service
and energy-efficiency targets. The ARP also generally defines mandated costs
that would be recoverable by Central Maine notwithstanding the index-based price
cap. To receive such treatment, the annual revenue requirement related to a
mandated cost must exceed $3 million and have a disproportionate effect on
Central Maine or the electric-power industry.
On May 13, 1998, Central Maine submitted its 1998 ARP compliance filing to the
MPUC. In keeping with its pledge of limiting increases to the inflation index,
Central Maine voluntarily limited its request to 1.78%, which was the inflation
rate for 1997 under the ARP. Central Maine also proposed a rate reduction of
approximately ten percent contingent on the consummation of, and ratemaking
associated with, Central Maine's planned sale of generating assets. The filing
also reported information on the costs of restoring service to Central Maine's
customers after the January 1998 ice storm, as required by the earlier MPUC
order allowing Central Maine to defer those costs. Effective July 11, 1998, the
MPUC approved a stipulated 1.33% increase. The amount of the increase remains
subject to change, based on the outcome of the pending FERC proceeding related
to the permanent shutdown of the Maine Yankee plant. Depending on FERC's
decision, the price increase could increase or decrease, ranging from a ceiling
of 1.78% to a floor of 0.22%. However, the Offer of Settlement pending before
the FERC in Maine Yankee's rate case, which has been approved by the MPUC,
provides that the 1998 ARP increase will not be adjusted.
The components of the last three ARP price increases approved by the MPUC are as
follows:
1998 1997 1996
---- ---- ----
Inflation Index 1.78% 2.12% 2.55%
Productivity Offset (1.00) (1.00) (1.00)
Qualifying Facility Offset (.29) (.42) -
Earnings Sharing 1.12 - .32
Flowthrough and Mandated Items (.28) .40 (.61)
---- ----- -----
1.33% 1.10% 1.26%
==== ==== ====
Electric-Utility Industry Restructuring
Stranded Costs - The enactment by Congress of the Energy Policy Act of 1992
accelerated planning by electric utilities, including Central Maine, for a
transition to a more competitive industry. In Maine, legislation that will
restructure the electric-utility industry on March 1, 2000, was enacted by the
Maine Legislature in May 1997, and is discussed in detail under this heading
below. Such departure from traditional regulation, however, could have a
substantial impact on the value of utility assets and on the ability of electric
utilities to recover their costs through rates. In the absence of full recovery,
utilities would find their above-market costs to be "stranded", or
unrecoverable, in the new competitive setting.
Central Maine has substantial exposure to cost stranding relative to its size.
In general, its stranded costs reflect the excess costs of Central Maine's
purchased-power obligations over the market value of the power, and the costs of
deferred charges and other regulatory assets. The major portion of Central
Maine's stranded costs is related to above-market costs of purchased-power
obligations arising from Central Maine's long-term, noncancelable contracts for
the purchase of capacity and energy from NUGs, with lesser estimated amounts
related to Central Maine's deferred regulatory assets.
There is a high degree of uncertainty that surrounds stranded-cost estimates,
resulting from having to rely on projections and assumptions about future
conditions, including, among others, estimates of the future market for power.
Higher market rates lower stranded-cost exposure, while lower market rates
increase it. In addition to market-related impacts, any estimate of the ultimate
level of stranded costs depends on such factors as state and federal
regulations, the extent, timing and form that competition for electric service
will take, the ongoing level of Central Maine's costs of operations; regional
and national economic conditions, growth of Central Maine's sales, the timing of
any changes that may occur from state and federal initiatives on restructuring;
and the extent to which regulatory policies and decisions ultimately address
recovery of strandable costs including the application of value from the sale of
Central Maine's generating assets.
The estimated market rate for power is based on anticipated regional market
conditions and future costs of producing power. The present value of future
purchased-power obligations and Central Maine's generating costs reflects the
underlying costs of those sources of generation in place today, with reductions
for contract expirations and continuing depreciation. Deferred regulatory-asset
totals include the current uncollected balances and existing amortization
schedules for purchased-power contract restructuring and buyouts negotiated by
Central Maine to lessen the impact of these obligations, along with energy
management costs, financing costs, and other regulatory commitments.
Maine Restructuring Legislation - The 1997 Maine restructuring legislation
requires the MPUC, when retail access to generation begins on March 1, 2000, to
provide a "reasonable opportunity" to recover stranded costs through the rates
of the transmission-and-distribution company, comparable to the utility's
opportunity to recover stranded costs before the implementation of retail access
under the legislation. Stranded costs are defined as the legitimate, verifiable
and unmitigable costs made unrecoverable as a result of the restructuring
required by the legislation and will be determined by the MPUC as provided in
the legislation. The MPUC has been conducting separate adjudicatory proceedings
to determine the stranded costs for each Maine utility, along with the
corresponding revenue requirements and stranded-cost charges to be charged by
each transmission-and-distribution utility. The first phase of the Central Maine
proceeding was completed in early 1999 and is discussed in this note under the
heading "MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate
Design," below.
In addition, the legislation requires utilities to use all reasonable means to
reduce their potential stranded costs and to maximize the value from generation
assets and contracts. The MPUC must consider a utility's efforts to mitigate its
stranded costs in determining the amount of the utility's stranded costs.
Stranded costs and the related rates charged to customers will be prospectively
adjusted as necessary to correct substantial inaccuracies in the year 2003 and
at least every three years thereafter.
The principal restructuring provisions of the legislation provide for customers
to have direct retail access to generation services and for deregulation of
competitive electric providers, commencing March 1, 2000, with
transmission-and-distribution companies continuing to be regulated by the MPUC.
By that date, subject to possible extensions of time granted by the MPUC to
improve the sale value of generation assets, investor-owned utilities are
required to divest all generation assets and generation-related business
activities, with two major exceptions: (1) non-utility generator contracts with
qualifying facilities and contracts with demand-side management or conservation
providers, brokers or hosts, and (2) ownership interests in nuclear power
plants. However, the MPUC can require the Company to divest its interest in
Maine Yankee Atomic Power Company on or after January 1, 2009. As discussed
below under "Agreement for Sale of Generating Assets," Central Maine has
contracted to sell its non-nuclear generating assets and, after a favorable
court decision, is proceeding toward a completion of the sale by April 7, 1999.
The legislation also requires investor-owned utilities, after February 29, 2000,
to sell their rights to the capacity and energy from all generation assets,
including the purchased-power contracts that had not previously been divested
pursuant to the legislation, with certain immaterial exceptions.
Upon the commencement of retail access on March 1, 2000, Central Maine, as a
transmission-and-distribution utility, will be prohibited from selling electric
energy to retail customers. Any competitive electricity provider that is
affiliated with Central Maine would be allowed to sell electricity outside
Central Maine's service territory without limitation as to amount, but within
Central Maine's service territory the affiliate would be limited to providing
not more than 33 percent of the total kilowatt-hours sold within Central Maine's
service territory, as determined by the MPUC. CMP Group does not now intend to
engage in the sale of electric energy after March 1, 2000.
Other features of the legislation include the following:
(a) After the effective date of the legislation, if an entity purchases
10 percent or more of the stock of a distribution utility, including Central
Maine, the purchasing entity and any related entity would be prohibited from
selling generation service to any retail customer in Maine.
(b) The legislation encourages the generation of electricity from
renewable resources by requiring competitive providers, as a condition of
licensing, to demonstrate to the MPUC that no less than 30 percent of their
portfolios of supply sources for retail sales in Maine are accounted for by
renewable resources.
(c) The legislation requires the MPUC to ensure that standard-offer
service is available to all consumers, but any competitive provider affiliated
with Central Maine would be limited to providing such service for only up to 20
percent of the electric load in Central Maine's service territory.
(d) Beginning March 1, 2002, or, by MPUC rule, as early as March 1, 2000,
the providing of billing and metering services will be subject to competition.
(e) A customer who significantly reduces or eliminates consumption of
electricity due to self-generation, conversion to an alternative fuel, or
demand-side management may not be assessed an exit fee or re-entry fee in any
form for such reduction or elimination of consumption or for the
re-establishment of service with a transmission-and-distribution utility.
(f) Finally, the legislation provides for programs for low-income
assistance, energy conservation research and development on renewable resources,
assistance for utility employees laid off as a result of the legislation, and
recovery of nuclear-plant decommissioning costs "[a]s required by federal law,
rule or order", all funded through transmission-and-distribution utility rates
and charges.
Legislative bills that would amend certain provisions of the 1997 legislation
have been submitted to the 1999 legislative session of the Maine Legislature.
CMP Group and Central Maine cannot predict whether any changes to the 1997
legislation will be enacted.
MPUC Proceeding on Stranded Costs, Revenue Requirements, and Rate Design. - As
noted above, the MPUC has completed the first phase of the proceeding
contemplated by Maine's restructuring legislation that will ultimately determine
the recovery of Central Maine's stranded costs, its revenue requirements, and
the design of its rates to be effective when Central Maine becomes a
transmission-and-distribution utility at the time retail access to generation
begins in Maine on March 1, 2000. On December 23, 1998, the MPUC Hearing
Examiners in the proceeding issued their report, in the form of a recommended
decision. Central Maine disagreed with a number of the individual
recommendations in the stranded-costs and revenue-requirements areas and filed
exceptions to those recommendations. The MPUC deliberated the recommendations on
February 10 and 11, 1999, indicated disagreement with some of the
recommendations, and issued its written order on March 19, 1999.
The MPUC stressed in its order that it was deciding the "principles" by which it
would set Central Maine's transmission-and-distribution rates, effective March
1, 2000, but was not calculating the rates themselves because such calculations
at that time would rely excessively on estimates. The MPUC pointed out that it
would hold a "Phase II" hearing to set the actual rates and determine the
recoverable stranded costs after processing information expected to become
available during 1999.
With respect to stranded costs, the MPUC indicated that it would set the amount
of recoverable stranded costs for Central Maine later in the proceeding pursuant
to its mandate under the restructuring statute to provide
transmission-and-distribution utilities a reasonable opportunity to recover such
costs that is equivalent to the utility's opportunity to recover these costs
prior to the commencement of retail access. The MPUC also reviewed the
prescribed methodology for determining the amount of a utility's stranded costs,
including among other factors the application of excess value from divested
generation assets to offset stranded costs. At the beginning of the proceeding
Central Maine had estimated its total stranded costs to be approximately $1.3
billion.
In the area of revenue requirements, the Phase I order did not include
definitive amounts, but did contain the MPUC's conclusions as to the appropriate
cost of common equity for Central Maine as a transmission-and-distribution
company beginning March 1, 2000. Central Maine had recommended a 12-percent cost
of common equity with a 55-percent common equity component in the capital
structure. The MPUC, after weighing conflicting recommendations, decided on a
common-equity cost of 10.50 percent with a common-equity component of 47
percent, and an overall weighted-average cost of capital of 8.68 percent.
In dealing with rate design, the MPUC limited itself in the first phase of the
proceeding primarily to establishing principles that would guide it in designing
Central Maine's rates to be effective March 1, 2000. The MPUC indicated that it
would focus on (1) facilitating the transition to a competitive market for
generation, and (2) implementing a "no-losers" policy, i.e., that the new rate
design would cause no Central Maine customer's bill to increase on March 1,
2000. Applying the latter principle, the MPUC rejected a newly designed standby
rate for self-generators proposed by Central Maine in favor of a design
generally similar to Central Maine's current rate for the class. The MPUC stated
that it planned to undertake a comprehensive rate design and alternative rate
plan proceeding for Central Maine prior to March 1, 2002, when it could consider
experience gained with the cost structures of other
transmission-and-distribution utilities after the commencement of retail access
to generation.
The Phase I order resulted from an extended proceeding with many points of view
represented and covers a wide variety of rate-related subjects. Definitive
findings by the MPUC in a number of the subject areas await the second phase of
the proceeding, which must be completed before March 1, 2000. CMP Group and
Central Maine cannot predict the definitive amount of stranded costs the MPUC
will determine that Central Maine will be entitled to recover pursuant to the
mandate of the restructuring statute, or the revenue requirements and rate
design that will result from Phase II of the MPUC proceeding.
Agreement for Sale of Generation Assets
On January 6, 1998, Central Maine announced that it had reached agreement to
sell all of its hydro, fossil and biomass power plants with a combined
generating capacity of 1,185 megawatts for $846 million in cash, including
approximately $18 million for assets of Union Water, to Florida-based FPL Group.
The related book value for these assets was approximately $ 218.9 million at
December 31, 1998. In addition, as part of its agreement with FPL Group, Central
Maine entered into energy buy-back agreements to assist in fulfilling its
obligation to supply its customers with power until March 1, 2000. Subsequently,
an agreement was reached to sell related storage facilities to FPL Group for an
additional $3.6 million ($1.5 million for the assets and $2.1 million for lease
revenue associated with the properties that CMP will retain), including $1.15
million for Union Water assets. The related book value of these assets was
approximately $11.9 million at December 31, 1998.
