- _ _ _ _ _ _ _ _ _ _ - - _ - - _ _ _ _ . . . - - - _ _ _ _ _ _ _ _ _

HYDRO-E C SC |

CGWWAHUAL

|

REPORT

19791

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| TO THE STOCKHOLDERS OF BANGOR HYDRO-ELECTRIC COMPANY

! Eamings in 1979 were disappointing - 31.63 per common share,8% less than 1978 earnings of $1.77 per common} share. In addition, the 1979 earnings contain two noteworthy income items. The first resulted from the recording of

unbilled revenue, as explained in Ncte 1 to the financial statements, which added $.58 per share. The second item;

! arose from the Maine Public Utilities Commission approval of a new fuel adjustment clause allowing the recoveryj of previously incurred fuel costs, as explained in Note 1 to the financial statements, which resulted in an increase in1 1979 earnings of $1.06 per share. However, $.36 of this $1.06 per share is attributable to the amount of fuel that! would have been deferred at December 31,1978 had the new fuel clause been in effect at that time. These two || items contribute $.94 of the $1.63 per share eamed in 1979.

It is clear that our basic rate schedule, established in 1976 and based on 1975 operating results, can no longersupport the realities of higher operating and maintenance costs and the higher costs of capital funds in the 1980's.Consequently, on February 25,1980 the Company filed for a general rate increase with the Maine Public Utilities I

,

j Commission seeking increased revenue of $5.372,000, or 10.4% over 1979 revenues. In addition, in order to support || the efforts of securing at reasonable costs the long-term financing that must be accomplished in carrying out the ;j capital construction program, some of which must be undertaken before any new permanent rates will be in effect,j the Company asked for interim rate relief of approximately one half the permanent request.! The year 1979 has been one of turmoil in the electric uti!'ty industry. Conflicts between growth and no-growth! continue to plague the decisions that must be made in planning for future energy requirements. During the year <; there were demonstrations at Seabrook in an effort to halt construction of that much needed facility; the Maine Public

Utilities Commission denied Central Maine Power Company permission to build a 600 megawatt coal-firedgenerating station on Sears Island, and New England Power Company cancelled the proposed nuclear generatingstation in Rhode Island in which your Company was a joint owner. The year also saw the accident at Three Mile

,

: Island and the cautious but positive response by the Kemeny Commission. Further, a referendum petition calling forthe prohibition of the generation of electricity by nuclear fission within the state, including the shutdown of Maine jYankee, has been circulated by anti-nuclear advocates. Although we cannot be certain at this writing. it would appearthat the petition drive has been successful, and that the question will go to public referendum later in 1980.

The electric utility industry has yet to see a clear-cut energy policy developed by the Federal government and i

the industry continues to be exposed to confusing signals from all branches of government. The most disturbing || aspect of this confusion is the resultant uncertainty about the sources of the electric energy necessary to serve |

customers in the years ahead. Little, if any, progress has been made in forcing regulators and policy makers to take arealistic approach to available solutions, and the regulatory and political processes continue to be bogged down in ,peripheral matters.

Evidently the only remedy is for the general public to exert its influence directly upon the politicians and regulatoryi bodies to make the difficult decisions on the issues which those politicians and regulators have, over the years,

appropriated to themselves to consider. Accordingly we again ask you to become involved in the energy issues andmake your views known to your national and state legislators and to the various agencies involved in regulating theelectric utility business.

The directors and officers of the Company gratefully acknowledge and appreciate the continued support of youthe stockholders.

Respectfully submitted, I I -

-

icnG a apR. N. Haskell kChairman of the Board

~

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.M.T. A. Green at |President '

nUsand D viper Share |

E Earnings per Share~

February 26,1980 E Dividends per Share 1975 1976 1977 1978 1979

2

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| YEARINREVIEW W ll''

|! Silas and Revenues.

|- |, <

| Revenuos in 19/9 increased by .| |i $9121 5'32 to a tutal of $51 /48 328 2I

Of th s increase only $108 / 418 isa tt r < r u t a t%e in rncreased general

' rato resenue T he remamder nf ,

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$8 fi 4 i f>l 4 i :nf_ r edsed f|;e| ( harge -

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re.onae f a r:p a y a d wc! result of I

increased cost of on dus,ng the yea- M i

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Fuel for generation and pur- od fired gererating sources from I

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chased power tota;eo $33 054.914 w h'c h the Company purchases|

1975 1976 1977 1978 1979 (exClus"ve of $5 484 688 deterred enerQy |Kilowatt Hours Sold see Note 1 to financial statements)O Other d Industnal

1979 com ared to $26 762 748 in Other Expenses,O Cornrnercial E Residential 19 8 Of this $6 292166 increase The Wuham F Wyman U nit n4

t rit a : ales n 19/4 nore $5 796 771 is d:rectty attnbutable generating station in Yarmouth1 .3 41 Sn all m eatt hnurs an to increaseo f uel expense in Jan- Maine +n wh>ch toe Company owns .

n( rease a H %, nr 101 '19 366 uar, of 1979 the Company was pay an 8 33% interest began com-1

M a att ru mr <: or last year [x ing $1188 tar a barrel of od in mercial operatton on December 1c luam |nterrupt.hk sants tota! f'rrr December the price had increased 1978 Operation maintenance de-saios rueaseu , % in tNs period 97% to $23 40 per barrel In preciation and property tax ex-Hos + n t .al ,a k n .nrreased 4% January 1980 the pr ce of oil was penses a ;sociated with the Com-c omo,erc ,a1 ,a:e< 14% and 'ndus- turther !ncreased to $24 40 per pany s ownership in that plant areIna! wos aca r exc!uding .nter barrel This type of increase was included in 1979 expenses H,gher

'

runttw ;a h " A ere up 12 3% The also experienced at the various payron costs as weh as signit-indus'r a! saw .ncrease is due to . icantly higher pnces for purchasedr

substetrahv nyher sa!es tn Great | materials supphes and outstdeiNnrtnern Paper Compans and '

services have also Contr:buted to |L !nc n ? Putp and Paper CompanN inc' eased operation and mainten-, Interruptrble sales ,nc reased 16 4% ance expenses' due in a major pla. '! expansion by '

Interest costs reflect heavierIMC (Tenurai Gmup Inc '

~ _

borrowing for the Comp;any's con-struction program as >eh as the

Fusi for Generationand Purchased Power

- - - _ abnormal increase in : nort-term.

- interest rates expenenced dunngIn 1979 the Company s generatton ~ -

the yearma pr oduc ed 17% from its hydroelectnc stanons m nom vaine

- - -

CAPACITYYankee Atomic Po Aer Company in_ _

which the Company owns a 7% - A major concern of the Company is'9hpera ng the abdity to meet its customerinterest and the remmning 60% xpenses ($ l ions) o

num od-bred sources owned by the O Taxes E oepreciation demands for electnc energy in mid(;ompan; or purchased from other G Operations and Maintenance to late 1980 s Current forecastsutihties a Fuel and Purchased Power indicate a 3 3% toad growth dunng

3

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|

| the next decade, down from the this investment will be requested in4.4% forecast of a year ago. the Company's 1980 rate pro- |

The Company has a .37% interest, ceeding.or 8.6 megawatts, in the Seabrook As a result of the cancellation ofnuclear units being bui|t by Public the New England Power CompanyService Company of New Hamp- units we are currently examiningshire, ("PSNH") and scheduled for alternative sources of generating

| completion in 1983 and 1985, and capacity. The Company is re 'has contracted to purchase an evaluating the economic feasibilityadditional 1.8% interest, or 41.4 of adding hydro-electric generation<

i megawatts, for a total of 50 mega- within the system. Despite the high; watts. The Company's commitment - construction costs, the develop ''

to purchase the additional interest_

ment of additional hyd o-electricin the Seabrook nuclear units, along capacity is becoming a competitivewith the commitments of other pur- alternative to the use of oil forchasers, is being delayed by regu- generation. Among other alterna-latory proceedings. Those proceed- tives being considered are pur-

January 1981 or even later,_ _ _

chases of capacity from otherings may not be completed untilutilities, including the N 2w Bruns-

1975 1976 1977 1978 1979 wick Electric Pcwer CommissionThe Company had planned toFuel sources of Power in Canada, and . m' ownership inprovide the greater part of the J

remainder of its capacity require. O oil E Nuclear E Hydro one or more of the generatingmonts in the late 1980's from its 100 stations being planned in Newmegawatt interest in the New Eng- New England Power Corrpany can- England. Other factors being con ,land Power Company nuclear units celled its plans to construct these sidered in our load projectionsto have been built in Charlestown, units. The Company's investment in include the impact of conserva ,Rhode Island. However, when efforts this project at December 31, 1979 tion and load management tech-to obtain the site were unsuccessful, I was $2,015,307. The recovery of niques.

