Maine & Maritimes 10-K 2006
Documents found in this filing:
Washington, D. C. 20549
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SEC. 13 OR 15(d) OF
For the fiscal year ended December 31, 2005
Commission File No. 333-103749
Maine & Maritimes Corporation
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: 207-760-2499
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Common Stock, $7.00 par value
Name of each exchange on which registered: American Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act:
Title of Class
Indicate by check mark if a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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. Yes x No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Aggregate market value of the voting stock held by non-affiliates at June 30, 2005: $40,086,092.
The number of shares outstanding of each of the issuers classes of common stock as of March 24, 2006.
Common Stock, $7.00 par value1,637,211 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Companys definitive Proxy Statement to be filed pursuant to Regulation 14A no later than 120 days after December 31, 2005, which is the end of the fiscal year covered by this report, are incorporated by reference into Part III.
Glossary of Terms
Maine & Maritimes Corporation (MAM or the Company), a Maine corporation, became a holding company effective June 30, 2003, when all shares of Maine Public Service Company (MPS) common stock were converted into an equal number of shares of MAM common stock, which are listed on the American Stock Exchange (AMEX) under the symbol MAM. MAM is the parent holding company for the following wholly-owned subsidiaries:
1. The Maricor Group (TMG, formerly known as Maine & Maritimes Energy Services) and its wholly-owned United States subsidiary The Maricor Group New England (TMGNE, formerly known as RES Engineering, Inc.) and TMGs wholly-owned Canadian subsidiary The Maricor Group, Canada Ltd (TMGC, formerly Maricor Ltd);
2. Maricor Properties Ltd (Maricor Properties), a Canadian subsidiary and its wholly-owned Canadian subsidiaries, Cornwallis Court Developments Ltd (Cornwallis) and Mecel Properties Ltd (Mecel), as well as a 50% owner of Maricor Ashford Ltd;
3. Maricor Technologies, Inc. (MTI), a U.S. wholly-owned subsidiary;
4. Maine Public Service Company (MPS) and its wholly-owned inactive Canadian subsidiary Maine & New Brunswick Electrical Power Company, Ltd (Me&NB); and
5. Energy Atlantic, LLC (EA), an inactive subsidiary.
Maine & Maritimes Corporation and Subsidiaries
* Maine & New Brunswick Electrical Power Company, Ltd and Energy Atlantic, LLC are inactive companies.
· Maine & Maritimes Corporation is a holding company incorporated in the State of Maine, and is the ultimate parent company for all business segments. MAM maintains investments in (a) a regulated electric transmission and distribution utility operating within the State of Maine, United States of America, (b) mechanical, electrical and plumbing/fire protection engineering, facility asset lifecycle management, energy efficiency, and asset development companies within the United States and Canada, (c) real estate investment and development companies in Canada, and (d) a facilities asset lifecycle management and sustainability software development company in the United States. MAM is headquartered in Presque Isle, Maine.
· The Maricor Group is an energy asset development and mechanical, electrical and plumbing/fire protection engineering consulting firm providing energy efficiency, facilities lifecycle asset management, facility condition assessment, fee-for-service engineering design and emissions reduction services focusing on sustainability and Leadership in Energy and Environmental Design (LEED). The Maricor Group operates primarily within the New England region of the United States and the eastern Canadian provinces, particularly Atlantic Canada. TMG was formed in November 2003, and is headquartered in Presque Isle, Maine, with offices in Boston, Massachusetts; Moncton and Saint John, New Brunswick; and Halifax, Nova Scotia.
· The Maricor Group New England is a mechanical and electrical engineering subsidiary of The Maricor Group with an office in Boston, Massachusetts, offering the services of The Maricor Group within New England, particularly the greater Boston area and other regions of the Commonwealth of Massachusetts. TMGNE was acquired by TMG on June 15, 2004.