Central Maine's interests in the power entitlements from approximately 50
power-purchase agreements with non-utility generators representing approximately
488 megawatts, its 2.5-percent interest in the Millstone Unit No. 3 nuclear
generating unit in Waterford, Connecticut, its 3.59-percent interest in the
output of the Vermont Yankee nuclear generating plant in Vernon, Vermont, and
its entitlement in the NEPOOL Phase II interconnection with Hydro-Quebec all
attracted insufficient interest to be included in the pending sale. Central
Maine will continue to seek buyers for those assets. Central Maine did not offer
for sale its interests in the Maine Yankee (Wiscasset, Maine), Connecticut
Yankee (Haddam, Connecticut) and Yankee Atomic (Rowe, Massachusetts) nuclear
generating plants, all of which are in the process of being decommissioned.
Substantially all of the generating assets included in the sale are subject to
the lien of Central Maine's General and Refunding Mortgage Indenture dated as of
April 15, 1976 (the "Indenture"). Therefore, substantially all of the proceeds
from sale must be deposited initially with the trustee under the Indenture at
the closing of the sale to free the generating assets from the lien of the
Indenture. Central Maine plans to use some of the proceeds on deposit with the
trustee to redeem or repurchase bonds under the terms of the Indenture, and may
discharge the Indenture. In addition, the proceeds could provide the flexibility
to redeem or repurchase outstanding equity securities. Central Maine must also
provide for payment of applicable taxes resulting from the sale. The manner and
timing of the ultimate application of the sale proceeds after closing are in any
event subject to various factors, including Indenture provisions, regulatory
requirements, market conditions and terms of outstanding securities.
On November 17, 1998, FPL Group announced that its subsidiary, FPL Energy Maine,
Inc. ("FPL Energy") had filed a civil action in the United States District Court
for the Southern District of New York requesting a declaratory judgment that
Central Maine could not meet essential terms of the January agreement. FPL Group
asserted that based on October 1998 FERC rulings on transmission access, as well
as other issues, it believed that Central Maine could not comply with the
conditions in the purchase contract and that FPL Energy should not be bound to
complete the transaction.
FPL Energy contended in its complaint that the FERC rulings (1) constituted a
material adverse effect under the purchase agreement and substantially lessened
the value of Central Maine's generating assets, and (2) precluded Central Maine
from obtaining all federal, state and local consents and approvals required for
the ownership, operation and maintenance of the generating assets in a manner
substantially consistent with Central Maine's historical ownership, operation,
and maintenance thereof, as required by the purchase agreement. In addition, FPL
Energy asserted that the FERC rulings limited the ability of the prospective
buyer to get power from the Central Maine generating assets to market
unconstrained by transmission limitations resulting from new generators being
added to the NEPOOL system, and therefore, based on the doctrine of frustration
of purpose, FPL Energy should be "excused without further obligation or
liability from effecting the purchase of [Central Maine's] generating assets."
Central Maine, FPL Energy, NEPOOL, and other parties interested in New England
transmission-access issues requested rehearing of the FERC rulings.
On November 23, 1998, the MPUC granted its approval of the sale to FPL Energy of
the generating assets contemplated by the purchase agreement, finding the sale
to be in the public interest. The MPUC also made the findings required as a
prerequisite to a FERC designation of the generating facilities as "exempt
wholesale generators," which had been requested by FPL Energy.
On November 24, 1998, the FERC approved the sale of the Central Maine generating
assets to FPL Energy, after making the required finding that the sale was
consistent with the public interest, and accepted certain implementing
agreements for filing. In discussing an issue raised by an intervenor the FERC
stated that by purchasing the generating assets FPL Energy would be "stepping
into the shoes of Central Maine" with respect to access to the Central Maine and
NEPOOL transmission system, but did not disturb the earlier transmission-access
rulings. The FERC granted its approval of the transfer of hydroelectric and
water storage licenses on December 28, 1998, the approval by FERC of
exempt-wholesale-generator status for the generating facilities, was granted on
February 24, 1999.
On March 11, 1999, the hearing on FPL Energy's request for a declaratory
judgment was held in the United States District Court for the Southern District
of New York. On the same day the presiding judge ruled that FPL Energy was not
entitled to the declaratory judgment and entered judgment for Central Maine and
its affiliated defendants on all counts of the complaint. Thereafter on that day
FPL Energy announced that it would not appeal the decision, but would proceed to
a closing of the sale on or before April 7, 1999, as required by the sale
agreement, and the parties are preparing for the closing.
Storm Damage to Central Maine's System
On January 7 through 9, 1998, an ice storm of unprecedented breadth and severity
struck Central Maine's service territory, causing power outages for
approximately 280,000 of Central Maine's 528,000 customers, and substantial
widespread damage to Central Maine's transmission and distribution system. To
restore its electrical system, Central Maine supplemented its own crews with
utility and tree-service crews from throughout the northeastern United States
and the Canadian maritime provinces, with assistance from the Maine national
guard. Central Maine's incremental non-capital costs of the repair effort were
$50.7 million, most of which is labor-related. In addition, approximately $1.7
million of carrying costs have been deferred as of December 31, 1998.
On January 15, 1998, the MPUC issued an order allowing Central Maine to defer on
its books the incremental non-capital costs associated with Central Maine's
efforts to restore service in response to the damage resulting from the storm.
The order required Central Maine, as part of its annual filing under the ARP, to
file information on the amounts deferred under the order and to submit a
proposal as to how the costs associated with the order should be recovered under
the ARP. In the 1998 ARP filing Central Maine stated that once the final cost of
the storm was determined and the status of federal assistance was finalized
Central Maine would propose a plan for recovery of its costs. Based on the MPUC
order, Central Maine has deferred $52.4 million in storm related costs as of
December 31, 1998. In October 1998, the MPUC staff issued its draft report of
its summary investigation of the Maine utilities' response to the January ice
storm. This report found no basis for formal adjudicatory investigation into the
response and supports the utilities' actions. On May 1, 1998, President Clinton
signed a Congressional appropriation bill that included $130 million for
Presidentially declared disasters in 1998, including storm-damage cost
reimbursement for electric utilities. On November 5, 1998 the United States
Department of Housing and Urban Development ("HUD") announced that of those
funds, $2.2 million had been awarded to Maine, with none designated for utility
infrastructure, which Central Maine and the Maine Congressional delegation
protested as inadequate and inconsistent with Congressional intent. On March 10,
1999, HUD published a notice in the Federal Register inviting parties to
re-apply for storm-damage cost reimbursement. Central Maine cannot predict what
portion of its ice storm-related costs it will ultimately recover through
federal assistance, if any, or from its customers, or when any such recovery
will take place.
Meeting the Requirements of SFAS No. 71
Central Maine continues to meet the requirements of SFAS No. 71. The standard
provides specialized accounting for regulated enterprises, which requires
recognition of "regulatory" assets and liabilities that enterprises in general
could not record. Examples of regulatory assets include deferred income taxes
associated with previously flowed through items, NUG buyout costs, losses on
abandoned plants, deferral of postemployment benefit costs, and losses on debt
refinancing. If an entity no longer meets the requirements of SFAS No. 71, then
regulatory assets and liabilities must be written off.
The ARP provides incentive-based rates intended to recover the cost of service
plus a rate of return on Central Maine's investment together with a sharing of
the costs or earnings between ratepayers and the shareholders should the
earnings be less than or exceed a target rate of return. Central Maine has
received recognition from the MPUC that the rates implemented as a result of the
ARP continue to provide specific recovery of costs deferred in prior periods.
The 1997 legislation enacted in Maine providing for industry restructuring
specifically addressed the issue of cost recovery of regulatory assets stranded
as a result of industry restructuring. Specifically, the legislation requires
the MPUC, when retail access begins, to provide a "reasonable opportunity" for
the recovery of stranded costs through the rates of the
transmission-and-distribution company, comparable to the utility's opportunity
to recover stranded costs before the implementation of retail access under the
legislation. As provided for in EITF 97-4, "Deregulation of the Pricing of
Electricity," Central Maine will continue to record regulatory assets in a
manner consistent with SFAS No. 71 as long as future recovery is probable, since
the Maine legislation provides the opportunity to recover regulatory assets
including stranded costs through the rates of the transmission-and-distribution
company. Central Maine anticipates that once a detailed plan for deregulation of
generation is known, the application of SFAS No. 71 to the unregulated
generation segment will no longer apply and Central Maine will be required to
discontinue SFAS No. 71 for any remaining generation segment of its business.
Central Maine further anticipates, based on current generally accepted
accounting principles, that SFAS No. 71 will continue to apply to the regulated
distribution and transmission segments of its business. Future regulatory rules
or other circumstances could cause the application of SFAS No. 71 to be
discontinued, which could result in a non-cash write-off of previously
established regulatory assets.
Note 4: Commitments and Contingencies
Construction Program
Central Maine's plans for improving and expanding generating, transmission,
distribution facilities, and power-supply sources are under continuing review.
Actual construction expenditures will depend upon the availability of capital
and other resources, load forecasts, customer growth, and general business
conditions. Central Maine's current forecast of capital expenditures, assuming
completion of the generation asset sale in the spring of 1999, for the five-year
period 1999 through 2003, is as follows:
(Dollars in millions) 1999 2000-2003 Total
---- --------- -----
Type of Facilities:
Generating projects $ 3 $ - $ 3
Transmission 3 22 25
Distribution 32 132 164
General facilities and other 18 74 92
-- --- ---
Total Estimated Capital Expenditures $56 $228 $284
== === ===
Customer Retention
Central Maine entered into five-year definitive agreements with 18 customers
that lock-in non-cumulative rate reductions of 15% for the three years 1995
through 1997, 16% for 1998, and 18% for 1999, below the December 1, 1994,
levels. These contracts also protect these customers from price increases that
might otherwise be allowed under the ARP. The participating customers agreed to
take electrical service from Central Maine for five years and not to switch
fuels, install new self-generation equipment, or seek another supplier of
electricity for existing electrical load during that period. New electrical load
in excess of a stated minimum level could be served by other sources, but
Central Maine could compete for that load.
Central Maine believes that without offering the competitive pricing provided in
the agreements, a number of these customers would be likely to install
additional self-generation or take other steps to decrease their electricity
purchases from Central Maine. The revenue loss from such a usage shift could
have been substantial.
Central Maine estimates that based on the rate reductions provided in these
agreements, its gross revenues were approximately $45 million lower in 1996,
approximately $65 million lower in 1997 and approximately $62 million lower in
1998, than would have been the case if these customers continued to pay full
retail rates without reducing their purchases from the Company.
However, these rate reductions were negotiated giving consideration to important
related cost savings. Electricity price changes affect the cost of some NUG
power contracts. The reduction in rates to large customers reduced
purchased-power costs by approximately $22 million as a result of linkage
between retail tariffs and some contract prices.
Operating Lease Obligations
Central Maine has a number of operating-lease agreements primarily involving
computer and other office equipment, land, and telecommunications equipment.
These leases are noncancelable and expire on various dates through 2007.
Following is a schedule by year of future minimum rental payments required under
the operating leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1998:
(Dollars in thousands) Amount
1999 $ 5,605
2000 5,033
2001 4,330
2002 4,257
2003 4,238
Thereafter 1,070
$24,533
Rent expense under all operating leases was approximately $6.3 million, $6.1
million, and $5 million for the years ended December 31, 1998, 1997 and 1996,
respectively.
Legal and Environmental Matters
Central Maine and certain of its affiliates are subject to regulation by federal
and state authorities with respect to air and water quality, the handling and
disposal of toxic substances and hazardous and solid wastes, and the handling
and use of chemical products. Electric utility companies generally use or
generate in their operations a range of potentially hazardous products and
by-products that are the focus of such regulation. Central Maine believes that
its current practices and operations are in compliance with all existing
environmental laws except for such non-compliance as would not have a material
adverse effect on Central Maine's financial position. Central Maine reviews its
overall compliance and measures the liability quarterly by assessing a range of
reasonably likely costs for each identified site using currently available
information, including existing technology, presently enacted laws and
regulations, experience gained at similar sites, and the probable level of
involvement and financial condition of other potentially responsible parties.
These estimates include costs for site investigations, remediation, operation
and maintenance, monitoring and site closure.
New and changing environmental requirements could hinder the construction and/or
modification of generating units, transmission and distribution lines,
substations and other facilities, and could raise operating costs significantly.
As a result, Central Maine may incur significant additional environmental costs,
greater than amounts reserved, in connection with the generation and
transmission of electricity and the storage, transportation and disposal of
by-products and wastes. Central Maine may also encounter significantly increased
costs to remedy the environmental effects of prior waste handling activities.
The cumulative long-term cost impact of increasingly stringent environmental
requirements cannot accurately be estimated.