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NYDR0fLECTRICCOMPANYFINANCIALSTATEMENTS &HOTESTOFINANCIALSTATEMENTS

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AUDITORS' REPORTTo the Stockholders and Board of Directors of Bangor Hydro-Electric Company:

We have examined the balance sheet of Bangor Hydro-Electric Company (a Maine corporation) and the statementof capitalization as of December 31,1979 and 1978, and the related statements cf income, retained earnings andsources of funds for plant additions for the years then ended. Our examinations were made in accordance withgenerally accepted auditing standards and, according!y, included such tests of the Eccounting records and suchother auditing procedures as we considered necessary in the circumstances.

In our opinion, the accompanying financial statements present fairly the financia: position of Bangor Hydro- i

Electric Company as of December 31,1979 and 1978, and the results of its operations and its sources of funds forplant additions for the years then ended, in conformity with generally accepted accounting principles, which, exceptfor the change (with which we concur) in the method of recording Electric Operating Revenues as indicated in INote 1 to the financial statements, have been applied on a consistent basis.

Arthur Andersen & Co. lBoston, Massachusetts. |

lJanuary 25,1980

6

_ _ _ - _ - _ _ - _ _ - _ _ _ _ _ _ _ _ _ _ _ _ _ - _ _ _ _- _ _ _ _ _ _ - _ _ -

BANG 0R HYDRO-ELECTRIC C0tlPANYStatement of Incoma for the Years Ended December 31,1979 and 1978

1979 1978Electric Operating Revenues (Note 1)General rate revente $27,340,857 $26.252.939Fuel charge revenue 24,407,471 16.373.857

$51,748,328 $42.626.796

Operating Expenses:Fuel for generation and purchased power (Notes 1. 8 and 9) $33,054,914 $26,762.748Other operation 6,266,570 5.156.183Mainter,ance 2,077,141 1.456.350Depreciation (Note 1) 2,814,541 2.200,513Taxes-

Local property and other 1,822,225 1,514.646

income (Note 2) 722,874 1.128.430$46,758,265 $38218.870

Operating income $ 4,990,063 $ 4,407.926

'ither income and (Deductions):Allowance for other funds used during construction (Note 1) - 531.293Other, net of applicatale income taxes (5,886) (14.117)

in 'ome Before Interest Expense $ 4,984,177 $ 4.925.102

Interest Expense:First mortgage bonds (Note 5) $ 2,088,957 $ 1.872.034

Other (Note 6) 1,243,365 304,734Allowance for borrowed funds used during construction (Note 1) (792,693) (643.149)

$ 2,539,629 $ 1.533.619

inc:me Before Cumulative Effect of a Change in Accounting Principle $ 2,444,548 $ 3.391.483

Cumulative effect on pnor periods (to December 31,1978) ofchanging to a different method of recording revenuenet of related income taxes of $1,034.000 (Note 1) 1,043.000 -

Net income $ 3,487,548 $ 3,391,483Dividends on Preferred Stock 546,420 450.570

Earnings Applicable to Common Stock $ 2.941,128 $ 2.940.913

Earnings Per Common Share, based on weignted average number of sharesoutstanding of 1,801.906 in 1979 and 1.658.985 in 1978 (Note 1)

Before cumulative effect of a change in accounting principle $ 1.05 $ 1.77Cumulative effect on prior periods (to December 31,1978) of

changing to a different method of recording revenue $ .58 $ -

Net $ 1.63 $ 1.77

Pro forma earnings assuming the new method of recordingrevenue is applied retroactively

Applicable to common stock $ 1,898,128 $ 3.045.475

Per share $ 1.05 $ 1.83

The 8CCCTpanyeg notes are an integral paff Of these trancial statements

7

e. ._

BANG 0R HYDR 0fLECTRIC COMPANYBalance Sheet - December 31,1979 and 1978

Assets1979 1978

investment in Utility Plant:Electric plant in service, at original cost (Notes 8 and 9) $95,017,710 $87.396.867Less Accumulated depreciation (Notes 8 and 9) 32,459,170 30.065.676

$62,558,540 $57,331,191Construction in progress, including $3.697,502 in 1979 and $3,835,595

in 1978 for construction of jointly-owned generating units (Notes 9 and 10) 3,824,265 5.453.208$66,382,805 $62.784,399

Investments in corporate joint ventures (Notes I and 8)Maine Yankee Atomic Power Company 4,683,022 4.678,772Maine Electric Power Company, Inc. 178,898 188.002

$71,244,725 $67.651.173Cther investments, principally at cost $ 520,395 $ 529.659

Current Assets:Cash (Note 6) $ 1,122,801 $ 1,917,124Accounts receivable -

Custorr. ors, not of reserve 5,098,511 4.280.689income tax refund 563,287 772.265

Unbilled revenue receivable (Note 1) 2,549,199 -

Inventories at average cost -Material and supplies 1,840,857 1,529.516Fuel oil 1,286,905 515.611

Prepaid expenses 359,103 357.590Deferred fuel costs (Note 1) 5,484,688 -

$18,305,351 $ 9.372.795Deferred Charges:Cost of cancelled NEPCO nuclear units, net of related income taxes

of $785.265 (Note 10) $ 1,230,041 $ -

Other 424,054 380.418$ 1,654,095 $ 380,418

$91,724,566 $77.934.045

The accompanymg notes are an otegral part of these fmancial statements

8

't .

Stockholders' investment and Liabilities1979 1978

. Capitalization (see accompanying statement):Common stock investment (Note 3)Pref rred stock (Note 4)

~

$25,694,645 - $25217,6054,734,000 4,734.000

Redeemable preferred stock (Note 4) 5,000,000 2,000,000First mortgage bonds, exclusive of a current maturity and

sinking fund requirements.(Note 5) 32,345,000 27.515.000Total capitalization $67,773,645 $59.466.605

Current Liabilites:Curr:nt maturity of long-term debt (Note 5) $ 2,000,000 $ -

Not:s payable to banks (Note 6) 7,550,000 7.050.000$ 9.550,000 $ 7.050.000

Oth:r current liabilities -Current sinking fund recuirements $ 170,000 $ 170,000

- Accounts payable 5,116,931 4,134,670Dividends payable 856,598 792,813Accrued interest 664,954 384,635Accrued taxes (Note 2)

. Current 207,764 227,742Short-term deferred (55,417) -

Customers' deposits 73,859 79,448

|Accrued pension plan contribution (Note 7) 410,000 363.600

$ 7,444,089 $ 6.152.908$16,994,689 $13.202.908

| Commitments and Contingencies (Notes 8, 9 and 10)Deferred Credits and Reserves (Note 2):Accumulated deferred income taxes $ 3,441,848 $ 2,746,181Unamortized investment tax credits 3,418,326 2,437,848,

Other 96,058 80.503>

$ 6,956,232 $ 5264.532$91,724,566 $77.934.045

.

The C:cornpanying #10tes are an ,rtegral part of these financet statements.