· The Maricor Group, Canada Ltd is the Canadian subsidiary of The Maricor Group offering its parent companys defined services primarily within the eastern Canadian provinces, particularly Atlantic Canada. Headquartered in Moncton, New Brunswick, it maintains offices in Saint John, New Brunswick, as well as Halifax, Nova Scotia. TMGC acquired its first mechanical and electrical engineering services company, Eastcan Consultants, Inc. (Eastcan) on December 1, 2003. On June 1, 2004, TMGC acquired Morris & Richards Consulting Engineers (M&R). Both companies are now operating divisions of TMGC.
· Maricor Properties Ltd is a Canadian real estate development, redevelopment and investment company focused on sustainable development and smart growth principles within second and third tier Canadian markets emphasizing the development and revitalization of downtowns and existing suburbs. It seeks to develop or invest in public and private facility projects involving the renewal or development of building infrastructure within revitalization districts promoting renewal of existing areas, thus negating the need for extension of additional infrastructure and promotion of sprawl. It utilizes the services of The Maricor Group in its development and redevelopment projects. Maricor Properties Ltd was organized on May 28, 2004, in Nova Scotia, Canada.
· Mecel Properties Ltd is a Canadian subsidiary of Maricor Properties Ltd and currently owns the office building housing the Halifax, Nova Scotia operating division of The Maricor Group, Canada Ltd. It was acquired on June 1, 2004, in conjunction with the acquisition of M&R by TMGC.
· Cornwallis Court Developments Ltd is a wholly-owned Canadian subsidiary of Maricor Properties, acquired on October 7, 2005. Cornwallis currently owns and operates the J. Angus MacDonald Building located in Halifax, Nova Scotia, Canada.
· Maricor Technologies, Inc., formed on February 14, 2005, is a software technology firm that develops and maintains information-based technologies, which support lifecycle asset management and capital budget planning with an increasing emphasis on capital performance
management and asset governance. On February 14, 2005, it purchased, through a three-way transaction, the Strategic Asset Management software technology assets of Delinea Corporation of Dallas, Texas, which were formerly owned by HCI Systems Asset Management, LLC. The Maricor Group utilizes the software in the delivery of its lifecycle asset management services and markets its products throughout North America. Maricor Technologies is headquartered in Presque Isle, Maine, with an office in Portland, Maine.
Maricor Technologies software products currently include iPlan, a web-based strategic planning tool used to quantify and prioritize capital investments required to maintain and preserve facilities and infrastructure assets. iPlan automates the process of defining an organizations capital needs, and assists in the identification of capital projects, quantifying replacement and renovation costs, and assigning priorities based on various lifecycle, safety, and return-on-investment measures. Building Blocks is a proactive computerized maintenance management system (CMMS) software solution for managing both the total lifecycle of assets and the daily operation of facilities.
· Maine Public Service Company is a regulated electric transmission and distribution utility serving all of Aroostook County and a portion of Penobscot County in northern Maine. Since March 1, 2000, the date retail electric competition in Maine commenced, customers in MPSs service territory have been purchasing energy from suppliers other than MPS. This energy comes from Competitive Electricity Suppliers (CES) or, if customers are unable or do not wish to choose a competitive supplier, the Standard Offer Service (SOS) provider. SOS providers are determined through a bid process conducted by the Maine Public Utilities Commission (MPUC). MPS provides the transportation through its transmission and distribution wires infrastructure. Its service area covers approximately 3,600 square miles, with a population of 72,000. The utility is regulated by the Federal Energy Regulatory Commission (FERC) and the MPUC. MPS is headquartered in Presque Isle, Maine.
MPS was originally incorporated in the United States as the Gould Electric Company (Gould) in April 1917, by a special act of the Maine legislature in connection with the purchase and lease of all of the assets of the Maine & New Brunswick Electrical Power Company, Ltd, a Canadian company. Following the sale of its assets to Gould, Me&NB remained a subsidiary of Gould, and subsequently MPS. Me&NB was primarily a hydro-electric generating company. It owned and operated the Tinker hydro-electric station in New Brunswick, Canada, until June 8, 1999, when these assets were sold by MPS to WPS Power Development, Inc. (WPS-PDI), a subsidiary of WPS Resources Corporation (WPS).