Central Maine has recorded a liability, based upon currently available
information, for what it believes are the estimated environmental remediation
costs that it expects to incur for identified waste disposal sites. In most
cases, additional future environmental cleanup costs are not reasonably
estimable due to a number of factors, including the unknown magnitude of
possible contamination, the appropriate remediation methods, the possible
effects of future legislation or regulation and the possible effects of
technological changes. Central Maine cannot predict the schedule or scope of
remediation due to the regulatory process and involvement of non-governmental
parties. At December 31, 1998, the liability recorded by Central Maine for its
estimated environmental remediation costs amounted to $1.9 million, which
management has determined to be the most probable amount within the range of
$1.9 million to $8.6 million. Such costs may be higher if Central Maine is found
to be responsible for cleanup costs at additional sites or identifiable possible
outcomes change.
Proposed Federal Income Tax Adjustments - On September 3, 1997, Central Maine
received from the Internal Revenue Service ("IRS") a Revenue Agent's Report
summarizing all adjustments proposed by the IRS as a result of its audit of
Central Maine's federal income tax returns for the years 1992 through 1994, and
on September 12, 1997, Central Maine received a notice of deficiency relating to
the proposed disallowances. There are two significant disallowances among those
proposed by the IRS. The first is a disallowance of Central Maine's write-off of
the under-collected balance of fuel and purchased-power costs and the
unrecovered balance of its unbilled Electric Revenue Adjustment Mechanism
("ERAM") revenues, both as of December 31, 1994, which were charged to income in
1994 in connection with the adoption of the Alternative Rate Plan ("ARP")
effective January 1, 1995. The second major adjustment would disallow Central
Maine's 1994 deduction of the cost of the buyout of the Fairfield Energy Venture
purchased-power contract by Central Maine in 1994. The aggregate tax impact,
including both federal and state taxes, of the unresolved issues amounts to
approximately $39.0 million, over 90 percent of which is associated with the two
major disallowances. The two major disallowances relate largely to the timing of
the deductions and would not affect income except for the cumulative interest
impact which, through December 31, 1998, amounted to $18.8 million, or a
decrease in net income of $11.1 million, and which could increase interest
expense by approximately $500,000 per month until either the tax deficiency is
paid or the issues are resolved in favor of Central Maine, in which case no
interest would be due. If the IRS were to prevail, Central Maine believes the
deductions would be amortized over periods of up to twenty, post-1994, tax
years. Central Maine believes its tax treatment of the unresolved issues was
proper and as a result the potential interest has not been accrued. On December
10, 1997, Central Maine filed a petition in the United States Tax Court
contesting the entire amount of the deficiencies and sought review of the
asserted deficiencies by an IRS Appeals Officer to determine whether all or part
of the dispute could be resolved in advance of a court determination. As of
March 17, 1999, four of the seven issues in dispute had been resolved, but not
the two major disallowances. Central Maine will continue to work toward
resolving the remaining issues, but a trial may be necessary for one or more of
those issues. Absent such a resolution, Central Maine plans to pursue vigorously
the Tax Court litigation, but cannot predict the result.
Nuclear Insurance
The Price-Anderson Act is a federal statute providing, among other things, a
limit on the maximum liability for damages resulting from a nuclear incident.
Coverage for the liability is provided for by existing private insurance and
retrospective assessments for costs in excess of those covered by insurance, up
to $88.095 million for each reactor owned, with a maximum assessment of $10
million per reactor in any year. However, after appropriate exemptive action by
the NRC Maine Yankee, and therefore its sponsors, are not responsible for
retrospective assessments resulting from any event or incident occurring after
January 7, 1999. Based on Central Maine's stock ownership in four nuclear
generating facilities and its 2.5 percent direct ownership interest in the
Millstone 3 nuclear unit, Central Maine's retrospective premium for post-January
7, 1999, events or incidents could be as high as $6 million in any year, for a
cumulative total of $52.9 million.
In addition to the insurance required by the Price-Anderson Act, the nuclear
generating facilities mentioned above carry additional nuclear property-damage
insurance. This additional insurance is provided from commercial sources and
from the nuclear electric utility industry's insurance company through a
combination of current premiums and retrospective premium adjustments. In
recognition of the reduced risk posed by the shutdown of the Maine Yankee Plant
and its defueled reactor, Maine Yankee substantially reduced its property-damage
coverage effective January 19, 1999.
Joint Venture
CMP Group and Energy East, through subsidiaries, have entered into a
joint-venture agreement to distribute natural gas to many Maine communities that
are not now served with that fuel. On July 24, 1998, the MPUC authorized the
provision of such service by the joint venture. CMP Group's level of investment
is dependent on the overall economic feasibility of natural gas as a competitive
energy option in Maine, a sufficient expression of customer interest in gas
service from CMP Natural Gas, and the prospects for achieving an acceptable
return on investment. CMP Natural Gas, L.L.C., which is owned equally by
subsidiaries of CMP Group and Energy East, is positioning itself to offer gas in
the Augusta and Bangor areas, and in other communities including Bath, Bethel,
Brunswick, Windham, Rumford, and Waterville.
Note 5: Pension and Other Benefits
Pension Benefits
CMP Group has two separate non-contributory, defined-benefit plans that cover
substantially all of its union and non-union employees. CMP Group funding policy
is to contribute amounts to the separate plans that are sufficient to meet the
funding requirements set forth in the Employee Retirement Income Security Act
(ERISA), plus such additional amounts as CMP Group may determine to be
appropriate. Plan benefits under the non-union retirement plan are based on
average final earnings, as defined within the plan, and length of employee
service; benefits under the union plan are based on average career earnings and
length of employee service.
A summary of the components of net periodic pension cost for the non-union and
union defined-benefit plans in 1998, 1997 and 1996 follows:
1998 1997 1996
---- ---- ----
Non- Non- Non-
(Dollars in thousands) union Union union Union union Union
----- ----- ----- ----- ----- -----
Service cost $2,791 $1,969 $2,375 $1,694 $2,334 $1,780
Interest cost 6,170 4,170 5,727 3,973 5,225 3,852
Expected return on plan
assets (6,364) (3,987) (5,734) (3,519) (5,441) (3,359)
Amortization on
unrecognized transition
(asset)/obligation 29 (270) 29 (270) 29 (270)
Amortization of
unrecognized prior
service cost 155 129 155 129 155 129
Amortization of
unrecognized (gain)/
loss - - (14) - - -
-------- -------- ------ -------- -------- ----
Net periodic
pension cost $2,781 $2,011 $2,538 $2,007 $2,302 $2,132
===== ===== ====== ====== ===== =====
Assumptions used in accounting for the non-union and union defined-benefit plans
in 1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Weighted average discount rate 6.50% 7.00% 7.50%
Rate of increase in future compensation levels 4.50% 4.50% 4.50%
Expected long-term return on assets 8.75% 8.75% 8.50%
The following table sets forth the change in benefit obligations, the change in
plan assets, and the funded status on CMP Group balance sheet at December 31,
1998, and 1997:
Non-Union Union
--------- -----
1998 1997 1998 1997
---- ---- ---- ----
Change in Benefit Obligation
Projected Benefit Obligation at Beginning of Year $ 87,606,945 $ 75,569,512 $60,806,647 $ 55,687,980
Service Cost 2,790,886 2,375,101 1,969,293 1,693,530
Interest Cost 6,170,100 5,727,139 4,170,129 3,973,237
Actuarial (Gain)/Loss 9,812,272 8,737,997 4,839,188 2,627,316
Benefits Paid (4,760,258) (4,802,804) (3,099,550) (3,175,416)
------------ ------------ ----------- ------------
Projected Benefit Obligation at End of Year $101,619,945 $ 87,606,945 $68,685,707 $ 60,806,647
Change in Plan Assets
Fair Value of Assets at Beginning of Year $ 85,706,828 $ 77,996,183 $54,803,329 $ 48,090,441
Actual Return on Plan Assets 15,698,483 10,682,687 10,249,172 7,285,549
Employer Contributions 2,967,216 1,830,762 4,006,793 2,602,755
Benefits Paid (4,760,258) (4,802,804) (3,099,550) (3,175,416)
------------ ------------ ----------- ------------
Fair Value of Assets at End of Year $ 99,612,269 $ 85,706,828 $65,959,744 $ 54,803,329
Non-Union Union
--------- -----
1998 1997 1998 1997
---- ---- ---- ----
Funded Status at December 31 $ (2,007,676) $ (1,900,117) $(2,725,963) $ (6,003,318)
Unrecognized Transition (Asset)/Obligation 104,583 133,634 (1,134,557) (1,404,689)
Unrecognized Prior Service Cost 1,473,873 1,629,207 1,223,028 1,352,027
Unrecognized (Gain)/Loss (15,536,708) (16,014,958) (6,306,647) (4,883,992)
----------- ----------- ---------- ------------
Net Amount Recognized - Accrued Benefit Cost $(15,965,928) $(16,152,234) $(8,944,139) $(10,939,972)
Savings Plan
CMP Group offers an employee savings plan to all eligible employees. The
non-union plan allows participants to invest from 2% to 15% of their salaries
among several alternatives. The employer contribution equals 60% of the first 5%
(total of 3%) of the employees' contribution.
As part of the collective bargaining agreement, effective in May 1997, the union
plan allows maximum deferrals of up to 16% of their salaries among several
alternatives. The employer contribution equals 60% of the first 5% and 50% of
the next 2% invested, bringing the maximum employer contribution to 4% if an
employee defers 7% of compensation.
CMP Group's contributions to the savings plan trust were $1.9 million in 1998,
$1.8 million in 1997 and $1.7 million in 1996.
Post-Retirement Benefits
In addition to pension and savings-plan benefits, CMP Group provides certain
health-care and life-insurance benefits for substantially all of its retired
employees.
The MPUC approved a rulemaking on SFAS No. 106, effective July 20, 1993, that
adopted the accrual method of accounting for the expected cost of such benefits
during the employees' years of service, and authorized the establishment of a
regulatory asset for the deferral of such costs until they are "phased-in" for
ratemaking purposes. The effect of the change can be reflected in annual
expenses over the active service life of employees or a period of 20 years,
rather than in the year of adoption.
The MPUC prescribes the maximum amortization period of the average remaining
service life of active employees or 20 years, whichever is longer, for the
transition obligation. CMP Group is utilizing a 20 year amortization period.
Segregation in an external fund is required for amounts collected in rates.
Central Maine (CMP Group was not formed until September 1998) funded $3 million
in November 1997 and July 1998 and plans to monitor and fund the same amount
annually in order to meet its obligation.
As a result of the MPUC order, CMP Group records the cost of these benefits by
charging expense in the period recovered through rates. The annual
post-retirement benefit expense is currently included in rates as well as an
amount designed to recover the deferred balance over a period of 20 years. The
amounts included in rates in 1998, 1997 and 1996 were $10.8, $9.7 and $9.8
million, respectively. With the reduction in the deferred account of $1.5
million in 1998 and, $1.8 million in 1997. The total amount deferred as a
regulatory asset as of December 31, 1998 and 1997 was $19.6 million and $21
million, respectively. A summary of the components of net periodic
postretirement benefit cost for the plan in 1998, 1997 and 1996 follows:
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Service cost $ 1,867 $ 1,201 $ 1,347
Interest cost 5,438 4,702 5,720
Expected return on plan assets (360) - -
Amortization of unrecognized transition obligation 3,704 3,704 4,080
Amortization of prior service cost - - 35
Amortization of unrecognized (gain)/loss (80) (1,029) (329)
--------- ----- -------
Postretirement benefits expense 10,569 8,578 10,853
Deferred postretirement benefits expense - - (1,056)
---------- -------- -------
Postretirement Benefit Expense Recognized in the
Statement of Earnings $ 10,569 $ 8,578 $ 9,797
======= ===== ======
The following table sets forth the change in benefit obligation, change in plan
assets and the funded status of the plan, and the liability recognized on CMP
Group's balance sheet at December 31, 1998 and 1997:
(Dollars in thousands) 1998 1997
---- ----
Change in Benefit Obligation
Benefit obligation at beginning of year $ 69,749 $ 73,903
Service cost 1,867 1,201
Interest cost 5,438 4,702
Estimated benefits paid (6,334) (5,401)
Actuarial (gain)/loss 16,232 (4,656)
------- -------
Benefit obligation at end of year 86,952 69,749
Change in Plan Assets
Fair value of plan assets at beginning of year 3,025 849
Actual return on plan assets 711 66
Employer contribution 9,100 7,511
Estimated benefits paid (6,334) (5,401)
------- -------
Fair value of plan assets at end of year 6,502 3,025
Funded Status (80,450) (66,724)
Unrecognized transition (asset)/obligation 51,859 55,563
Unrecognized prior service cost 4 5
Unrecognized actuarial (gain)/loss (3,718) (19,680)
------- -------
Accrued benefit cost $(32,305) $(30,836)
======= =======
The assumed health-care cost-trend rate was an average gross medical trend of
approximately 6% for 1998 reducing to 5% overall in the year 2020. Rates range
from 5.6% to 6.5% for 1997 reducing to 5.0% overall over a period of 25 years.