9

I 1

BANG 0R HYDRG-ELECTRIC COMPANYStatement of Retained Earnings for the Years Ended December 31,1979 and 1978

1979 1978Balance at Beginning of Year $ 8,599,913 $ 8,026,517Add:Net income 3,487,548 3,391,483Equity reserve for licensed hydro projects - 136262

$12,087,461 $11,554.262Deduct:C1sh dividenc; declared on-

Preferred stock $ 546,420 $ 450,570Common stock - $1.52 per share in 1979 and $1.46 per share in 1978 2,742,338 2.503,779

$ 3,288,758 $ 2,954,349Balance at End of Year $ 8,798 703 $ 8.599.913

Statement of Capitalization - December 31,1979 and 19781979 1978

Common Stock Investment:Common stock, par value $5 pe'r share-

Authorized--2,500,000 sharesOutstanding--1,812.023 shares in 1979 and 1,789,827 shares in 1978 $ 9,060,115 $ 8.949,135

Amounts paid in excess of par value 7,835,827 7,668,557Retained earnings 8,798,703 8.599.913

$25,694,645 $25217,605Preferred Stock, non-participating, cumulative, par value $100 per share,authorized 100,000 shares (Note 4):

Subject to mandatory redemption requirements-9-1/2%, Callable at $109.50, 30,000 shares authorized and outstanding $ 3,000,000 $ -

9-1/4%, Callable at $106.77, 20,000 shares authorized and outstanding 2,000,000 2.000.000$ 5,000,000 $ 2.000.000

Not redeemable or redeemable soifly at the option of the issuer-7%, Noncallable. 25,000 shares authorized and outstanding $ 2,500,000 $ 2,500,0004-1/4%, Callable at $100, 4,840 shares authorized and outstanding 484,000 484,0004%, Series A, Callable at $110,17,500 shares authorized and outstanding 1,750,000 1.750.000

$ 4,734,000 $ 4.734.000First Mortgage Bonds (Note 5):2-3/4% Series due 1980 $ 2,000,000 $ 2,000,0003-1/4% Series due 1982 1,000,000 1,000,0003-1/8% Series due 1984 $ ,000,000 1.000,0003-1/4% Series due 1985 1,500,000 1.500,0004% Series due 1988 2,500,000 2,500.0004% Series due 1993 3,500,000 3,500,0006-3/4% Series due 1998 2,500,000 2,500,0008-1/4% Series due 1999 3,500,000 3.500.00010-1/2% Senes due 2000 4,800,000 4,850,0009-1/4% Series due 2001 2,865,000 2.910,0008-3/5% Series due 2003 2,350,000 2.425,00010-1/4% Series due 2004 7,000,000 -

$34,515,000 $27,685,000Less - Sinking fund requirements and a current maturity 2,170,000 170.000

$32,345,000 $27,515.000Total capitahzation $67,773,645 $59,466.605

Ihe SCC 0mpanysng notes are an entegral part Of these f#nancial Staternents.

--

+

BANG 0R HYDRORECTRIC CatIPANYStatement of Sources of Funds for Plant Additions for the Years Ended December 31,1979 and 1978

197!) 1978Sources of Funds:Internal sources-

Operations -N^,t income before cumulative change in accounting principle $ 2,444,548 $ 3,391.483Itsms not currentir requiring or (providing) funds-

Depreciation 2,814,541 2200,513Deferred income taxes 695,667 470,488Investment tax credit, net 980,478 923,637Allowance for cther funds used during construction - (531,293)

Funds provided from operations $ 6,935,234 $ 6,454,828Cumulative effect on prior years (to December 31, 1978) of a change

to a different trethod of recordi.1g revenue 1,043,000 -

$ 7,978,234 $ 6.454,828Other sources (uset;) of funds -

Sinking fund requ rements $ (170,000) $ (170,000)Dividends declare 1 (3,288,758) (2.954,349)Other, net 874,952 74.206

$(2,583,806) $(3.050,143)Change in net current assets, exclusive of interim financing -

Cash, receivables and unbilled revenue $(2,363,720) $(3,122,661)Deferred fuel costs (5,484,688) -

Other current assets (1,084,148) (83,265)Accounts payable 982,261 1,807,113Other current liabdities 309,522 54,944

$(7,640,773) $(1,343.869)Funds available from internal sources $(2,246,345) $ 2.060.816

External sources-Notes payable to banks $ 500,000 $ 2,750,000Prcceeds from sale of-

First mortgage bonds 7,000,000 2,500,000Preferred stock (30,000 shares in 1979) 3,000,000 -

Common stock-Public offering - 4288,010Dividend reinvestment purchase plan (14,145 shares in 1979) 194,626 -

Employee stock ownership plan (8.051 shares in 1979 and 3,800 in 1978) 110,547 56.696Funds from external sources $10,805,173 $ 9.594,706

Funds Available for Plant Additions $ 8,558,828 $11.655.522

Funds Used For:Wyman Unit #4 $ 1,313,818 $ 3,620,186NEPCO Units #1 and #2 (Note 10) 379,991 1,271,168Seabrook 1,504,070 2200,279Other plant additions 5,360,949 5.095,182

$ 8,558,828 $12,186,815Less: Allowance for other funds used during construction - *(531,293)Funds Used for Plant Additions $ 8,558,828 $11.655.522

The acompanycg notes are an ircegral part of these foancial statements

11

BANGORHYDR0fLECTRIC CORIPANYNotes to Financial Statements December 31,1979 and 1978

(1) Summary of Significant Accounting Policies

Electric Operating RevenuesPrior to 1979, Electric Operating Revenues were recorded when billings, based on cycle meter readings for either aone- or two-month period of consumption, were rendered to customers. Due to the cycle billing process, a portion ofthe electricity used by the Company's customers during a fiscal period remains unbilled at the end of that period. Ingeneral. this "unbilled" amount of revenue was not recorded as revenue prior to 1979.

In the first quarter of 1979, the method of recording Electric Operating Revenues was changed to recognizerevenues as electricity is used by the Company's customers. including electricity delivered but not yet billed at theend of the accounting penod. This accounting change was made in order to better match the recogriition of electricrevenues with the recognition of the costs of providing the electric service.

The cumulative effect of this accounting change on prior years (to December 31,1978) amounts to $1,043.000(after reduction for income taxes of $1,034.000) and was included in income for the first quarter of 1979. The proformL amounts shown in the Statement of income reflect the effect of retroactive application of the new method ofrecording revenue as if the new method had been followed throughout the periods.

Deferred Fuel AccountingUnder the fuel adjustment clause in operation in 1979, Fuel Charge Revenue was generally recorded when the cost offuel was billed to customers. Opem..g Expenses were charged for the cost of fuel as incurred, which preceded thebilling of fuel adjustment revenues by an average of three months. Consequently, in periods of rising fuel costs theCompany's earnings were adversely affected by the amount of fuel costs incurred in excess of fuel billings.

On December 28, 1979 the Maine Public Utilities Commission ("MPUC") promulgated new fuel adjustmentregulations to be effective January 1,1980. As part of its order implementing the new fuel regulations, the MPUCauthorized the Company to collect, over a three-year period beginning January 1980, the fuel costs incurred whichwere unrecovered at December 31,1979, due to the operation of the previous fuel clause. Accordingly,in Decemberthe Company deferred $3,806.901 of fuel expenses, which amount represents the balance of unrecovered fuel costswhich will be collected over the next three years. The after-tax effect of this deferral is to increase earnings by $1.06 '

per common share.Prior to December, the Company had received separate orders providing for deferral of incremental fuel costs

incurred as a result of the two 1979 shutdowns of the Maine Yankee Atomic Power Company nuclear plant (" MaineYankee") Deferred fuel costs at December 31, 1979 include the $230.380 remaining balance of unrecoveredincremental fuel costs incurred during the normal maintenance shutdown i.n September 1979 and the $1 A47.407remaining balance of unrecovered incremental costc incurred during the unscheduled shutdown discussed below.

During the March 15 to June 5,1979 Maine Yankee plant shutdown ordered by the Nuclear RegulatoryCommission ("NRC") for safety checks, the Company purchased replacement energy at costs in excess of the costof the energy that Maine Yankee would have generated. During the shutdown period the MPUC held hearings toconsider the applicability of the Maine utilities' normal fuel adjustment clauses to the incremental costs of replace-ment energy. On May 5,1979 the MPUC issued an order altering the utilities' fuel clauses so as to provide forrecovery of this incremental cost of energy over a 12-month penod. On December 28 and 31,1979 the MPUC issuedorders which further extended this collection penod through the end of 1980. The utilities involved in these hearings.including th3 Company, have appealed the December 28 and 31 orders.