Following its incorporation in the United States, Gould changed its name to Maine Public Service Company in August 1929. MPS was a privately held subsidiary of the Consolidated Electric & Gas Company until 1947, when its capital stock was sold as a result of Consolidated Electric & Gas Companys forced divestiture. From 1947 until its corporate reorganization in 2003, MPS was the corporate parent and traded under the stock symbol MAP on the AMEX. Until its generating assets were sold on June 8, 1999, MPS produced electric energy for retail and wholesale customers. From that date through March 1, 2000, MPS continued to purchase electric energy for sale to these customers. MPS continues to provide transmission services to former wholesale energy customers and transmission and distribution services to retail customers in the service territory; however, it does not provide electric energy supply.
MPSs research and analyses indicate that its service areas economy, once heavily influenced by a significant military presence, continues to be dependent upon agricultural and the forest products industries. Potato farming and processing and the manufacturing of forest products, principally lumber, plywood, and oriented strand board, continue to be dominant economic forces within MPSs service area. The growing of broccoli has added diversity to the regions
agricultural economic base. Tourism, particularly related to snowmobiling and skiing, appears to be playing an increasingly significant role in the areas economy. The medical industry represents a significant positive and growing economic force within the region, serving as a leading employer and job creation sector. However, data appears to suggest that the northern Maine economy continues to lag behind national economic trends and is experiencing population losses based on the most recent census data and projections, particularly among the service areas youth and young adults. Attracting new businesses and jobs to northern Maine in an effort to reverse out-migration trends appears to be a continuing challenge to the areas leaders and businesses, including MPS. As a result of its service areas economic challenges, MPS has taken a lead role in forming a public/private partnership for economic progress in cooperation with the Northern Maine Development Commission. Managed by a private-sector investors council, MPS and its staff are serving as private sector leaders in helping to execute a rational and results-oriented economic development program. The Aroostook Partnership for Progresss (APPs) efforts are intended to increase the areas emphasis on economic development through improved focus and funding for economic development.
Electric sales in the Companys territory are seasonal, and the Companys results of operations reflect this seasonal nature. The highest usage occurs during the five heating season months, from November through March due to heating-related requirements and shorter daylight hours. The rate year is divided into two periods, with higher rates in place in the winter months to encourage conservation. Also, due to the climate in the northern Maine area, the majority of MPSs construction program is completed during the spring, summer and fall months.
· Maine & New Brunswick Electrical Power Company, Ltd is an inactive Canadian subsidiary of MPS, which, prior to deregulation and generation divestiture, owned MPSs Canadian electric generation assets. Me&NB was incorporated in 1903 under the laws of the Province of New Brunswick, Canada.
· Energy Atlantic, LLC is a licensed, but currently inactive, CES of retail electricity, and is classified as discontinued operations. EA formerly competed for electric supply customers within the northern and southern regions of the State of Maine as a CES from March 1, 2000, through February 28, 2004, and also provided the Standard Offer supply for Central Maine Power Companys (CMPs) territory from March 1, 2000, through February 28, 2002, and 20% of the medium non-residential SOS in MPSs territory from March 1, 2000, through February 28, 2001.
At the end of 2005, the Company and its subsidiaries had the following employees:
The Companys consolidated payroll costs were $12.1 million for 2005 and $9.5 million for 2004. The increase was due primarily to new employees added through TMGs acquisitions during 2004. Approximately 37% of MPSs labor force are members of the Local 1837 of the International Brotherhood of Electrical Workers (IBEW) and are covered under a collective bargaining agreement. On September 22, 2005, the IBEW 1837 Union approved a four-year collective bargaining agreement
for the term of October 1, 2005, through September 30, 2009. No employees of the Company are covered under collective bargaining agreements that will expire within one year.
Maricor Properties Ltd is an equal partner in Maricor Ashford Ltd, a joint venture with Ashford Investments, Ltd., an unaffiliated real estate management company. Maricor Ashford Ltd is a real estate development and redevelopment company based in Moncton, New Brunswick, Canada. Management reviewed the characteristics of this joint venture in accordance with Financial Accounting Standards Board Interpretation No. 46(R), Consolidation of Variable Interest Entities, an Interpretation of ARB 51 (FIN 46(R)), and determined that Maricor Properties Ltd is not the primary beneficiary of this joint venture. Accordingly, the activity of Maricor Ashford Ltd has been recorded in these financial statements under the equity method, and Maricor Ashford Ltd is not consolidated with these financial statements.