Rates range from 5.7% to 6.8% for 1996, reducing to 5.0% overall, over a period
of 10 years. The effect of a one-percentage-point increase in the assumed
health-care cost-trend rate for each future year would increase the aggregate of
the service and interest-cost components of the net periodic postretirement
benefit cost by $1.1 million and the accumulated postretirement benefit
obligation ("APBO") by $11.0 million. The effect of a one-percentage-point
decrease in the assumed healthcare cost-trend rate for each future year would
decrease the aggregate of the service and interest-cost components of the net
periodic postretirement benefit cost by $947 thousand and the APBO by $9.3
million. Additional assumptions used in accounting for the postretirement
benefit plan in 1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Weighted-average discount rate 6.50% 7.00% 7.50%
Rate of increase in future compensation levels 4.50% 4.50% 4.50%
CMP Group is exploring alternatives for mitigating the cost of postretirement
benefits and for funding its obligations. These alternatives include mechanisms
to fund the obligation prior to actual payment of benefits, plan-design changes
to limit future expense increases, and additional cost-control and cost-sharing
programs.
Note 6: Incentive Compensation
Stock options granted are exerciseable at the market price of the common stock
on the date of the grant. They expire seven years from their grant date. One
third options vest annually, commencing on the first anniversary of the option
grant date. Upon vesting stock options are exerciseable during periods of active
employment or within thirty (30) days after termination of employment, provided
termination did not occur due to cause.
Stock options granted for the year 1998 are summarized as follows:
Weighted Average
Exercise Price
Shares
Outstanding at the beginning of 1997 -
Granted during the year 253,925 $17.375
Expired/canceled during the year 11,929 $17.375
------
Outstanding as of December 31, 1998 241,996 $17.375
=======
The stock options were granted with a grant date fair value of $2.28. The fair
value was estimated using the Black-Scholes option pricing model with the
following weighted average assumptions:
Expected option life 7 Years
Risk free interest rate 6.00%
Expected volatility 0.154%
Dividend yield 5.10%
CMP Group uses the intrinsic value based method to recognize compensation
expense related to stock options. No compensation expense was recognized in 1998
related to stock options granted, since they contained an exercise price equal
to the fair market value on the date of the grant. Had compensation costs for
stock options been determined based on the fair value at the grant dates for
awards under this plan consistent with the method of SFAS No. 123, the CMP
Group's net income and earnings per share would have been reduced to the pro
forma amounts indicated as follows:
1998
Net Income:
As Reported $52,910
Pro Forma $52,583
Earnings Per Share:
As Reported $1.63
Pro Forma $1.62
Performance Shares - Performance shares are shares of CMP Group stock granted at
the end of a 3-year performance cycle, based on achievement of performance goals
that are directly linked to increasing shareholder value. If the goals are not
achieved at the end of the 3-year cycle, the performance shares are forfeited.
Contingently issuable performance shares for the three year period beginning in
1997 and 1998, totaled 61,437 and 66,906, respectively.
CMP Group is accruing the compensation expense associated with these shares over
the applicable three year period. The total expense recognized in 1998 was
approximately $743 thousand.
Note 7: Transactions with Affiliated Companies
Central Maine provides certain services to CMP Group and its subsidiaries,
including administrative support services and pension and employee benefit
arrangements. Charges related to those services have been determined based on a
combination of direct charges and allocations designed to recover Central
Maine's cost. These assessments are reflected as an offset to Central Maine's
expenses and totaled approximately $3 million for the year ended December 31,
1998.
CMP Group provides certain managerial services to its subsidiaries. Charges
related to those services have been determined based on a combination of direct
charges and allocation in order to recover the majority of their expenses. These
assessments are reflected as an offset to CMP Group's expenses and totaled
approximately $1.2 million for the year ended December 31, 1998.
In addition, a subsidiary of CMP Group provides certain real estate and river
management services charged to Central Maine at cost and environmental,
engineering, utility locator and construction services based on a contracted
rate. These expenses amounted to $2.7 million for the year ended December 31,
1998.
As of December 31, 1998, Central Maine's accounts receivable and accounts
payable balances include the following balances with affiliated companies:
(dollars in thousands)
Accounts Receivable Accounts Payable
CMP Group $ 180 $1,590
MainePower 43 604
CNEX 190 138
MaineCom 138 -
TeleSmart 78 36
Union Water 950 1,386
------ -----
$1,579 $3,754
===== =====
Note 8: Fiber Optic Network
In July 1998, MaineCom's equity investments, FiveCom, Inc., and FiveCom of
Maine, LLC reorganized along with other related companies to form a new company,
Northeast Optic Network, Inc. ("NEON"). MaineCom's ownership interest of
53.5-percent in the new company was equal to its combined ownership interest in
FiveCom and FiveCom of Maine.
In August 1998 NEON issued 4 million new shares of common stock at $12.00 per
share on the open market in an initial public offering ("IPO"). NEON's IPO had
the effect of decreasing MaineCom's ownership interest from 53.5-percent to
approximately 40-percent. The shares were issued at an amount greater than
MaineCom's per share investment, resulting in an increase in MaineCom's
investment in NEON of $15.9 million. In accordance with the SEC's Staff
Accounting Bulletins ("SAB") 51 and 84 MaineCom increased additional paid in
capital by $9.4 million and deferred tax reserve liability by $6.5 million. CMP
Group's accounting policy for such transactions is to recognize a gain in
income. However, the above transaction was reflected in additional paid in
capital as required by the SEC SAB's.
In conjunction with the IPO, Central Maine sold 282,023 NEON shares, resulting
in a net after tax gain of approximately $1.9 million and further reducing its
(now MaineCom's) ownership percentage to 38.5-percent of the outstanding common
shares.
NEON is a facilities-based provider of technologically advanced, high-bandwidth,
fiber optic transmission capacity for communications carriers on local loop,
inter-city and interstate facilities. NEON is currently expanding its fiber
optic network to encompass over 1,000 fiber optic cable route miles, or more
than 65,000 fiber strand miles, in New England and New York, utilizing primarily
electric-utility rights-of-way, including some of Central Maine's in Maine and
some owned by other electric utilities including Northeast Utilities, another
substantial minority stockholder, in Connecticut, Massachusetts and New
Hampshire. As of December 31, 1998, NEON had completed construction of
approximately 600 route miles, or 49,000 fiber miles, of its planned system and
is currently engineering, constructing, or acquiring additional routes with a
goal of creating a continuous fiber optic link between New York City and
Portland, Maine, with access into and around Boston and numerous other major
service areas in the Northeast.
CMP Group believes there is a growing need for such a fiber optic network in the
Northeast and that NEON's outside financing will provide substantial assistance
in completing construction of the network, but cannot predict the results of
this venture.
Note 9: Capacity Arrangements
Power Agreements
Central Maine, through certain equity interests, is entitled to a portion of the
generating capacity and energy production of four nuclear generating facilities
(the Yankee companies), three of which have been permanently shut down, and is
obligated to pay its proportionate share of costs, which include fuel,
depreciation, operation-and-maintenance expenses, a return on invested capital,
and the estimated cost of decommissioning the nuclear plants.
Pertinent data related to these power agreements as of December 31, 1998, are as
follows:
(Dollars in thousands) Maine Yankee Vermont Connecticut Yankee Atomic
Yankee Yankee
Ownership share 38% 4% 6% 9.5%
-- - - ---
Operating Status Permanently Operating Permanently Permanently
shutdown shutdown shutdown
August 6, 1997 December 4, February 26,
1996 1992
Contract expiration date 2008 2012 1998 2000
Capacity (MW) - 531 - -
Company's share of: Capacity (MW)
- 19 - -
1998 energy and capacity costs $ 41,631 $ 7,012 $ 4,737 $ 4,513
Long-term obligations and redeemable
preferred stock $ 75,461 $ 7,884 $ 8,894 -
Estimated decommissioning obligation
$273,895 $16,272 $29,913 $ 7,761
Accumulated decommissioning fund
$ 80,812 $ 7,620 $14,992 $14,313
Under the terms of its agreements, Central Maine pays its ownership share (or
entitlement share) of estimated decommissioning expense to each of the Yankee
companies and records such payments as a cost of purchased power.
Permanent Shutdown of Maine Yankee Plant
On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently
cease power operations at its nuclear generating plant at Wiscasset, Maine (the
"Plant") and to begin decommissioning the Plant. The Plant experienced a number
of operational and regulatory problems and did not operate after December 6,
1996. The decision to close the Plant permanently was based on an economic
analysis of the costs, risks and uncertainties associated with operating the
Plant compared to those associated with closing and decommissioning it. The
Plant's operating license from the NRC was scheduled to expire on October 21,
2008.
Central Maine continues to incur costs, which are substantially less than in
1997, in connection with its 38% share of Maine Yankee as well as additional
costs for replacement power since the Plant has been shut down. For the twelve
months ended December 31, 1998, such costs amounted to approximately $41.6
million for Central Maine, $3.1 million related to energy costs and $38.5
million for capacity charges. The power formerly received from Maine Yankee has
been primarily replaced with two long-term purchased power arrangements that
Central Maine has made with Canadian sources through February 2000.
Central Maine's 38% ownership interest in Maine Yankee's common equity amounted
to $30 million as of December 31, 1998, and under Maine Yankee's Power Contracts
and Additional Power Contracts, Central Maine is responsible for 38% of the
costs of decommissioning the Plant. Maine Yankee's most recent estimate of the
cost of decommissioning is $380.6 million, based on a 1997 study by an
independent engineering consultant, plus estimated costs of interim spent-fuel
storage of $127.6 million, for an estimated total cost of $508.2 million (in
1997 dollars). This would result in approximately $36.4 million being collected
annually from Maine Yankee's sponsors. 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, 1998, Maine Yankee had collected
approximately $212.7 million for its decommissioning obligations.
FERC Rate Case. On November 6, 1997, Maine Yankee submitted to FERC for filing
certain amendments to the Power Contracts (the "Amendatory Agreements") and
revised rates to reflect the decision to shut down the Plant and to request
approval of an increase in the decommissioning component of its formula rates.
Maine Yankee's submittal also requested certain other rate changes, including
recovery of unamortized investment (including fuel) and certain changes to its
billing formula, consistent with the non-operating status of the Plant. By Order
dated January 14, 1998, the FERC accepted Maine Yankee's new rates for filing,
subject to refund after a minimum suspension period, and set Maine Yankee's
Amendatory Agreements, rates and issues concerning the prudence of the
Plant-shutdown decision for hearing.
By Complaint dated December 9, 1997, the Maine Office of the Public Advocate
("OPA") sought a FERC investigation of Maine Yankee's actions leading to the
decision to shut down the Plant, including actions associated with the
management and operation of Maine Yankee since 1993. The MPUC had initiated an
investigation in Maine earlier, raising generally similar issues. By decision
dated May 4, 1998, the FERC consolidated the OPA Complaint with the
comprehensive rate proceeding. In addition, 28 municipal and cooperative
utilities that had purchased in the aggregate approximately 6.2 percent of the
output of the Plant from Maine Yankee's sponsors (the "Secondary Purchasers")
intervened in the FERC proceeding, raising similar prudence issues and other
issues specific to their status as indirect purchasers from Maine Yankee.
In support of its request for an increase in decommissioning collections, Maine
Yankee submitted with its initial FERC filing a 1997 decommissioning cost study
performed by TLG Services, Inc. ("TLG"). During 1998, Maine Yankee engaged in an
extensive competitive bid process to engage a Decommissioning Operations
Contractor ("DOC") to perform certain major decontamination and dismantlement
activities at the Plant on a fixed-price, turnkey basis. As a result of that
process, a consortium headed by Stone & Webster Engineering Corporation ("Stone
& Webster") was selected to perform such activities under a fixed-price
contract. The contract provides for, among other undertakings, construction of
an independent spent fuel storage installation ("ISFSI") and completion of major
decommissioning activities and site restoration by the end of 2004. The DOC
process resulted in fixing certain costs that had been estimated in the earlier
decommissioning cost estimate performed by TLG.
Since the filing of the rate request, Maine Yankee and the active intervenors,
including among others the MPUC Staff, the OPA, Central Maine and other owners,
the Secondary Purchasers, and a Maine environmental group (the "Settling
Parties"), engaged in extensive discovery and negotiations. Those parties
participated in settlement discussions that resulted in an Offer of Settlement
filed by those parties with the FERC on January 19, 1999. On February 8, 1999,
the FERC Trial Staff recommended that the presiding judge certify the settlement
to the FERC and that the FERC approve it. Upon approval by the FERC, the
settlement would constitute a full settlement of all issues raised in the
consolidated FERC proceeding, including decommissioning-cost issues and issues
pertaining to the prudence of the management, operation, and decision to
permanently cease operation of the Plant. A separately negotiated settlement
filed with the FERC on February 5, 1999, would resolve the issues raised by the
Secondary Purchasers by limiting the amounts they will pay for decommissioning
the Plant and by settling other points of contention affecting individual
Secondary Purchasers. On February 24, 1999, the FERC Trial Staff recommended
certification and approval of the settlement with the Secondary Purchasers.