The MPUC is conducting hearings to connider the justness and reasonableness of the incremental fuel costsincurred by the Maine utilities during the Maine Yankee shutdown and the amounts which the utilities will ultimatelybe allowed to collect from customers. Management bel; eves that all of the replacement energy costs incurred by'he Company were just and reasonable and therefore shC1 be recoverable from its customers.

Equity Method of AccountingThe Company accounts for its investments in the common stock of Maine Yankee and Maine Electric PowerCompany, Inc. (" Maine Electric"). an electric transmission company, on the equity method of accounting and recordsits proportionate share of the not earnings of these companies (substantially all of these earnings are paid out individends) as a reduction of purchased power costs. See Note 8 for additional information with respect to theseinvestments.

Depreciation of Electric Plant and Maintenance PolicyDepreciation of electric plant is prov',ded using the straight-line method at rates desig7ed to amortize the originalcost of the properties over their estimated service lives. The composite depreciation rate, expressed as a percentageof average depreciable plant in service, was approximately 3.2% in both 1979 and 1978.

The Company follows the practice of charging to maintenance the cost of repairs, replacements and renewalsof minor items considered to be less than units of property. Costs of additions, replacements and renewals of

12

.

it ms consideted to be units of property are charged to the utility plant accounts and any items removed are retired'

from such accounts. The original costs of units of property retired and removal costs, less salvage, are charged tothe reserve for depreciation.

. Allowance for Funds Used During ConstructionThe Company reflects as an element of the cost of construction of major units of depreciable property an allowancefor funds (including common equity func's) employed during the construction period ("AFDC"). While not currentlyproviding funds, under the rate-making process of applicable regulatory agencies,the Compary is permitted torecover these amounts over the usefullife of the constructed property. Further, the unrecovered cost of constructedproperty, including the allowance, is an element of rate base on which the Company is permitted to earn a retem.

The amount of the allowance recorded is determined by multiplying the portion of the average monthly dollarbalance of construction in progress financed by short-term borrowings by the weighted average interest rateapplicable to short-term borrowings for the month and multiplying any remainder of the monthly dollar balance ofconstruction in progress by the weighted average cost of debt and equity as of the beginning of the year. in 1979, theaverage monthly short term borrowings exceeded the average monthly balance of construction in progress and, as

' a result, the 1979 allowance rate is the average interest rate of 1979 short-term borrowings.The average rate produced by the Company's computations was 132% in 1979 and 8.4% in 1978.

(2) Income Taxes -,

The individual components of Federal and state income taxes reflected in the statement of income for the yearsended December 31,'1979 and December 31, 1978 are as follows:

1979 1978Federal State Federal State

Current $ (491.027) $ (238,106) $ (453.080) $102,120Deferred-short-term 326.040 403.808 -- -

,

Deferred-other 695f67 - 467.928 2,560investment tax credit, net 980 478 923.637Employee stock ownership plan investment tax credit 106,165 95,964 -

Total provision for income taxes $1,617,323 $ 165,702 $1,034,449 $104,6804

Charged to other income (22,515) (3.683) (9.215) (1,484)Allocated to cumulative change in

accounting principle (Note 1) (888.553) (145.400) - --

,

4 Charged to operating expenses $ 706.255 $ 16.619 $1,025.234 $103.196

In 1979, the Company experienced a net loss for tax purposes resulting principally from three significanttransactions which increased income for accounting purposes but not for tax purposes. The loss for tax purposesresulted in net operating loss and investment tax credit carryovers which, subject to review by the Internal Revenue'

Service, will be used to reduce income taxes otherwise payable in future years The provisions and accruals relatedto these items, which have been classified (principally as short-term deferred taxes) to correspond to the accountingfor the related assets, are as follows:'

Federal State- Costs of cancelled NEP units S 681,548 $ 103,717Deferred fuel costs 2.346,349 383,928Unbil!cd revenues 1,090b7 178,444

Net operating loss carry forward (1.603.732) (262,281)Investment tax credit carry forwards

Through 1985 - (1,187,814) -

Through 1986 (1.000.858) -

$ 326.040 $ 403.808<

The rate-making practice followed by the MPUC in the Company's most recent (November,1976) rate orderpermitted the Company to recover as a part of the cost of service only the deferred Federalincome tax arising fromthe use, for income tax purposes, of accelerated depreciation of property added subsequent to 1969. Except as,

described above, the income tax effects of other timing differences between pretax accounting inccme and taxableincome generally are, in effect, flowed through to the Company's customers. Although this accounting differs fromgenerally' accepted accounting principles followed by nonrateiregu6ted companies, which are required to recorddeferred taxes related to all timing' differences, the Company expects that deferred taxes not recorded will becollected through customer rates in the future when such taxes become payable.

;'

13

~. -- - , . .,, _,

m

The table below reconciles a provision c lculited by multiplying income befora Federal income tax:s by thestatutory Feder:I income tax rata to the above provision for Federal income taxes:

1979 1978Amount % Amount %

(Dollars in Thousands)Federal income tax provision at statutory rate $2.348 46% $2,110 48%

Pamanent reductions in tax expense resulting from statutcry exclusionsfrom taxable income:

Dividend received deduction related to camings of associated companies 207 4 208 5Equity component of AFDC - - 255 6Preferred ' dividends paid deduction - - 34 1

Amortization of investment tax credit 80 1 36 1

Other 34 1 - -

Federal income tax provision before effect of flow-through $2.027 40% $1,577 35%

Timing differences that are flowed through for rate-making andaccounting purposes:

Interest component of AFDC 365 7 309 7Deduction of certain costs (primarily pension costs and payroll taxes) fortax purposes that are included in the cost of electric property 29 1 27 1

One-half year depreciation convention - - 216 5Other 16 - (9) (1)

Federal income tax provision $1.617 32% $1.034 23%

Under the Federal income tax laws, the Company receives investment tax credits at a rate of 10% on qualifiedproperty additions. Investment credits received are deterred and amortized over the life of the related property.Due to the adoption of a Tax Reduction Act Stock Ownership Plan (see Note 3), the Company receives an additional1% investment tax credit which is used to fund the Plan.

(3) Capital Stock -

The Ccmpany has an employee stock ownership plan which qualifies as a Tax Reduction Act Stock Ownership Plan("TRASOP"). Annual contributions to the Plan by the Company will be in the form of common stock of the Companyhaving a market value equal to an additional 1% investment credit allowed by Federal tax law, less some adminis-trative expenses. The Company also has adopted a Dividend Reinvestment and Common Stock Purchase Planthrough which shareholders may purchase common stock without payment of brokerage commissions or servicecharges. In connection with these plans, the Company has reserved 130.000 shares of common stock.

. (4) Preferred StockGeneralAuthorized preferred stock consists of 100,000 shares, par value $100 per share, of which there are outstanding97.340 shares: The remaining 2,660 authorized but unissued shares (plus additional shares equal in number tosuch presently outstanding shares as may be retired) may be issued with such preferences, restrictions or qualifica-tions as the Board of Directors may determine. The callable preferred stock may be called in whole or in part uponany dividend date by appropriate resolution of the Board of Directors.

- With the exception of the 20,000 shares of 9%% Preferred Stock and the 30,000 shares of 9K% Preferred Stock(issued on August 31, 1979), the outstanding preferred stock has general voting rights of one vote per share.

. Redeemable Preferred SharesThe 9%% Preferred Stock and the 9%% Preferred Stock are subject to man,datory redemption through the operationof sinking funds at the redemption price of $100 per share plus dividends accrued. The Company will set aside inc"sh annually (1) on December 1 in each year commencing with December 1,1982, an amount sufficient to redeem1000 shares of the 9%% Preferred Stock; and (2) on August 1 in each year commencing with August 1,1985, anamount sufficient to redeem 2000 shares of the 9%% Preferred Stock.