MPS owns 5% of the common stock of Maine Yankee, which operated an 860 MW nuclear power plant (the Plant) in Wiscasset, Maine. On August 6, 1997, the Board of Directors of Maine Yankee voted to permanently cease power operations 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 Plants operating license from the Nuclear Regulatory Commission (NRC) was due to expire on October 21, 2008.
MPS also owns 7.49% of the common stock of Maine Electric Power Company, Inc. (MEPCO). MEPCO owns and operates a 345-KV (kilovolt) transmission line about 180 miles long, which connects the New Brunswick Power (NB Power) system with the New England Power Pool (NEPOOL).
See Note 4 to the attached financial statements.
See Note 4 to the attached financial statements
See Item 1a. below.
The public may read and copy any materials the Company files with the SEC at the SECs Public Reference Room at 100 F Street, N.E. Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The Company is an electronic filer and the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov. The Company also maintains an Internet site containing such reports at www.maineandmaritimes.com. All such reports, including annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, may be downloaded from such site without charge. Also listed at the Companys site under Investor Relations, Corporate Governance, is the Code of Ethics for Senior Financial Officers and all other Principal Executive Officers and Managers, as well as the Companys policy regarding Insider Trading and Dissemination of Inside Information.
As with all companies, MAM is exposed to certain risk factors as a result of their operations. MAM has identified the following key risk factors for the company as a whole and also specific to the various industries in which MAM and its subsidiaries operate.
MAMs current liabilities of $23.17 million as of December 31, 2005, exceed its current assets of $12.68 million by $10.49 million, exposing MAM to the risk of being unable to fulfill its obligations in 2006. However, of these current liabilities, $14.1 million is short-term borrowings, including the lines of credit and one-year notes payable through Royal Bank of Canada. MAM has taken steps to mitigate this short-term risk before and after year-end, including identification of additional sources of financing and options to reduce or defer costs.
In the long term, Management expects MAMs cash flow to improve, with MPSs recovery of deferred fuel and other stranded costs currently deferred by MPS. The current cash expenditures for deferred fuel and Maine Yankee exceed the recovery of stranded costs. With the expiration of the Wheelabrator-Sherman contract in December 2006, this position will reverse, and recovery of stranded costs will exceed the cash outflows.
The unregulated business segments which have been added since 2003 have not been profitable to date. Please read the in-depth analysis in the Managements Discussion and Analysis of Financial Condition and Results of Operations. As noted there, Management believes that the success of these ventures is crucial to the future growth of the Company, but can give no assurances as to the success of these ventures.
The Maricor Group and Maricor Properties have each acquired several companies over the past three years, in conjunction with MAMs growth strategy. The companies face several risks associated with this process, including lack of suitable available targets, insufficient funds for acquisitions to achieve the growth strategy, lack of synergies and the cost of integration. MAM and its subsidiaries mitigate these risks through a due diligence process intended to identify and mitigate these risks throughout and after the acquisition process.
Changes in legislation and regulation could impact MAMs earnings and operations positively or negatively. Such changes could include changes in tax rates, changes in environmental or workplace laws or changes in regulation of cross-border transactions. For The Maricor Group, public policies related to energy, energy efficiency, asset lifecycle management, and air emissions may impact the overall market, particularly the governmental sectors.
MPS is a regulated utility, operating its distribution activity under the jurisdiction of the Maine Public Utilities Commission and transmission activity under the jurisdiction of the Federal Energy Regulatory Commission. MPUC and FERC regulate the rates MPS is allowed to charge its customers. MPS filed notice with the MPUC on January 10, 2006, under Docket No. 2006-24, that it intended to seek a 4% increase in distribution rates, a procedure expected to last through most of 2006. Further, the transmission formula under which MPS transmission rates have been determined for the past three years is up for review and negotiation for the rates that will go into effect on June 1, 2006. Finally, the rates for recovery of stranded costs are set to expire in December 2006. The outcome of these rate
cases could have a positive or negative impact on earnings and cash flow; their ultimate impact is unknown at this time.