The Offer of Settlement provides for Maine Yankee to collect $33.6 million in
the aggregate annually, effective January 15, 1998, consisting of (1) $26.8
million for estimated decommissioning costs, and (2) $6.8 million for
ISFSI-related costs. The original filing with FERC on November 6, 1997, called
for an aggregate annual collection rate of $36.4 million for decommissioning and
the ISFSI, based on the TLG estimate. Under the settlement the amount collected
annually could be reduced to approximately $26 million if Maine Yankee is able
to (1) use for construction of the ISFSI funds held in trust under Maine law for
spent-fuel disposal, and (2) access approximately $6.8 million being held by the
State of Maine for eventual payment to the State of Texas pursuant to a compact
for low-level nuclear waste disposal, the future of which is now in question
after rejection of the selected disposal site in west Texas by a Texas
regulatory agency. Both would require authorizing legislation in Maine, which
Maine Yankee is committed to use its best efforts to obtain.
The Offer of Settlement also provides for recovery of all unamortized investment
(including fuel) in the Plant, together with a return on equity of 6.50 percent,
effective January 15, 1998, on equity balances up to maximum allowed equity
amounts. The Settling Parties also agreed in the proposed settlement not to
contest the effectiveness of the Amendatory Agreements submitted to FERC as part
of the original filing, subject to certain limitations including the right to
challenge any accelerated recovery of unamortized investment under the terms of
the Amendatory Agreements after a required informational filing with the FERC by
Maine Yankee. In addition, the settlement contains incentives for Maine Yankee
to achieve further savings in its decommissioning and ISFSI-related costs and
resolves issues concerning restoration and future use of the Plant site and
environmental matters of concern to certain of the intervenors in the
proceeding.
As a separate part of the Offer of Settlement, Central Maine, the other two
Maine utilities which own interests in Maine Yankee, the MPUC Staff, and the OPA
entered into a further agreement resolving retail rate issues and other issues
specific to the Maine parties, including those that had been raised concerning
the prudence of the operation and shutdown of the Plant (the "Maine Agreement").
Under the Maine Agreement Central Maine would continue to recover its Maine
Yankee costs in accordance with its most recent ARP order from the MPUC without
any adjustment reflecting the outcome of the FERC proceeding. To the extent that
Central Maine has collected from its retail customers a return on equity in
excess of the 6.50 percent contemplated by the Offer of Settlement, no refunds
would be required, but such excess amounts would be credited to the customers to
the extent required by the ARP.
The final major provision of the Maine Agreement requires the Maine owners, for
the period from March 1, 2000, through December 1,2004, to hold their Maine
retail ratepayers harmless from the amounts by which the replacement power costs
for Maine Yankee exceed the replacement power costs assumed in the report to the
Maine Yankee Board of Directors that served as a basis for the Plant shutdown
decision, up to a maximum cumulative amount of $41 million. Central Maine's
share of that amount would be $31.16 million for the period. The Maine
Agreement, which was approved by the MPUC on December 22, 1998, also sets forth
the methodology for calculating such replacement power costs.
CMP Group and Central Maine believe that the Offer of Settlement, including the
Maine Agreement, constitutes a reasonable resolution of the issues raised in the
Maine Yankee FERC proceeding, and that approval of the Offer of Settlement by
the FERC would eliminate significant uncertainties concerning CMP Group's and
Central Maine's future financial performance. Although all of the active parties
to the proceeding, including the FERC Trial Staff, support or, with respect to
certain individual provisions, do not oppose, the Offer of Settlement, CMP Group
and Central Maine cannot predict with certainty whether or in what form it will
be approved by the FERC.
Condensed financial information on Maine Yankee Atomic Power Company is as
follows:
(Dollars in thousands) 1998 1997 1996
---- ---- ----
Earnings:
Operating revenues $ 110,608 $238,586 $185,661
Operating income 13,430 18,170 17,150
Net income 6,295 9,037 8,106
Earnings applicable to common stock 4,916 7,613 6,637
Central Maine's Equity Share of Net Earnings $ 1,868 $ 2,893 $ 2,522
----------- ---------- ---------
Investment:
Net electric property and nuclear fuel $ 687 $ 17,938 $222,360
Current assets 20,896 71,098 44,979
Deferred charges and other assets 1,161,715 1,279,107 334,722
--------- --------- -------
Total Assets 1,183,298 1,368,143 602,061
--------- --------- -------
Less:
Redeemable preferred stock 16,800 17,400 18,000
Long-term obligations 201,614 270,299 223,572
Current liabilities 15,122 35,518 34,265
Reserves and deferred credits 870,856 966,561 255,472
--------- --------- -------
Net Assets $ 78,906 $ 78,365 $ 70,752
---------- ---------- --------
Company's Equity in Net Assets $ 29,984 $ 29,779 $ 26,886
========== ========== ========
Other Nuclear Investments
In December 1996, the Board of Directors of Connecticut Yankee Atomic Power
Company announced a permanent shutdown of the Connecticut Yankee plant in
Haddam, Connecticut, and decided to decommission the plant for economic reasons.
The Company has a 6% equity interest in Connecticut Yankee, totaling
approximately $6.3 million at December 31, 1998. Central Maine estimates its
share of the cost of Connecticut Yankee's continued compliance with regulatory
requirements, recovery of its plant investments, decommissioning and closing the
plant to be approximately $29.9 million and has recorded a regulatory asset and
a liability on the consolidated balance sheet. Central Maine is currently
recovering through rates an amount adequate to recover these expenses.
On February 26, 1992, the Board of Directors of Yankee Atomic Electric Company
(Yankee Atomic) decided to permanently discontinue power operation at the Yankee
Atomic Plant in Rowe, Massachusetts, and to decommission that facility. Central
Maine relied on Yankee Atomic for less than 1% of the Company's system capacity.
Its 9.5% equity investment in Yankee Atomic is approximately $1.9 million.
Central Maine has estimated its remaining share of the cost of Yankee Atomic's
continued compliance with regulatory requirements, recovery of its plant
investments, decommissioning and closing the plant, to be approximately $7.8
million.
Central Maine has approximately a 60% ownership interest in the jointly owned,
Company-operated, 620-megawatt oil-fired W. F. Wyman Unit No. 4. See Note 3,
"Regulatory Matters" - "Agreement for Sale of Generation Assets." Central Maine
also has a 2.5% ownership interest in the Millstone Unit No. 3 nuclear plant
operated by Northeast Utilities, and is entitled to approximately a 29-megawatt
share of that unit's capacity. Central Maine's plant in service, nuclear fuel,
decommissioning fund, and related accumulated depreciation and amortization
attributable to these units as of December 31, 1998, and 1997 were as follows:
Wyman 4 Millstone 3
------- -----------
(Dollars in thousands) 1998 1997 1998 1997
---- ---- ---- ----
Plant in service, nuclear fuel and decommissioning
fund $116,075 $116,367 $112,907 $112,227
Accumulated depreciation and amortization 69,028 66,239 45,433 42,412
Power-Pool Agreements
The New England Power Pool, of which Central Maine is a member, has contracted
in its Hydro-Quebec Projects to purchase power from Hydro-Quebec. The contracts
entitle Central Maine to 44.5 megawatts of capacity credit in the winter and
127.25 megawatts of capacity credit during the summer. Central Maine has entered
into facilities-support agreements for its share of the related transmission
facilities. Central Maine's share of the support responsibility and of
associated benefits is approximately 7%.
Central Maine is making facilities-support payments on approximately $25.4
million, its remaining share of the construction cost for these transmission
facilities incurred through December 31, 1998. These obligations are reflected
on the Company's consolidated balance sheet as lease obligations with a
corresponding charge to electric property.
Non-Utility Generators
Central Maine has entered into a number of long-term, non-cancelable contracts
for the purchase of capacity and energy from non-utility generators (NUG). The
agreements generally have terms of five to 30 years, with expiration dates
ranging from 1999 to 2023. They require Central Maine to purchase the energy at
specified prices per kilowatt-hour, which are often above market prices. As of
December 31, 1998, facilities having 508 megawatts of capacity covered by these
contracts were in-service. The costs of purchases under all of these contracts
amounted to $265 million in 1998, $306.4 million in 1997, and $313.4 million in
1996.
Central Maine's estimated contractual obligations with NUGs as of December 31,
1998, are as follows:
(Dollars in Amount
millions)
1999 $ 280
2000 281
2001 260
2002 267
2003 271
2004 - 2023 1,857
-----
$3,216
Note 10: Capitalization and Interim Financing
Retained Earnings
Under terms of the most restrictive test in Central Maine's General and
Refunding Mortgage Indenture and Central Maine's Articles of Incorporation, no
dividend may be paid on the common stock of Central Maine if such dividend would
reduce retained earnings below $29.6 million. At December 31, 1998, Central
Maine's retained earnings were $76.3 million, of which $46.7 million were not so
restricted. There are no such restrictions on CMP Group. Future dividend
decisions will be subject to future earnings levels and the financial condition
of CMP Group and Central Maine and will reflect the evaluation by their Board of
Directors of then existing circumstances.
Mortgage Bonds
Substantially all of Central Maine's electric-utility property and franchises
are subject to the lien of the General and Refunding Mortgage.
Central Maine's outstanding mortgage bonds may be redeemed at established prices
plus accrued interest to the date of redemption, subject to certain refunding
limitations. Bonds may also be redeemed under certain conditions at their
principal amount plus accrued interest by means of cash deposited with the
trustee under certain provisions of the mortgage indenture. Under the Indenture
such cash may be applied at any time, at the direction of Central Maine, to the
redemption of bonds outstanding under the Indenture at a price equal to the
principal amount of the bonds being redeemed, without premium, plus accrued
interest to the date fixed for redemption. Such cash may also be withdrawn by
Central Maine by substitution of allocated property additions or available
bonds. At December 31, 1998, there was approximately $1,000 of such cash on
deposit with the trustee.
Mortgage Bonds outstanding as of December 31, 1998, and 1997 were as follows:
Central Maine Power Company
General and Refunding Mortgage Bonds:
Interest
Series Maturity rate 1998 1997
------ -------- ---- ---- ----
(Dollars in thousands)
U 1998-April 15 7.54% $ $ 25,000
-
S 1998-August 15 6.03 - 60,000
T 1998-November 1 6.25 - 75,000
O 1999-January 1 7 3/8 - 50,000
P 2000-January 15 7.66 43,717 75,000
N 2001-September 15 8.50 - 11,000
Q 2008-March 1 7.05 75,000 75,000
R 2023-June 1 7 7/8 50,000
------- --------
-
Total Mortgage Bonds $118,717 $421,000
======= =======
During 1998, Central Maine paid at maturity or redeemed the following principal
amounts of its General and Refunding Mortgage Bonds: on March 30, $50 million of
Series R 7-7/8%, Due 2023; on the same day $11 million of Series N 8.50%, Due
2001; on April 15, $25 million of Series U 7.54%, Due 1998; on June 15, $31.3
million of Series P 7.66%, Due 2000; on August 15, $60 million principal amount
of Series S 6.03%, Due 1998; on November 1, $75 million principal amount of
Series T 6.25%, Due 1998; and on December 31, $50 million principal amount of
Series O 7.375%, Due 1999. No premiums were paid by Central Maine for the bonds.
Limitations on Unsecured Indebtedness
Central Maine's Articles of Incorporation limit certain unsecured indebtedness
that may be outstanding to 20 percent of capitalization, as defined without the
consent of the holders of Central Maine's preferred stock; 20 percent of defined
capitalization amounted to $143 million as of December 31, 1998. Unsecured
indebtedness, as defined, amounted to $131 million as of December 31, 1998.
Central Maine's $500 million medium-term note program, having received the
consent of Central Maine's preferred stockholders in May 1997, is not included
in "unsecured indebtedness" for purposes of the 20-percent limitation.
Medium-Term Notes
At the annual meeting of the stockholders of Central Maine on May 15, 1997, the
holders of Central Maine's outstanding preferred stock consented to the issuance
of $350 million in principal amount of Central Maine's medium-term notes in
addition to the $150 million in principal amount to which they had previously
consented in 1989. As of December 31, 1998, $337 million of medium-term notes
were outstanding of which $10 million are classified as short-term. Interest on
fixed-rate notes is payable on March 1 and September 1, while interest on
floating-rate notes is payable on the dates indicated thereupon.