The aggregate amounts of preferred stock redemption requirements for each of the five years fclowing 1979are as follows:

1980 -

1981 -

1982 $100,0001983 $100,0001984 $100.000

14

4

(5) First Mortgage Bonds

Under the provisions of the indenture, substantially all of the Company's plant and property has been mortgaged tosecur) the First Mortgage Bonds. Additional bonds may be issued under the First Mortgage Bond indenture. Subjectto certzin restrictions and provisions specified in the indenture and supplements thereto.

Sinking fund requirements and current matunties of long-term debt for the five years subsequent tu December 31,1979 aggregate $4,850,000 as follows:

Sinking Fund CurrentRequirement Maturities Total '

1980 $170,000 $2,000,000 $2,170,0001981 170,000 - 170,0001982 170,000 1,000,000 1,1"0,0001983 170,000 - 170,0001984 170,000 1,000,000 1,170,000

$4.850,000

(6) N;tes payable to Banks

The Company uses short term borrowings under lines of credit to initially finance construction and for othercorporate purposes. The Company iritends to refinance such borrowings with the proceeds from sales of long-termdebt and equity secunties.

At December 31, 1979 the Company had lines of credit with three banks totakng $15,300,000 as follows:Amount Available Under Interest Commitment Fee or

Line of Credit Rate Compensating Balance Terms$7,000,000 Prime Rate -

4,300,000 Prime Rate $100,000 compensating balance plus a fee ofprime rate applied to 7h% of $3,300,000of the line plus a fee of the prime rateapplied to 7%% of borrowings

4,000,000 108% of the $100,000 compensating balance plus a fee ofPrime Rate pnme rate applied to 8% ot $3,000,000

of the lineCertain information related to these borrowings for the years 1979 and 1978 is as follows:

1979 1978Total knes of credit $15,300,000 $9,000,000Unused line of cedit at end of period $ 8,050,000 $2,250,000Borrowings outstanding at end of period $ 7,250,000 $6,750,000Effective interest rate (exclusive of fees for the lines)on borrowings outstanding at end of period 15.5% 11.75 %

Averaga daily outstanding borrowings for the period $ 9,291,000 $2,490,000Weightd daily average annual interest rate 13.2% 9.8%Highese level of borrowings outstanding at anymonth-end during the period $14,250,000 $6,750,000

(7) Supplementry income Statement Informatior.The Company has a noncontributory pension plan covering substantially all of its employees. The Company fundspension costs accrued. Pension expense was $410,000 in 1979 and $408,600 in 1978, including amortization ofunfunded prior service costs (approxirnstel). $928,000 as of January 1,1979) over a twenty-year pericd. As ofJanuary 1,1979, the date of the latest actuarial review, the pension fund assets exceeded the actuarially computedvalue of vested benefits.

M intenance expense, depreciation, and local property and other taxes not based on income which werech:rged to operating expenses are stated separately in the income statement. Rents and advertising costs are notsignific nt. No royalty or research and development expenses were incurred.

(8) Cepacity

The Company owns 7% of the common stock of Maine Yankee Atomic Power Company, a nuclear generatingcompany, and 14 2% of the common stock of Maine Electric Power Company, Iric, an electric transmission company.Under purchased power arrangements, the Company is entitled to purchase 7.3071% of the output of Maine Yankee,cnd is obligated to pay a like percentage of Maine Yankee's costs. including a return on invested capital,regardless ofthe levil of electrical outpt.t. The Company is also entitled to 2.4% of a purchased power contract between Maine

~ Electric'and the New Brunswick Electric Power Commission. To the extent that Maine Electric's revenues from trans-mis ~, ion services are insufficient to meet its expenses, the Company and the other participants oay Maine Electric's

.15

costs based on their r:lativ3 System peaks. Information relating to the above purchased power arrangements andthe operations.of Maine Yankee and Maine Electric is as follows:

Maine Yankee Maine ElectricPower Sales Contract Term 1973 - 2003 1976 - 1986Capacity Entitlement in megawatts (MW) 60MW 9.6MWOperations: 1979 1978 1979 1978

As reported by investee. (Dollars in Thousands)Operating revenues S 68.867 $ 70.373 $ 98.122 $ 59.860

Depreciation $ 8.279 $ 8,173 $ 735 $ 736Interest and preferred dividends 14,458 12,550 1,238 1,201

Other, net 39.480 42.948 95.994 57.760

$ 62.217 $ 63.671 $ 97.967 $ 59.697

- Eamings applicable to common stock $ 6.650 $ 6,702 $ 155 $ 163

Amounts reported by Company-Purchased power costs $ 4,199 $ 4.217 $ 587 $ 551Equity in net income (468) (479) (24) (39)

$ . 31 $ 3.738 $ 563 $ 512Financial Position-

As reported by investee-Plant in service $240.061 $237,884 $ 18.617 $ 18.617Accumulated depreciation (54,105) (46,449) (6.482) (5,746)Other 101,149 74.520 10.669 7.941

Total asseta $287,105 $265.955 $ 22,804 $ 20.812Less-Preferred stock 13.070 13,696 - -

First mortgage bonds and long term notes 139,373 128,818 10,560 11.220Other liabilities and deferred credits 67.805 56.657 10.997 8.267

Net assets $ 66.857 $ 66.784 $ 1.247 $ 1.325

Company's reported equity-Equity in net assets S 4,680 $ 4.675 $ 177 $ 188Add (deduct) - Effect of adjusting Company'sestimate to actual 3 4 2 -

Amounts reported by Company $ 4.683 $ 4.679 $ 179 $ 188

Financial statements of Maine Yankee and Maine Electric are included in the Company's Annual Report onForm 10-K filed with the Securities and Exchange Commission.

The Company owns 8.3% (50 megawatts) of the 600 megawatt Wyman #4 plant which is operated by anotherutility. Included in plant in service and accumulated depreciation is the Company's interest in this plant of $16.207,360and $485,174 respectively. The Company's proportionate share of the direct expenses of this unit is includedin the corresponding operating expenses in the income Statement.

(9) ConstructionThe Company is engaged in an ongoing construction program including an investment in the Seabrook NuclearUnits ("Seabrook"), a jointly-owned electric generating facility being built by the Public Service Company of NewHampshire ("PSNH"). The Company now owns .37% (8.6 megawatts) of Seabrook and has contracted to purchaseanother 1.8% (41.4 megawatts) of that plant. The Company's participation in the .37% interest and its potentialparticipation in the 1.8% interest are summarized below-

Participation 5 Seabrook

Existing Under Contract TotalCompany's Ownership Percentage .37% 1.8% 2.17%

Utility plant under construction (000's):Construction and nuclear f uel costs $ 3,319 $16,145 $19,464Allowance for funds 379 - 379

Estimated for. completion:Construction and nuclear fuel costs 5,210 25,345 30,555Allowance for funds 2,110 11,992 14.102

Total $11.018 $53.482 $64.500

16

Th3 above estimates for completion are based on the latest cstimates of the project's cost fumished by PSNH.See also Note 10. " Contingencies - Seabrook" for a further discussion of this project.

The Company also had a 4.35% interest ($2,015.000 at December 31, *r79) in the New England PowerCompany nuclear units which have been cancelled. See Note 10. " Contingencies - NEP Nuclear Units" for adiscussion of this matter.

(10) C ntingencies

NEP Nuclear UnitsOne of the projects in which the Company had an ownership interest is the New England Power Company nuclearunits originally planned for Charlestown, Rhode Island, at the site of an abandoned naval base. The Company'sinvestment in that project at December 31,1979 was $2.015,000, including AFDC of $359.700.

Efforts to obtain the site were unsuccessful, and the lead owner's parent company has determined that thecapacity from the Units wil! not be required to meet its system's fifteen year corporate plan. Accordingly, onDecember 17, 1979, the lead owner announced the cancellation of the project.

The recoverability of the Company's investment in the project will depend upon regulatory approval, which isbeing sought as a part of the Company's general rate increase request filed in February 1980. The Company'sinvestment may be reduced somewhat by its proportionate share in the salvage value of certain contracts relatingto nuclear fuel. While the Company believes that these costs should be recovered, no prediction can be made as tothe amount of any recovery through rates or otherwise or the time period over which recovery will take place. If anyof this amount is determined not to be recoverable, that amount would be charged, net of related income taxes,against earnings in the period such a determination is made.