MAM subsidiaries Maricor Properties, including its subsidiaries Mecel Properties Ltd and Cornwallis Court Developments Ltd and its joint venture Maricor Ashford Ltd, and The Maricor Group, Canada operate in Canada. Me&NB, an inactive subsidiary of MPS, is also based in Canada. There are a number of risks associated with operations outside of the United States, including differences in laws, policies and measures; regulatory requirements affecting trade and investment; differences in social, political, labor, and economic conditions, including foreign exchange rates; difficulties in staffing and managing foreign operations; and potential adverse foreign tax consequences.
MAM, like all other entities, is exposed to a certain amount of risk as a result of the general economic conditions under which it operates. Such risks include the overall economy of the geographic region in which the entity operates, interest rate risk, risk of loss of value of real estate assets and risk of inflation.
MPS operations are restricted to a territory in Aroostook County and northern Penobscot County, Maine. Limited population growth and economic expansion in the region could negatively impact the utilitys ability to maintain this customer base. MPS has been actively involved with the Aroostook Partnership for Progress, an organization with the mission of enhancing the economy in Aroostook County.
The Maricor Group and its subsidiaries generally operate within Atlantic Canada and New England. The nature of work available may differ depending on various economic and political conditions, including cost of energy, interest rates, and other factors.
MAM, TMG, Maricor Properties and MPS each have interest rate risk due to variable interest rates on financing arrangements. The Company has mitigated a portion of this risk by fixing interest rates on three MPS variable rate debt issues with a derivative interest rate swap transaction on September 9, 2003. See Item 8 of this Form 10-K, Note 7 to the Consolidated Financial Statements, Accumulated Other Comprehensive Income (Loss), which is hereby incorporated by this reference, for a discussion on the impact on MPSs financial statements and further description of the interest rate swaps.
The Company has observed that increasing interest rates generally tend to negatively impact the market for fee-for-service mechanical and electrical engineering services. However, increasing interest rates also appear to increase the demand for energy efficiency and asset lifecycle management services. The Company cannot warrant or predict these economic effects and makes no predictive statement as to future market or competitive trends.
The net book value of Maricor Properties real estate totaled $7.82 million at December 31, 2005. MAM is exposed to risk associated with the local real estate markets in Moncton, New Brunswick and Halifax, Nova Scotia, and its impact on the value of these properties. The most recent appraisals
obtained during 2005 and 2006 indicate that the appraised value of the properties currently exceeds the book value; however, this position could reverse with changes in the real estate markets.
MAM is exposed to inflation risk in both the United States and Canada.
Except for consumers served by municipal electric utilities within MPSs service area, MPS has a nearly exclusive franchise to deliver electric energy in its service territory, and has little exposure to risk from competition.
The Maricor Group, Canada Ltd and The Maricor Group New England operate in competitive markets and do not have exclusive franchises. Competition for contracts comes from local, regional and mechanical and electrical engineering firms, as well as local, regional or national energy services, energy asset development and energy controls companies. TMGC also faces risks associated with their relationships with the local architectural firms. The majority of its current business is obtained through local architects, and a deterioration of this relationship could negatively impact financial performance.
Maricor Properties Ltd, Cornwallis Court Developments Ltd and Mecel Properties Ltd compete in the open market for tenants for facilities owned and operated by these subsidiaries. Competition is driven by per square foot lease costs, operating costs, quality of the work environment, availability of parking, management services and other factors that could influence a tenant to lease office space. These companies have greatly mitigated this risk with their existing long-term leases for tenants.
In addition to competition for tenants, the subsidiaries compete in the market with other real estate and development companies regarding the potential acquisition of additional real estate. Market conditions driven by supply and demand issues, as well as interest rates typically drive the subsidiaries markets to acquire, lease or sell real estate holdings. Maricor Properties and Mecel Properties compete with individual real estate developers, regional real estate developers, real estate investment trusts (REITs), national real estate developers, insurance companies and others that invest in commercial real estate.