Medium-Term Notes outstanding as of December 31, 1998, and 1997 were as follows:
(Dollars in thousands)
Maturity Interest rate 1998 1997
------------- ---- ----
Series A:
2000 9.65% $ 5,000 $ 5,000
Series B:
1998 5.32 - 8,000
Series C:
1999-2001 5.67-7.81 127,000 30,000
Series D:
1999-2000 5.52-7.04 205,000 -
------- -----
Medium-Term Notes 337,000 43,000
Less: Amount Due Within One Year 10,000 -
-------- -----
Total Medium-Term Notes $327,000 $43,000
======= ======
Pollution-Control Facility and Other Notes
Pollution-control facility and other notes outstanding as of December 31, 1998,
and 1997 were as follows:
(Dollars in thousands)
Series Interest rate Maturity 1998 1997
- ------ ------------- -------- ---- ----
Central Maine Power Company:
Yarmouth Installment Notes 6 3/4% June 1, 2002 $ 9,330 $ 9,805
Yarmouth Installment Notes 6 3/4 December 1, 2003 1,000 1,000
Industrial Development
Authority of the State of
New Hampshire Notes 7 3/8 May 1, 2014 19,500 19,500
Finance Authority of Maine 8.16 January 1, 2005 45,929 53,329
Revolving Credit Agreement 6.1125 October 22, 1999 50,000 -
Maine Electric Power Company, Inc.:
Promissory Notes Variable* November 1, 2000 420 620
NORVARCO: Promissory Note 10.48 November 1, 2020 24,090 -
NORVARCO: Senior Note 7.05 November 1, 2020 1,747 -
Union Water Power Company-Bank Notes
7.99 December 2011 1,163 -
Union Water Power Company-Bank Notes
Variable** October 2018 1,284 -
-------- ------
Pollution-Control Facility and Other Notes
154,463 84,254
Less: Amount Due Within One Year 1,183 -
--------- ------
$153,280 $84,254
======= ======
*The average rate was 6.48% in 1998 and 6.5% in 1997.
**The average rate was 8.25% in 1998.
The bonds issued by the Industrial Development Authority of the State of New
Hampshire are supported by loan agreements between Central Maine and the
Authority. The bonds are subject to redemption at the option of Central Maine at
their principal amount plus accrued interest and premium, beginning in 2001.
On October 26, 1994, FAME issued $79.3 million of Taxable Electric Rate
Stabilization Revenue Notes Series 1994A (FAME notes). FAME and Central Maine
entered into a loan agreement under which Central Maine issued FAME a note for
approximately $66.4 million, evidencing a loan in that amount. The remaining
$12.9 million of FAME-notes proceeds over the $66.4 million was placed in a
capital-reserve account. The amount in the capital-reserve account is equal to
the highest amount of principal and interest on the FAME notes to accrue and
come due in any year the FAME notes are outstanding. The amounts invested in the
capital reserve account are initially invested in government securities designed
to generate interest income at a rate equal to the interest on the FAME notes.
Under the terms of the loan agreement, Central Maine is also responsible for or
receives the benefit from the interest rate differential and investment gains
and losses on the capital reserve account.
Capital Lease Obligations
CMP Group leases some of its buildings and equipment under lease arrangements,
and accounts for certain transmission agreements as capital leases using periods
expiring between 2006 and 2021. The net book value of property under capital
leases was $29.4 million and $31.2 million at December 31, 1998, and 1997,
respectively. Assets acquired under capital leases are recorded as electric
property at the lower of fair-market value or the present value of future lease
payments, in accordance with practices allowed by the MPUC, and are amortized
over their contract terms. The related obligation is classified as other
long-term debt. Under the terms of the lease agreements, executory costs are
excluded from the minimum lease payments.
Estimated future minimum lease payments for the five years ending December 31,
2003, together with the present value of the minimum lease payments, are as
follows:
(Dollars in thousands) Amount
------
1999 $ 5,257
2000 5,088
2001 4,919
2002 4,749
2003 4,580
Thereafter 47,024
------
Total minimum lease payments 71,617
Less: amounts representing interest 38,844
------
Present Value of Net Minimum Lease Payments $32,773
======
Sinking-Fund Requirements
Consolidated sinking-fund requirements for long-term obligations, including
capital lease payments and maturing debt issues, for the five years ending
December 31, 2003, are as follows:
(Dollars in thousands)
Sinking fund Maturing debt
Total
1999 2,455 282,000 284,455
2000 10,519 128,717 139,236
2001 10,949 10,000 20,949
2002 18,766 - 18,766
2003 11,889 - 11,889
Disclosure of Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of each class of
financial instruments for which it is practicable are discussed below. The
carrying amounts of cash and temporary investments approximate fair value
because of the short maturity of these investments. The fair value of redeemable
preferred stock and pollution-control facility and other notes is based on
quoted market prices as of December 31, 1998 and 1997. The fair value of
long-term obligations is based on quoted market prices for the same or similar
issues, or on the current rates offered to the particular company based on the
weighted average life of each class of instruments.
The estimated fair values of the CMP Group's financial instruments as of
December 31, 1998, and 1997 are as follows:
1998 1997
Carrying Carrying
(Dollars in thousands) amount Fair value amount Fair value
Redeemable preferred stock $ 27,910 $ 28,747 $ 46,528 $ 48,247
Mortgage bonds 118,717 120,782 421,000 421,151
Medium-term notes 327,000 326,226 43,000 43,378
Pollution-control facility and other notes 153,280 157,771 84,254 83,163
Cumulative Preferred Stock
Preferred-stock balances outstanding as of December 31, 1998 and 1997 were as
follows:
(Dollars in thousands, except per-share amounts)
Current shares
outstanding 1998 1997
Preferred Stock - Not Subject to
Mandatory Redemption:
$25 par value - authorized 2,000,000
shares; outstanding: None $ - $ -
$100 par value noncallable -authorized
5,713 shares; outstanding 6% voting 5,713 571 571
$100 par value callable - authorized
2,300,000* shares; outstanding:
3.50% series (redeemable at $101) 220,000 22,000 22,000
4.60% series (redeemable at $101) 30,000 3,000 3,000
4.75% series (redeemable at $101) 50,000 5,000 5,000
5.25% series (redeemable at $102) 50,000 5,000 5,000
7 7/8% series (optional redemption after
9/1/97, at $100) - 30,000
6% stock owned by CMP Group, Inc. 533 (43) -
------- ------
Total $35,528 $65,571
====== ======
Redeemable Preferred Stock - Subject to
Mandatory Redemption:
Flexible Money Market Preferred Stock,
Series A - 7.999% (279,100 shares in
1998, 395,275 sharesin 1997 and 1996) 189,100 27,910 39,528
8 7/8% series (redeemable at $101 - 7,000
Total $27,910 $46,528
*Total authorized $100 par value callable is 2,300,000 shares. Shares
outstanding are classified as Not Subject to Mandatory Redemption and Subject to
Mandatory Redemption.
Sinking-fund provisions for the 8 7/8% Series Preferred Stock require the
Company to redeem all shares at par plus an amount equal to dividends accrued to
the redemption date on the basis of 70,000 shares annually commencing on July,
1996. The Company also has the non-cumulative right to redeem up to an equal
amount of the respective number of shares annually, beginning in 1996, at par
plus an amount equal to dividends accrued to the redemption date. The
sinking-fund requirement for the five-year period ending December 31, 2000 is
$7.0 million annually beginning in 1996. The Company redeemed $14 million of
these shares at par in 1996 and 1997 pursuant to the mandatory and optional
sinking-fund provisions. On July 1, 1998 Central Maine redeemed the final $7
million of its Preferred Stock 8 7/8% Series through its mandatory sinking fund
provisions. In connection with the Central Maine common stock conversion, a
number of holders of the 6% preferred stock requested payment at fair value for
their shares pursuant to section 910 of the Maine Business Corporation Act. CMP
Group purchased 533 shares from various shareholders of Central Maine 6%
preferred stock.
Sinking-fund provisions for the Flexible Money Market Preferred Stock, Series A,
7.999%, require Central Maine to redeem all shares at par plus an amount equal
to dividends accrued to the redemption date on the basis of 90,000 shares
annually beginning in October 1999. Central Maine also has the non-cumulative
right to redeem up to an equal number of shares annually beginning in 1999, at
par plus an amount equal to dividends accrued to the redemption date. The
sinking-fund requirement for the period 1998 through 2001 is $9 million annually
with a final sinking fund requirement of $910 thousand in 2002.
On April 1, 1998, Central Maine redeemed all of the outstanding 300,000 shares
of its Preferred Stock 7-7/8% Series at a redemption price of $100 per share. No
accrued dividends were paid on the preferred stock since the redemption date was
a regular dividend payment date.
Interim Financing and Credit Agreements
Central Maine uses funds obtained from short-term borrowing to provide initial
financing for construction and other corporate purposes.
To support its short-term capital requirements, in October 1996, Central Maine
entered into a $125 million Credit Agreement with several banks, with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders. The
arrangement originally had two credit facilities: a $75 million, 364-day
revolving credit facility and a $50-million, 3-year revolving credit facility
that matures on October 22, 1999. Effective December 15, 1998, the banks'
commitments under the 364-day facility were reduced from $75 million to $25
million, and other provisions were amended to reflect the reorganization of
Central Maine into a holding-company structure and recognize other changed
circumstances. Both credit facilities require annual fees on the total credit
lines. The fees are based on Central Maine's credit ratings and allow for
various borrowing options including LIBOR-priced, base-rate-priced and
competitive-bid-priced loans. Access to commercial paper markets has been
substantially precluded based upon Central Maine's past credit ratings. The
amount of outstanding short-term borrowing will fluctuate with day-to-day
operational needs, the timing of long-term financing, and market conditions. The
amount of outstanding short-term borrowing will fluctuate with day-to-day
operational needs, the timing of long-term financing, and market conditions.
Central Maine had $5.0 million outstanding under the 364-day revolving credit
facility at 6.63% and $50 million outstanding under the 3-year revolving credit
facility at 6.11%.
CMP Group and its subsidiaries had a total of $16.4 million outstanding, made up
of revolving credit facility and other short-term financings as of December 31,
1998.
Note 11: Quarterly Financial Data (Unaudited)
CMP Group's unaudited, consolidated quarterly financial data pertaining to the
results of operations are shown below.
(Dollars in thousands, except per-
share amounts) Quarter ended
March 31* June 30* September 30 December 31
-------- ------- ------------ -----------
1998
Electric operating revenues $248,745 $208,216 $234,056 $247,722
Operating income 39,934 14,326 26,370 45,251
Net income (loss) 16,398 572 17,440 18,500
Earnings (loss) per common share* .51 .02 .54 .57
For the years prior to 1998, CMP Group, Inc. was not in existence; the figures
for the years 1996 and 1997 are the same as Central Maine's.
*Same results as Central Maine. CMP Group was formed September 1, 1998.
Central Maine's unaudited, consolidated quarterly financial data pertaining to
the results of operations are shown below.
(Dollars in thousands, except per-
share amounts) Quarter ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1998
Electric operating revenues $248,745 $208,216 $234,027 $247,573
Operating income 39,934 14,326 25,753 46,636
Net income (loss) 18,295 1,646 13,135 21,747
Earnings (loss) per common share* .51 .02 .38 .67
1997
Electric operating revenues $268,367 $210,074 $226,134 $249,601
Operating income 27,513 8,881 7,394 19,491
Net income (loss) 16,027 (2,539) (5,845) 5,779
Earnings (loss) per common share* .43 (.15) (.24) .12
1996
Electric operating revenues $274,139 $216,358 $228,987 $247,562
Operating income 39,601 20,495 14,667 32,909
Net income 27,857 9,096 3,392 19,884
Earnings per common share* .78 .20 .04 .54
*Earnings per share are computed using the weighted-average number of common
shares outstanding during the applicable quarter.
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT.
See the information under the heading "Election of Directors" in the
registrants' definitive proxy material for its annual meeting of shareholders to
be held on May 20, 1999, and Item 4.1, Executive Officers of the Registrant,
above, both of which are hereby incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION.
See the information under the heading "Board Committees, Meetings and
Compensation" and the heading "Executive Compensation" in the registrants'
definitive proxy material for its annual meeting of shareholders to be held on
May 20, 1999, which is hereby incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
See the information under the heading "Security Ownership" in the
registrants' definitive proxy material for its annual meeting of shareholders to
be held on May 20, 1999, which is hereby incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the information under the heading, "Board Committees, Meetings and
Compensation" in the registrants' definitive proxy material for its annual
meeting of shareholders to be held on May 20, 1999, which is hereby incorporated
herein by reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a) List of documents filed as part of this report:
(1) Financial Statements and Supplementary Data
See the Index to Financial Statements and Schedules under Item 8
in Part II hereof, where these documents are listed, on page 56.
(2) Exhibits - see (c) below.
(b) Reports on Form 8-K. The Company filed the following reports on Form
8-K during the last quarter of 1998 and thereafter to date:
Date of Report Items Reported
November 17, 1998 Item 5
CMP Group and Central Maine reported that FPL Group was seeking a declaratory
judgment in the United States District Court for the Southern District of New
York that Central Maine could not meet essential terms of its January 6, 1998,
agreement to sell its non-nuclear generating assets to FPL Group and that
therefore FPL Group should be excused from completing its purchase of the
assets.
Date of Report Items Reported
January 19, 1999 Item 5
a) The registrants reported on the status of the FPL Group declaratory judgment
action discussed above.
b) The registrants reported on an Offer of Settlement filed with the FERC in
Maine Yankee's decommissioning rate case.
c) The registrants reported on the status of the MPUC proceeding on Central
Maine's stranded costs, revenue requirements, and rate design.
d) CMP Group reported on a bylaw provision dealing with shareholder proposals
and nominations of directors by shareholders.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized.
CMP GROUP, INC.