SeabrookAs discussed in Note 9 above, one of the jointly owned generating stations in which the Company is participating isthe nuclear generating plant being constructed in Seabrook, New Hampshire in which PSNH has a 50% ownershipinterest and acts as the principal or lead participant.

In response to the passage of a statute in New Hampshire prohibiting the inclusion of expenditures for con-struction work in progress in rate base, PSNH determined that it could not continue to finance a 50% interest in theSeabrook units, and in March 1979 it began efforts to reduce its ownerchip interest to 28%. PSNH's efforts haveresulted in commitments only sufficient to reduce PSNH's interest to approximately 35%, which transactions can beconsummated only after regulatory approvals of all purchases are obtained. The Company anticipates having nodithculty in receiving the necessary regulatory approvals for its additional 1.8% interest. However, regulatoryproceedings with respect to some of the other purchasers' interests have been delayed, and PSNH has indicated thatthe required approvals may not be obtained before January 1981, or later. In the meantime, PSNH is attempting tocontinue to finance its 50% ownership interest in the Seabrook project. PSNH has indicated that absen' adequaterate rehef, it may be unable to continue to finance its 50% interest in the Seabrook project pending approval of theabove described reduchon of its interest. No assurance can be given that such approvals will be forthcoming.However, PSNH has applied for a rate increase, which is currently pending before the New Hampshire Public UtilitiesCommission ("NHPUC"), and in December 1979 the NHPUC granted PSNH's request for emergency rate relief whilethe rate request is being considered.

Construction of the Seabrook units has required numerous approvals and permits from various state andFederal regulatory agencies The process of obtaining these approvals and permits has been long and complexand has been opposed consisten!!y by a number of intervening groups. Opposition to the project has includeddemonstrations at the Seabrook site. The project also has been plagued by lengthy delays which have resulted ingreatly increased costs. One court appeal from Federal regulatory approvals is pending and further appeals arepossible.

The Company cannot predict whether PSNH's rinancing problems will be resolved, nor can it predict what effectthose financing problems or further administrative or court decisions or regulatory actions may have upon PSNH'sability to complete the project or upon the cost of the project.Maine Yankee InvestigationDuring the March to June,1979 shutdown of Maine Yankee ordered by the NRC, the Company's costs of fuel andpurchased energy were increased by an estimated $3,350,000 in order to replace the energy which Maine Yankeewould have supplied. Upon complaint of citizens' groups, the MPUC has been conducting an investigation of theser: placement energy costs with respect to the Company and the other two major electric utilities in Maine. On May 5,1979 the MPUC issued an order alter ng the fuel clauses of these utilities to provide that the replacement energycosts would be collected over a 12 month period instead of the shorter period that otherwise would have pertained.The uncollected balance of such costs was $1,447,407 at December 31,1979. On December 23 and 31,1979, theMPUC issued orders further extending the recovery period through the end of 1980. The Company and the otherutibtics have appealed to the Maine Supreme Judicial Court from this action. The MPUC investigation is continuing,and includes such issues as whether the utiktics were responsible for the shutdown and therefore should not recoverth; costs; whether, absent such responsibikty, the costs should nevertheless be amortized over an even longerperiod of time; and whether the costs themselves are just and reasonable. It is the opinion of managerrent that tne

17

- -- _ _ - - - -

replicement energy costs incurred by the Company were just and reasonable and therefore ought to be recovered.The Company is unable to predict what order, if any, the MPUC will issue with regard to a more lengthy amortization

- of such costs. j

Stullen Cases.

The Company is the' defendant in a class action brought by the Penobscot Nation of Indians seeking $5 million incompensatory damages and a like amount in punitive damages for loss of lands taken by flowage resulting from thedamming of the Penobscot River by the Company's predecessors in title, allegedly in violation of the Indian Tradeand Intercourse Act of 1790. The Company is also the defendant in an action based upon the same 1790 law

j brought by an individual alleging that he is a Penobscot Indian seeking $200,000 in damages for trespassing andrequesting removal of existing transmission lines.

Proceedings in both of the above matters have been stayed pending the outcome of two suits brought by theUnited States against the State of Maine, one on t,ehalf of the Passamaquoddy Tribe of Indians and one on behalf of

'

the Penobscot Nation of Indians, seeking a total of $300 million in damages for divesting them of their aboriginallands more than a century ago, allegedly in violation of the above mentioned 1790 law. The suits could be amendedto seek the return of that land. The area involved includes much of northeastem Maine and substantially all of

tthe Company's service territory.The United States has refrained from proceeding with the claims in Court while various extra-judicial settlement

proposals have been explored by the parties. The United States and the other parties have been actively engaged innegotiations during 1979. The Company believes that any settlement package ultimately agreed upon is likely toprovide, among other things, for Federal funds and services and other considerations to be extended to the indiansin return for extinguishment of some or all of the indians' claims against private landowners, including the Company. -

Unt.1 the disposition of the Indian cases against the State of Maine, the likelihood of an unfavorable outcome inthe cases against the Company cannot be specifically determined, but in the opinion of management, based on the

] opinion of iegal counsel, the outcome of the above mentioned cases against the Company will not have a ma9tially; adverse effect on the financial condition of the Company.'

IMC! IMC Chemical Group, Inc. ("lMC"), tho Company's largest customer, accounting for approximately 8.1% of the

Company's general rate revenue, instituted proceedings in August 1975 before the MPUC requesting that it be 1

,

i served by another utility. If the MPUC were to grant the request, the Company would apply for rate relief to make upfor the loss of revenue from the basic rates applicable to this customer. Honever, the loss of this customer would,

reduce the Company's cost of fuel and purchased energy which is passed on to all customers including IMC. In the.

opinion of management, the magnitude of this reduction in fuel and purchased energy costs would offset substantially,

all of any basic rate increase to other customers.

(11) Unsudited Quarterly Financial Information

i See " Management's Analysis of Summary of Operations" for unaudited quarterly financial information.i

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I'. --

SIX YEAR STATCTICAL SUMZASY FROM 1070 THROUGH 1C70 -

1979 1978 1977 1976 1975 1974Electric Plant(000) Total Electric Plant $ 103,704 $ 91,717 $ 86.026 $ 79.018 $ 72,490 $ 68.928

Depreciation Reserve 32,459 30.066 28239 26.588 24,993 24239Net Electric Plant $ 71,245 $ 67.651 $ 57.787 $ 52.430 $ 47,497 $ 44.689

Capital Structure(000) Bonds $ 34,515 $ 27.685 $ 25.355 $ 27.950 $ 25,000 $ 25.000

Redeemable Preferred Stock 5,000 2.000 2,000 2.000 - -

Preferred Stock 4,734 4.734 4,734 4,734 4.734 4.734Common Stock 9,060 8.949 7,430 6.169 6.168 5,544

Prernium on Common Stock 7,836 7.6E8 4.843 2.388 2,405 1,763Retained Earnings 8,799 8.60) 8.027 7.637 8.250 7,900

Total Capitalization $ 69,944 $ 59.630 $ 52,389 $ 50,878 $ 46.557 $ 44.941Capital Structure Ratios

Bonds 49.4 46.4 48 4 54.9 53.7 55.6Preferred Stock 13.9 11 3 12.8 13.2 10.2 10.5

Common Stock Equity 36.7 42.3 38.8 31.9 36.1 33.9

Summary of Operations(000) Operating Revenue $ 51,748 $ 42.627 $ 38294 5 31,336 $ 32.314 $ 30,546

Fuel & Purchased Power 33.055 26.763 22,548 18.143 17,974 18,178Operation & Maintenance 8,344 6.612 6.687 6.334 6.067 5.472

Depreciation 2,814 2.201 2.095 2.029 1,962 1.897Taxes 2,545 2.643 2.894 1.819 2,952 2270

Other Income (expenses) (456) 855 407 167 (140) (212)Bond Interest 2,089 1.872 1,718 1.633 1.132 1.090