Date: March 31, 1999 By /s/ David E. Marsh
---------------- -------------------
David E. Marsh
Chief Financial Officer
(Duly Authorized Officer)
CENTRAL MAINE POWER COMPANY
Date: March 31, 1999 By /s/ Curtis I. Call
---------------- -------------------
Curtis I. Call
Treasurer
(Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants and in the capacities and on the dates indicated.
Signature Title Date
CMP Group, Inc.:
/s/ David T. Flanagan President and Chief Executive Officer; Director March 31, 1999
- -----------------------------
David T. Flanagan
(Principal Executive Officer)
/s/ David E. Marsh Chief Financial Officer March 31, 1999
- ------------------------------
David E. Marsh
(Principal Financial Officer)
/s/ Michael W. Caron March 31, 1999
- ----------------------------
Michael W. Caron
(Principal Accounting Officer)
Central Maine Power Company:
/s/ Sara J. Burns President; Director March 31, 1999
- ---------------------------------
Sara J. Burns
(Principal Executive Officer)
/s/ Curtis I. Call Treasurer March 31, 1999
- -----------------------------------
Curtis I. Call
(Principal Financial Officer)
/s/ Michael W. Caron Comptroller March 31, 1999
- -----------------------------
Michael W. Caron
(Principal Accounting Officer)
CMP Group, Inc. and Central Maine Power Company:
/s/ David M. Jagger Chairman of the Board of Directors March 31, 1999
- -------------------------------
David M. Jagger
/s/ Charles H. Abbott Vice Chairman of the Board of Directors March 31, 1999
- ------------------------------
Charles H. Abbott
/s/ Charleen M. Chase Director March 31, 1999
- -----------------------------
Charleen M. Chase
/s/ Duane D. Fitzgerald Director March 31, 1999
- ------------------------------
Duane D. Fitzgerald
/s/ David T. Flanagan Director March 31, 1999
- ------------------------------
David T. Flanagan
/s/ Robert H. Gardiner Director March 31, 1999
- ------------------------------
Robert H. Gardiner
/s/ Peter J. Moynihan Director March 31, 1999
- -----------------------------
Peter J. Moynihan
/s/ William J. Ryan Director March 31, 1999
- ------------------------------
William J. Ryan
/s/ Kathryn M. Weare Director March 31, 1999
- ---------------------------
Kathryn M. Weare
/s/ Lyndel J. Wishcamper Director March 31, 1999
- -------------------------
Lyndel J. Wishcamper
EXHIBIT INDEX
The following designated exhibits, as indicated below, are either filed herewith
or have heretofore been filed with the Securities and Exchange Commission under
the Securities Act of 1933, the Securities Exchange Act of 1934 or the Public
Utility Holding Company Act of 1935 and are incorporated herein by reference to
such filings. Reference is made to Item 8 of this Form 10-K for a listing of
certain financial information and statements incorporated by reference herein.
NOTE: In this exhibit index the "Company" or "Central Maine" refers to Central
Maine Power Company. "CMP Group" refers to CMP Group, Inc. All exhibits are
Central Maine exhibits unless otherwise designated.
Prior
Exhibit Description of Exhibit
No. Document SEC Docket No.
EXHIBIT 2: PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT,
LIQUIDATION OR SUCCESSION
Not Applicable.
2-1 Form Of Agreement And Plan Of Merger 333-49677 2
EXHIBIT 3: ARTICLES OF INCORPORATION AND BY-LAWS
Incorporated herein by reference:
3-1 Articles of Incorporation, as amended. Annual Report on Form 10-K 3.1
for year ended December 31,
1992
3-1.1 Form of Articles of Amendment of CMP Group 333-49677 3.1
3-2 Bylaws, as amended. Annual Report on Form 10-K 3.2
for year ended December 31,
1996
3-2.1 Form of By laws of CMP Group 333-49677 3.2
EXHIBIT 4: INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
Incorporated herein by reference:
4-1 General and Refunding Mortgage between the Company 2-58251 2.18
and The First National Bank of Boston, as Trustee,
dated as of April 15, 1976, relating to the Series
A Bonds.
4-2 First Supplemental Indenture dated as of March 15, 2-60786 2.19
1977 to the General and Refunding Mortgage.
4-3 Supplemental Indenture to the General and Annual Report on Form 10-K A
Refunding Mortgage Indenture dated as of October for the year ended December
1, 1978 relating to the Series B Bonds. 31, 1978
4-4 Supplemental Indenture to the General and Quarterly Report on Form A
Refunding Mortgage Indenture dated as of October 10-Q for the quarter ended
1, 1979, relating to the Series C Bonds. September 30, 1979
4.10 Supplemental Indenture to the General and 33-9232 4.16
Refunding Mortgage Indenture dated as of December
1, 1986, relating to the Series I Bonds.
4.14 Indenture, dated as of August 1, 1989, between the 33-29626 4.1
Company and The Bank of New York, Trustee,
relating to the Medium-Term Notes.
4.15 First Supplemental Indenture, dated as of August Current Report on Form 8-K 4.15
7, 1989, relating to the Medium-Term Notes, Series dated August 16, 1989
A, and supplementing the Indenture relating to the
Medium-Term Notes.
4.15.1 Second Supplemental Indenture, dated as of January Current
Report on Form 8-K 4.1 10, 1992, relating to the
Medium-Term Notes, dated January 28, 1992 Series B, and
supplementing the Indenture relating to the Medium-Term
Notes.
4.15.2 Third Supplemental Indenture, dated as of December Annual
Report on Form 10-K 4.15.2 15, 1994, relating to the
Medium-Term Notes, for year ended December 31, Series C,
and supplementing the Indenture relating 1994 to the
Medium-Term Notes.
4.15.3 Fourth Supplemental Indenture, dated as of 333-35235 4.4
February 26, 1998, relating to the Medium-Term
Notes, Series D, and supplementing the Indenture relating
to the Medium-Term Notes.
4.17 Supplemental Indenture to the General and Current Report on Form 8-K 4.1
Refunding Mortgage Indenture, dated as of dated September 17, 1991
September 15, 1991, relating to the Series N Bonds.
4.18 Supplemental Indenture to the General and Current Report on Form 8-K 1.2
Refunding Mortgage Indenture, dated as of December dated December 10, 1991
1, 1991, relating to the Series O Bonds.
4.19 Supplemental Indenture to the General and Annual Report on Form 10-K 4.19
Refunding Mortgage Indenture, dated as of December for year ended December 31,
15, 1992, relating to the Series P Bonds. 1992
4.20 Supplemental Indenture to the General and Current Report on Form 8-K 4.1
Refunding Mortgage Indenture, dated as of February dated March 1, 1993
15, 1993, relating to the Series Q Bonds.
4.21 Supplemental Indenture to the General and Current Report on Form 8-K 4.1
Refunding Mortgage Indenture, dated as of May 20, dated May 20, 1993
1993, relating to the Series R Bonds.
4.22 Supplemental Indenture to the General and Current Report on Form 8-K 4.1
Refunding Mortgage Indenture, dated as of August dated November 30, 1993
15, 1993, relating to the Series S Bonds.
4.23 Supplemental Indenture to the General and Current Report on Form 8-K 4.2
Refunding Mortgage Indenture, dated as of November dated November 30, 1993
1, 1993, relating to the Series T Bonds.
4.24 Supplemental Indenture to the General and Annual Report on Form 10-K 4.24
Refunding Mortgage Indenture, dated as of April for year ended December 31,
12, 1994, relating to the Series U Bonds. 1994
4.26 Supplemental Indenture to the General and Annual Report on Form 10-K 4.26
Refunding Mortgage Indenture, dated as of February for year ended December 31,
15, 1996, evidencing the succession of State 1995
Street Bank and Trust Company as Trustee
EXHIBIT 9: VOTING TRUST AGREEMENT
Not applicable.
EXHIBIT 10: MATERIAL CONTRACTS
Incorporated herein by reference:
10-1 Agreement dated April 1, 1968 between the Company 2-30554 4.27
and Northeast Utilities Service Company relating
to services in connection with the New England
Power Pool and NEPEX.
10-2 Form of New England Power Pool Agreement dated as 2-55385 4.8
of September 1, 1971 as amended to November 1,
1975.
10-3 Agreement setting forth Supplemental NEPOOL 2-50198 5.10
Understandings dated as of April 2, 1973.
10-4 Sponsor Agreement dated as of August 1, 1968 among 2-32333 4.27
the Company and the other sponsors of Vermont
Yankee Nuclear Power Corporation.
10-5 Power Contract dated as of February 1, 1968 2-32333 4.28
between the Company and Vermont Yankee Nuclear
Power Corporation.
10-6 Amendment to Exhibit 10.5 dated as of June 1, 1972. 2-46612 13-21
10-7 Capital Funds Agreement dated as of February 1, 2-32333 4.29
1968 between the Company and Vermont Yankee
Nuclear Power Corporation.
10-8 Amendment to Exhibit 10.7 dated as of March 12, 70-4611 B-3
1968.
10-9 Stockholder Agreement dated as of May 20, 1968 2-32333 4.30
among the Company and the other stockholders of
Maine Yankee Atomic Power Company.
10-10 Power Contract dated as of May 20, 1968 between 2-32333 4.31
the Company and Maine Yankee Atomic Power Company.
10-10.1 Amendment No. 1 to Exhibit 10-10 dated as of March Annual Report on Form 10-K 10-1.1
1, 1984. for the year ended December
31, 1985 of Maine Yankee
Atomic Power company (File
No. 1-6554)
10-10.2 Amendment No. 2 to Exhibit 10-10 dated as of Annual Report on Form 10-K 10-1.2
January 1, 1984. for the year ended December
31, 1985 of Maine Yankee
Atomic Power Company (File
No. 1-6554)
10-10.3 Amendment No. 3 to Exhibit 10-10 dated as of Annual Report on Form 10-K 10-1.3
October 1, 1984. for the year ended December
31, 1985 of Maine Yankee
Atomic Power Company (File
No. 1-6554)
10-10.4 Additional Power Contract between the Company and Annual Report on Form 10-K 10-1.4
Maine Yankee Atomic Power Company dated February for the year ended December
1, 1984. 31, 1985 of Maine Yankee
Atomic Power Company (File
No. 1-6554)
10-11 Capital Funds Agreement dated as of May 20, 1968 2-32333 4.32
between the Company and Maine Yankee Atomic Power
Company.
10-11.1 Amendment No. 1 to Exhibit 10-11 dated as of Annual Report on Form 10-K 10-2.1
August 1, 1985. for the year ended December
31, 1985 of Maine Yankee
Atomic Power Company (File
No. 1-6554)
10-25 Agreement dated as of May 1, 1973 for Joint 2-48966 13-57
Ownership, Construction and Operation of New
Hampshire Nuclear Units among Public Service
Company of New Hampshire and certain other
utilities, including the Company.
10-42 Twentieth Amendment to Exhibit 10-25 dated as of Annual Report on Form 10-K 10-42
September 19, 1986. for the year ended December
31, 1986
10-46 Participation Agreement, dated June 20, 1969 among 2-35073 4.23.1
Maine Electric Power Company, Inc., the Company
and certain other utilities.
10-47 Power Purchase and Transmission Agreement dated 2-35073 4.23.2
August 1, 1969, among Maine Electric Power
Company, Inc., the Company and certain other utilities,
relating to purchase and transmission of power from The
New Brunswick Electric Power
Commission.
10-48 Agreement amending Exhibit 10-47 dated June 24, 2-37987 4.41
1970.
10-49 Agreement supplementing Exhibit 10-47 dated 2-51545 5.7.4
December 1, 1971.
10-50 Assignment Agreement dated March 20, 1972, between 2-51545 5.7.5
Maine Electric Power Company, Inc., and the New
Brunswick Electric Power Commission.
10-51 Capital Funds Agreement dated as of September 1, 2-24123 4.19.1
1964 among Connecticut Yankee Atomic Power
Company, the Company and certain other utilities.
10-52 Power Contract dated as of July 1, 1964 among 2-24123 4.19.2
Connecticut Yankee Atomic Power Company, the
Company and certain other utilities.
10-53 Stockholder Agreement dated as of July 1, 1964 2-24123 4.19.3
among the stockholders of Connecticut Yankee
Atomic Power Company, including the Company.
10-54 Connecticut Yankee Transmission Agreement dated as 2-24123
4.19.4 of October 1, 1964 among the stockholders of
Connecticut Yankee Atomic Power Company, including
the Company.
10-55 Agreements with Yankee Atomic Electric Company each dated
June 30, 1959, as follows:
10-55.1 Stock Agreement. 2-15553 4.17.1
10-55.2 Power Contract. 2-15553 4.17.2
10.55.3 Research Agreement. 2-15553 4.17.3
10-56 Transmission Agreement with Cambridge Electric 2-15553 4.18
Light Company and other sponsoring stockholders of
Yankee Atomic Electric Company.
10-57 Agreement for Joint Ownership, Construction and 2-52900 5.16
Operation of Wyman Unit No. 4 dated November 1,
1974 among the Company and certain utilities.
10-58 Amendment to Exhibit 10-57 dated as of June 30, 2-55458 5.48
1975.
10-59 Amendment to Exhibit 10-57 dated as of August 16, 2-58251 5.19
1976.
10-60 Amendment to Exhibit 10-57 dated as of December 2-68184 5.31
31, 1978.
10-61 Transmission Agreement dated November 1, 1974 2-54449 13-57
among the Company and certain other utilities,
relating to Wyman Unit No. 4.
10-62 Sharing Agreement--1979 Connecticut Nuclear Unit 2-50142 2.43
dated September 1, 1973 among the Company and
certain other utilities, relating to Millstone
Unit No. 3.
10-63 Amendment to Exhibit 10-62 dated as of August 1, 2-51999 5.16
1974, relating to Millstone Unit
No. 3.
10-64 Agreement dated as of February 25, 1977 among the 2-58251 5.24
Company, the Connecticut Light and Power Company,
the Hartford Electric Light Company and Western
Massachusetts Electric Company, relating to
Millstone Unit No. 3.
10-70 Project Agreement dated December 5, 1984 among the Annual
Report on Form 10-K 10-69 Company, the Cities of Lewiston
and Auburn, Maine for the year ended December and certain
other parties, relating to development 31, 1984 of
hydro-electric plant.
10-73 Trust Indenture dated as of June 1, 1977 between 2-60786 5.27
the Town of Yarmouth and Casco Bank & Trust
Company, as trustee, relating to the Town of Yarmouth's 6
3/4% Pollution Control Revenue Bonds (Central Maine Power
Company, 1977 Series A).
10-74 Installment Sale Agreement dated as of June 1, 2-60786 5.28
1977 between the Town of Yarmouth and the Company.
10-75 Agreements Relating to $11,000,000 Floating/Fixed
Rate Pollution Control Revenue Refunding Bonds:
10-75.1 Bond Purchase Agreement dated as of May 1, 1984. Quarterly Report on Form 28.3
10-Q for the quarter ended
June 30, 1984
10-75.2 Loan Agreement dated as of May 1, 1984. Quarterly Report on Form 28.4
10-Q for the quarter ended
June 30, 1984
10-76 Agreements Relating to $8,500,000 Floating/Fixed
Rate Pollution Control Revenue Bonds:
10-76.1 Bond Purchase Agreement dated December 28, 1984. Annual Report on Form 10-K 10-77.1
for year ended December 31,
1984
10-76.2 Loan Agreement dated as of December 1, 1984. Annual Report on Form 10-K 10-77.2
for year ended December 31,
1984
10-77.1 Indenture of Trust dated as of March 14, 1988 Annual Report on Form 10-K 10-1.4
between Maine Yankee Atomic Power Company and for year ended December 31,
Maine National Bank relating to decommissioning 1987, of Maine Yankee Atomic
trust funds. Power Company (1-6554)
10-77.1(a) Amended and Restated Indenture of Trust dated as Annual Report on Form 10-K 10-6.1
of January 1, 1993 between Maine Yankee Atomic for year ended December 31,
Power Company and The Bank of New York relating to 1992, of Maine Yankee Atomic
decommissioning trust funds. Power Company (1-6554)
10-77.2 Indenture of Trust dated as of October 16, 1985 Annual Report on Form 10-K 10-7
between the Company and Norstar Bank of Maine for year ended December 31,
relating to the spent fuel disposal funds. 1985, of Maine Yankee Atomic
Power Company (1-6554)
10-78 Form of Agreement of Purchase and Sale dated Annual Report
on Form 10-K 10.79 February 19, 1986 between the Company
and Eastern for the year ended December Utilities
Associates, relating to the sale of the 31, 1985 Company's
Seabrook Project interest.
10-79 Addendum to Agreement of Purchase and Sale dated Quarterly
Report on Form 2.1 June 23, 1986, among the Company,
Eastern 10-Q for the quarter ending Utilities Associates
and EUA Power Corporation, June 30, 1986 amending Exhibit
10-78.
10-80 Agreement, dated as of October 29, 1986, between Quarterly
Report on Form 2.1 the Company and EUA Power Corporation,
relating to 10-Q for the quarter ended the sale of the
Company's interest in the Seabrook September 30, 1986
Project.
10-81 Credit Agreement, dated as of October 15, 1986, Quarterly Report on Form 2.2
among the Company, various banks and Continental 10-Q for the quarter ended
Illinois National Bank and Trust Company of September 30, 1986
Chicago, as agent, establishing the terms of a $40
million unsecured credit facility.
10-86 Labor Agreement dated as of May 1, 1989 between Annual
Report on Form 10-K 10.86 the Company (Northern, Western
and Southern for the year ended December Division) and
Local 1837 of the International 31, 1989 Brotherhood of
Electrical Workers.
10-86.1 Agreement dated as of November 25, 1991 extending Annual Report on Form 10-K 10.86.1
Labor Contract. for year ended December 31,
1991
10-89 1987 Executive Incentive Plan, as amended January Annual Report on Form 10-K 10.89
20, 1993.* for year ended December 31,
1992
10-90 Deferred Compensation Plan for Non-Employee Annual Report on Form 10-K 10.90
Directors, as amended and restated effective for year ended December 31,
February 1, 1992.* 1992
10-91 Retirement Plan for Outside Directors, as amended Annual
Report on Form 10-K 10.91 and restated effective April 24,
1991.* for year ended December 31,
1992
10-93 Central Maine Power Company Long-Term Incentive Annual Report on Form 10-K 10.93
Plan.* for year ended December 31,
1993.
10-93.1 Transfer of 10-93 to CMP Group 333-49643 -
10-94.1 Central Maine Power Company Supplemental Executive Annual Report on Form 10-K 10-94.1
Retirement Plan, as Amended and Restated Effective for
year ended December 31, January 1, 1993, and as further
Amended Effective 1995 January 1, 1996.*
10-95 Competitive Advance and Revolving Credit Facility Annual Report on Form 10-K 10.95
between the Company and Chemical Bank dated as of for year ended December 31,
November 7, 1994. 1994
10-98 Credit Agreement dated as of October 23, 1996, Annual Report on Form 10-K 10-98
between the Company and certain banks. for year ended December 31,
1996
10-98.1 Amendment of 10-98 dated as of December 15, 1998 Filed herewith
10-98.2 Credit Agreement dated as of December 15, 1998, Filed herewith
between Central Maine and certain banks
10-99 Asset Purchase Agreement, dated as of January 6, 333-35235 99.2
1998, by and between the Company, other sellers,
and National Energy Holdings, Inc.
10.100 Employment Agreement between CMP Group and David Annual Report on Form 10-K 10.100
T. Flanagan dated December 31, 1997 for year ended December 31,
1997
10.101 Employment Agreement between CMP Group and Arthur Annual Report on Form 10-K 10.101
W. Adelberg dated January 1, 1998 for year ended December 31,
1997
10.102 Employment Agreement between CMP Group and David Annual Report on Form 10-K 10.102
E. Marsh dated January 1, 1998 for year ended December 31,
1997
10.103 Employment Agreement between CMP Group and Gerald Annual Report on Form 10-K 10.103
C. Poulin dated January 1, 1998 for year ended December 31,
1997
10.104 Employment Agreement between the Company and Sara Annual Report on Form 10-K 10.104
J. Burns dated June 30, 1997 for year ended December 31,
1997
10-105 Employment Agreement between CMP Group and F. Filed herewith -
Michael McClain dated August 26, 1998
10-106 Employment Agreement between Central Maine and Filed herewith -
Michael R. Cutter dated June 30, 1997
10-107 Employment Agreement between Central Maine and Filed herewith -
Curtis I. Call dated June 30, 1997
10-108 Employment Agreement between CMP Group and Anne M. Filed herewith -
Pare dated June 30, 1997
*Management contract or compensatory plan or arrangement required to be filed
in response to Item 14(c) of Form 10-K.
EXHIBIT 11: STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Not Applicable.
EXHIBIT 12: STATEMENTS RE COMPUTATION OF RATIOS
Not Applicable.
EXHIBIT 13: ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR
QUARTERLY REPORT TO SECURITY HOLDERS
Not Applicable.
EXHIBIT 16: LETTER RE CHANGE IN CERTIFYING ACCOUNTANT
Not Applicable.
EXHIBIT 18: LETTER RE CHANGE IN ACCOUNTING PRINCIPLES
Not Applicable.
EXHIBIT 21: SUBSIDIARIES OF THE REGISTRANTS Filed herewith
EXHIBIT 22: PUBLISHED REPORT CONCERNING MATTERS SUBMITTED TO
VOTE OF SECURITY HOLDERS
Not Applicable.
EXHIBIT 23: CONSENTS OF EXPERTS AND COUNSEL
23-1 Consent of PricewaterhouseCoopers LLP to the Filed herewith
incorporation by reference of their reports
included or incorporated by reference herein in
the Company's Registration Statements (File Number
33-36679, 33-39826, 33-44754, 33-51611, 33-56939
and 333-35235) and CMP Group's Registration
Statements (File Number 333-49677, 333-49643, and
33-39826).
EXHIBIT 24: POWER OF ATTORNEY
Not Applicable.
EXHIBIT 27: FINANCIAL DATA SCHEDULE Filed herewith
EXHIBIT 28: INFORMATION FROM REPORTS FURNISHED TO STATE
INSURANCE REGULATORY AUTHORITIES
Not Applicable.
EXHIBIT 99: ADDITIONAL EXHIBITS
To be filed under cover of a Form 10-K/A amendment of this
Form 10-K within 180 days after December 31, 1998,
pursuant to Rule 15d-21 under the Securities Exchange Act
of 1934:
99-1 and -2 Information, financial statements and exhibits
required by Form 11-K with respect to certain employee
savings plans maintained by the Company.
Central Maine Power Company
Form 10-K - 1998
Schedule II
Page 1 of 3
Central Maine Power Company
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1998
(Dollars in Thousands)
Additions
Charged Charged to
Balance to costs other Balance
at Beginning and accounts- Deductions at end
Description of Period Expenses describe -describe of period
Reserves deducted from assets to which they apply:
Uncollectible accounts $ 2,400 $5,644 $ - $4,908(A) $ 3,136
Reserves not applied against assets:
Casualty and insurance $ 1,500 $ 1,379 $ $ 516(C) $ 2,363
Workers' compensation 8,494 1,485 294(B) 1,779(C) 8,494
Hazardous material
clean-up 2,108 (368) (188)(D) 1,928
Total $12,102 $2,496 $294 $2,107 $12,785
Notes:
(A) Amounts charged off as uncollectible after deducting customers' deposits
and recoveries of accounts previously charged off.
(B) Amounts transferred to capital and billable accounts.
(C) Principally payments for various injuries and damages and expenses in
connection therewith. (D) Amounts charged to regulatory asset account.
Central Maine Power Company
Form 10-K - 1998
Schedule II
Page 2 of 3
Central Maine Power Company
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1997
(Dollars in Thousands)
Additions
Charged Charged to
Balance to costs other Balance
at Beginning and accounts- Deductions at end
Description of Period Expenses describe -describe of period
Reserves deducted from assets to which they apply:
Uncollectible accounts $ 4,177 $5,514 $ - $7,291(A) $ 2,400
Reserves not applied against assets:
Casualty and insurance $ 1,275 $ 1,862 $ $ 1,637(C) $ 1,500
Workers' compensation 7,994 1,692 423(B) 1,615(C) 8,494
Hazardous material
clean-up 3,639 1,069 2,600(D) 2,108
Total $12,908 $4,623 $423 $5,852 $12,102
Notes:
(A) Amounts charged off as uncollectible after deducting customers' deposits
and recoveries of accounts previously charged off.
(B) Amounts transferred to capital and billable accounts.
(C) Principally payments for various injuries and damages and expenses in
connection therewith. (D) Amounts charged to regulatory asset account.
Central Maine Power Company
Form 10-K - 1998
Schedule II
Page 3 of 3
Central Maine Power Company
VALUATION AND QUALIFYING ACCOUNTS
For the Year Ended December 31, 1996
(Dollars in Thousands)
Additions
Charged Charged to
Balance to costs other Balance
at Beginning and accounts- Deductions at end
Description of Period Expenses describe -describe of period
Reserves deducted from assets to which they apply:
Uncollectible accounts $ 3,313 $7,396 $ - $6,532(A) $ 4,177
Reserves not applied against assets:
Casualty and insurance $ 1,275 $ 798 $ $ 798(C) $ 1,275
Workers' compensation 6,400 2,820 270(B) 1,496(C) 7,994
Hazardous material
clean-up 3,540 895 796(D) 3,639
Total $11,215 $4,513 $270 $3,090 $12,908
Notes:
(A) Amounts charged off as uncollectible after deducting customers' deposits
and recoveries of accounts previously charged off.
(B) Amounts charged to capital accounts.
(C) Principally payments for various injuries and damages and expenses in
connection therewith. (D) Amounts charged to regulatory asset account.