Net income $ 3,488* $ 3.391 $ 2,759 $ 1,545 $ 2.087 $ l.427

Common StockNumber of Stockholders-End of Year 7,535 7,479 6.841 6.184 6.136 5,870

Shares Outstanding-End of Year 1,B12,023 1,789.827 1,486,027 1.233,710 1.233,710 1,108,710Shares Outstanding-Average 1,801,906 1,658,985 1.317.816 1.233.710 1,139,960 1,108.710

Earnings per Common Share-Average $ 1.63* $ 1.77 $ 1.75 $ .95 $ 1.60 $ 1.05' (

Dividends Declared per Common Share $ 1,52 $ 1.46 $ 1.41 $ 1.34 $ 1.29 $ 1.28

Production Sources in KWH(000) Hydro Generation 246,052 213,195 245.821 254.813 232.341 233,655

Fuel Generation 77,209 15,910 11.498 113.119 118,386 182.624Purchased Power 1,112,676 1,108,416 977,400 818.361 717,162 688297

Total Generated & Purchased 1,435,937 1,337,521 1.234.719 1.186,293 1.067,889 1,104.576

Sales in KWH(000) Residential 386,623 369.989 349.869 335,692 308,253 301.069

Commercial 221,071 213.777 198.384 186271 170291 162,118Other 724,056 646,765 580.679 557,167 501,045 562.045Total 1,331,750 1 230,531 1,128.932 1.079,130 979.589 1,025232

Revenue from ElectricEnergy Sales (000) Residential $ 18,627 $ 16,171 $ 14.994 $ 12,306 $ 12,618 $ 11.303

Commercial 10,384 9,013 8,207 6,649 6.705 5,970Other 22,307 17,152 14,764 12222 12,830 13.097Total $ 51,318 $ 42,336 $ 37,965 $ 31,177 $ 32.153 $ 30.370

Residential Customer UseAverage Number of Customers 64,958 64,666 62.371 60,975 59.131 55,075

Kilowatt Hours per Customer 5,952 5,721 5,609 5,505 5.213 5.467Revenue per Customer $ 286.75 $ 250.07 $ 240.40 $ 201.82 $ 213.40 $ 205.33

Revenue per Kilowatt-hour 4.82c 4.37C 4.29C 3.67C 4.09c 3.75c

includes cumuiatwe effect of ahange en accounting pnnciple of $1.043000 ($ 58 per share) and $658/29 ($ 36 per share) attnbutable to theamount of fuel inat would have been deferred at December 31,1978 had the new fuet regulations been effectwe at that date. See Note 1 to thefinancial statements.

See page 23 for Management's Analyses of Summary of Operations

19

TWO YEAR STOCK PRICES AND DMDENDS BY OUARTERS

The Common and Preferred Stocks shown below are not listed on any Exchange but are traded in the Over theCounter Market. The 9%% and the 9W% Preferred Stock series were not quoted during this period.

1979

First Quarter Second Quarter Third Quarter Fourth QuarterHigh Low High Low High Low High Low

Common Stock 14h 134 14% 13 14% 12% 12% 11%

Preferred Stock - 7% Series 65 64 67 63 64 63 57 53

Preferred Stock - 4%% Series 38 36 39 37 37 37 34 32

Preferred Stock - 4% Series 36 35 36 36 36 35 32W 30_

1978

First Quarter Second Quarter Third Quarter Fourth QuarterHigh Low High Low High Low High Low

Common Stock 15% 14 4 15% 14% 15% 14% 14% 134

Preferred Stock - 7% Series 73 70 -- -- 72 72 66 66

Preferred Stock - 4%% Series 43 43 -- -- 42 42 39 39

Preferred Stock - 4% Series 42 42 -- -- 41 41 38 38

Cash Dividends were declared as follows:'First Quarter Second Quarter Third Quarter Fourth Quarter1979 1978 1979 1978 1979 1978 1979 1978

Common Stock $ .38 $ .36 $ .38 $ .36 $ .38 $.36 $ .38 $ .38

Preferred Stock - 94% Series -- -- -- -- .79 -- 2.375 --

Preferred Stock - 9%% Series 2.3125 2.3125 2.3125 2.3125 2.3125 2.3125 2.3125 2.3125Preferred Stock - 7% Series 1.75 1.75 1.75 1.75 1.75 1.75 1.75 1.75

Preferred Stock - 4%% Series 1.06 1.06 1.06 1.06 1.06 1.06 1.07 1.07

Preferred Stock - 4% Series 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00

*See page 22 for a discussion of the tax status of 1979 dividends.

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. . .

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MANCING PunPA contains requirements in tne ment and numeraus standards woiareas of customer class load data be rewewed in pubhc heanngs or a

On August 31 ' 979 the Company and cost of service inf ormation penodic hasis NECPA rncludes a| issued and sold at pnvate sal 6 A proc,:am involving magnetic de residential conservation service

$ 7 000 000 of f irst Mortgage Bonds mand r ec or der s on at least two program which A dl involve theand hiU00 shares of Preferred hundred customers Adl be ; nit'ated Cornpany in comprehensive energyStock $100 par value The bonds and adm ntstered margina: and aud,ts of homes as Aeil as arrange-hear inforest at t 0 25 /o are subject embedded cost data wal be col mer is for installation financing andto r ecompt a in al face value pur 'et ted and a comprehensive eval billing of customer conservation

a<,1 t< > a sink ing f und at the rate batton of rate design load manage- investments<>f 4 " r. pe >r ypar beger'ning in 198!and are duva on August 6 2004 Thep r e'e' r ed sinck pays divid4 nds atthe annual rate of 4 u, and +sstjf t>r ? I') r t 'dt'r fl|if ain dI par ['l J r -! ,__ 7 |',

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sti,ges ( $ *r yt'ar hf gr:ning in 1985 #/ '[ [ ,-[[hf

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21

___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

.- - - _ - - __ _ . _ . _ _ _. ___ ___ __ _ _ _ _ _

i

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REGULATORYACTMTY F 'hh @-'

. ,u -_-e iThe Company was the first Ma.ine -

g'

utility to implement the newly <4

,

authorized, forward looking fuel -

clause. Operation of this clause will I

i eliminate the delay between therecording of fuel expense and fuelrevenue which, in these days of ,

rapidly accelerating fuel prices, had, %,

prior to 1979, adversely impacted V]..

the Company's earnings. In addition g gg-

to allowing the Company to Detter ~A_ mymatch revenues and expenses, the -

new clause will result in a more . . |

stable mv 5anism for billing fuel .#r-

j ';_ ,

' costs to our customers. In conjunc- -,

-w' +: ">--~_-n' '

tion with the implementation of the'

_.

new clause, the Maine Public6 ^ "

'

Utilities Commission ("MPUC") -

has authorized the Company to Generating units at the Company's 6.400 KW MJtord hydro station on the Penobscot River

collect over a three year period| fuel costs unrecovered at year-end MPUC matters will occupy much to base wages were made in the ,

' 1979 under the previous fuel clause. more of the Company's time in 1980 non-union pay scale effective .

The Nuclear Regulatory Commis- with the processing of the rate January 1,1980.sion ("NRC") ordered the shutdown increase request and the contin- Despite technological advance-of Maine Yankee on March 13,1979 uation of the Maine Yankee investi- ment in the distribution of electricity I

pending investigation of certain gation, the IMC case and the and processing of information forsafety related piping systems. The Hampden-Orrington transmission billing and customer inquiries, theinvestigation was completed and the line proceeding. Company continues to rely on theNRC terminated the shutdown order dedication and skill of its employeeson May 24,1979, and the plant MANAGEMENTCHANGE in oreer to assure tne continuationresumed normal operations on June of reliable electric service and to5,1979. In April, complaints were On July 1,1979 Robert S. Briggs meet other customer needs. Thefiled with the MPUC against the joined the Company as Vice Presi- officers and directors of the Com-Company and other Maine electric dent and General Counsel. Mr. pany wish to extend their apprecia-

; utilities seeking to prevent col- Briggs had been in the private tion to these employees for theirlection of the replacement energy practice of law in Bangor since contribution to the Company'scosts or any other costs related to 1973, and has been clerk and legal operations.the shutdown. As reported in Note counsel to the Company since 1975.10 to the financial statements, the He is a graduate of the University INCOMETAXMPUC altered the fuel clauses of of New Hampshire and the Univer-

.

1

the utilities involved to provide for sity of Maine School of Law. STATUSOFDMDENDS,

' the recovery of the Maine Yankee '

| replacement energy costs over a EMPLOYEES Tne Company estimates tnat a12 month period instead of the portion of the dividends paid in 1979shorter period which otherwise The Company had 330 full-time and will be considered nontaxable forwould have nortained. In December 14 part-time employees at Decem- Federal income tax purposes. The1979 the MPUC stretched that ber 31,1979 for a total of 344, a primary reason that this hasperiod to the end of 1980. Mean- reduction of 2 from the prior year. occurred is the difference betweenwhile, the underlying investigation in accordance with the contract the tax return and financial state- |begun by the complaints continues. between the Company and Local ment treatment accorded certain '

Other activities before the MPUC 1837 of the international Brother- 1979 transactic^included further pre-hearing confer- hood of Electrical Workers, which Based on os estimates, theences in the investigation instituted represents 184 employees of the Common Stock and Preferred Stockupon the August 1975 complaint of Company, a 6.75% base wage in- 1979 dividend distributions ofSobin Chemicals, Inc. (now IMC crease became effective on Jan- January 20 and April 20 are fully |Chemical Group, Inc.) which is uary 1,1980, the beginning of the taxable as dividend income. Thedescribed in more detail in Note 10 second year cf the two year con- dividend distributions of July 20to the notss to financial statements. tract. Commensurate adjustments and October 19 are fully nontaxable

22

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- _ _ _ _

as dividend income. The dividend wages 8%% on March 9,1979; and operations for 1979 are showndistributions excludable from divi. 3) other inflationary pressures. below-dond income should be applied to Depreciation increased by syn,ng,reduce the tax cost basis of the $614,028 or 27.9% mainly as a For the Electnc Net (loss) Petshares upon which the dividends result of the Wyman #4 plant [ R**' .$"''" .no'"s[i C.]were paid. depreciation which amounted to ano.;

,

voow .n wous$485,174.

3/31 $12,436 $ 395 $ 873* $ .42'MANAGEMENT'S Local Property and Other Taxes 6/30 11.845 1,439 817 39

increased $307,579 or 20.3% due 9/30 12.509 543 (95) (.13)ANALYSIS 0F iargeiy to ine $i77,705 tax at $2/3i i4.9se 2.ei 3 i,893 .ss

SUMMARY 0FOPERATIONS *Y * " " 4 "d'""**d'*- " * * " ' ' ** 5''** ''*

able property and property tax inctumng the cumulatwe enect sr.onoa, or

1979ASCOMPARE0 raies. > 58 ver aere or o".er oeree r'o oece-aer s>.7ncome Taxes decreased re$e ue'so an o serent mernod or recoreng

WITH1978 $a05.556 or 35.9% because of a ina-a .: g..,,e,, ,ec.. .res c..ea nou

reduction in tawhle income before "e9^'ed 8"*'82e o' c mm " "''e8 ''S''"*"9#"""# * #'Electric Operating Revenues in- the cumulative eF. ct of the change

creased $9,121,532 or 21.4% in accounting principle as well asprincipally because of an $8,033,614 the lower Federal tax rate. BER ERREMT'Sor 49.1% increase in fuel adjust- Ailowance for Other Funds - -mment rate revenue. This increase is Used During Construction de- ANALYSISOFdirectly attributable to the fuel creased $531,293 as the averageportion of the increase in "Pur- balance of short-term notes payable SUMMARY 0FOPERATIONSchased Power and Fuel for Genera- exceeded the average balance of

1978ASCOMPARE0tion" expense discussed next. construction work in progress andFu:1 for Generation and Pur- accordingly the allowance for funds WITH1977ch=d Power Expense increased was limited to the borrowed com-'

$6.292,166 or 23.5% primarily as a ponent. Electric Operating Revenues in-result of: 1) substantial increases in First Mortgage Bond Interest creased approximately $4,333,000

;the price of oil; 2) the amortization Expense increased $216,923 or or 11.3% as a result of a 3.5% andof $2,472,000 of incremental fuel 11.6% because of the August 31, 5% increase in the number of resi-costs as a result of the two Maine 1979 issuance of $7,000,000 of dential and commercial customersYankee shutdowns in 1979; and 3) 10%% bonds. respectively. Residential customersan 8.2% increase in kilowatt-hour Allowance for Borrowed Funds also experienced a 2% increase insales billed during the period. Used During Construction in- average electrical usage. Further- 1

Oth:r Operation Expense in- creased $149,544 or 23.3% partially more, several of the Company's |

|creased $1,110.387 or 21.5% sub- because the entire amount of large industrial customers under-stantially due to: 1) $251,516 in allowance for funds is allocable to went significant expansion pro-expenses attributable to the 8.3% interest as explained above. In grams.participation in the William F. addition, the rate of accrual is Purchased Power and Fuel forWyman #4 generating plant which higher this yeer because of the Generation increased $4,214,000 I

was certified ready for operation increased burowing rates. Off- or 18.7% because of the purchase |on December 1, 1978; 2) an Inter- setting this increase, however, was of additional capacity under a |nal Revenue Service adjustment a reduction in the Company's con- capacity contract and increased Iattributable to a prior period re- struction work in progress due to the fuel costs. Fuel costs were higher |sulting in the 1978 expense being completion of Wyman #4. due to lower than normal watersome $300,000 lower than it would Other Interest Expense in- conditions, a refueling shutdownbe otherwise; 3) the union wage creased $938,631 or 306% as the of the Maine Yankee nuclear plant,contract which increased wages average short-term borrowings a reduction in the vperation of the8%% on March 9,1979; and 4) other increased from $2,490,000 to Corapany's Graham Station due toinf|ationary pressures. $9,291,000 and the cmrage interest cooling water intake problems and

M; int: nance Expense increased rate increased from 9.3% to 132%. increased kilowatt-hour sales$620,791 cr 42.6% principally The Cumulative Effect on explained above.because of: 1) $222,509 in ex- Prior Years (to December 31, income Taxes decreased ap-'

l penses attributable to the 8.3% 1978) of Changing to a Different proximately $200,000 or 16.3% |participation in the William F. Method of Recording Revenue due to t reduction in pretax

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Wyman #4 generating plant which is explained in Note 1 to the accounting income. See Note 2 :owas certified ready for operation financial statements. the financii statements for furtheron December 1,1978; 2) the union Unaudited quarterly fmancial informatic,..wage contract which increased data pertaining to the results of interest n First Mortgage

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Bonds increased approximately i mately $198 000 or 44 5% as a re- tions for 1978 are shown below |

|$154 000 or 9% pnmanly as a re- sult of the 'r reased expenditures v., ine i 1 3. - , qs

sult of the refunding in January 1978 for c onstr uction in progress pn g",, ;g.j' 3 TD ' " ' , 2,T'i

of $2.500.000 of First Mortgage mardy the Wyman NEPCO and Ended ,.r r man'

Bonds at a h:gher interest rate Seabrook units 3/31 $10 715 $1425 $1 133 $ 61 1

The Allowance for Other Funds Earnings per Common Share 6/30 9 518 1 134 853 45

Used During Construction in are affected by the issuance of an J/30 9 597 563 447 20'

creased approximately $298 000 additional 300I000 shares in June 12/31 12 797 1 265 958 51

mai $42 627 54 407 $3 391 s1 77or 12/ % and the Allowance for 1978Borrowed Funds Used During Unaudited quarterly financial data [",['""L,*C,[f"[[",$Q'[,g |Construction increased approm pertaining to the results of opera- |,n

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' ~BANGOR HYORO ELECTRIC COMPANY '- BULK RATE- 33 STATE STREET U.S. POSTAGE

~ ~ ' .BANGOR MAINE / 04401-PAID -

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Bangor, MainePermit No.' 651

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