Maricor Technologies, Inc. competes in the open market and does not have an exclusive franchise. Factors affecting its market include the economic needs of facilities owners, the age of facilities infrastructure, the availability or lack thereof of capital, public policies and other issues. It competes with existing and potential additional providers and/or developers of similar software solutions. Maintaining the market viability of their software assets through product enhancements and new versions is a critical part of ensuring its market competitiveness. Additionally, its competitiveness may be impacted by its ability to expand its product offerings to address a more comprehensive array of facility infrastructure information management and planning needs.
MAM, particularly MPS, bear environmental risks associated with former ownership of nuclear, diesel and oil fired generation, as well as the ownership of transformers containing Poly Chlorinated Bi-phenols (PCBs). Further, MPS has potential risks concerning claims related to electro-magnetic fields (EMFs). While the Company takes significant steps to ensure prudent environmental practices, it cannot assure that risks do not exist from past or future environmental practices. Additionally, while the Company does not believe EMFs represent a danger, particularly due to its lack of ownership of bulk transmission, it cannot warrant that claims could not be filed.
MPS has risks associated with aging infrastructure assets that may in some instances be beyond the useful life of the asset. The failure of such assets could result in the loss of power that could result in harm to property or person. MPS works diligently through on-site inspection and testing programs to ensure the integrity of its infrastructure, but cannot warrant that outages will not occur due to the age of some infrastructure. MPS does maintain substantial back-up equipment and the capability to repair or rebuild such assets in a timely manner, including the maintenance of mobile transformers.
MAM and certain of its subsidiaries have obtained financing with financial and other covenants, such as debt service coverage ratios. In a default, the lender can require immediate repayment of the debt. This could also trigger increases in interest rates, difficulty obtaining other sources of financing and cross-default provisions within the debt agreements.
MAMs subsidiaries sometimes extend credit to their customers. This may be regulated, as in the case of MPS, or under the terms of contracts or leases. In these situations, MAM bears the risk that it may not collect these funds. MAM partly mitigates this risk through the use of credit checks and monitoring of the accounts receivable aging. MAM also maintains an allowance for uncollectible accounts for accounts receivable that are unlikely to be collected.
MAM primarily operates in service sectors, and is heavily dependent on the attraction and retention of qualified employees, including engineers and electricians. MAM maintains competitive wage and benefits packages for its employees to aid in attracting and retaining staff.
The Maricor Group and its subsidiaries incurred equity price risk when it bought the stock of certain of its subsidiaries. Part of the consideration was MAM stock. In the event that the price of MAM common stock is below a specified price when the seller wishes to dispose of it, The Maricor Group (or the applicable subsidiary) has agreed to pay the difference. There were 41,151 shares outstanding pursuant to this kind of agreement as of December 31, 2005. At a market price of $15.49 per share on that date, the total exposure was approximately $814,000. A $1.00 change in the market price would impact this exposure by approximately $41,000.
Market price protection of a different sort was given by Maricor Technologies when it acquired the HCI assets. Part of the consideration for that acquisition was MAM preferred stock which is convertible into 26,000 shares of MAM common stock on February 15, 2008, subject to some other conditions. To the extent that the market price of MAM common stock is then below $25 per share, the number of shares issuable on conversion is ratably increased, which could result in further dilution of MAMs common stock.
The Maricor Group and its subsidiaries are subject to risks associated with engineering design errors and/or omissions. The Company carries insurance to address errors and omissions to mitigate certain risks.
Due to the nature of their business, Maricor Technologies is subject to risks associated with changing technologies and obsolescence of their products. As a result, MTI monitors technology and competitor trends to ensure its product offerings remain market competitive.
MPS and its electric wires infrastructure are at risk to natural phenomena, especially those caused by the weather. Storms, such as ice storms and major winter snow storms may have an impact on the integrity of MPS infrastructure assets in the field.
Vandalism, Terrorism and Other Illegal Acts
MAM and its asset-owning subsidiaries are subject to the risks of damage to others properties or human harm due to the failure of infrastructure. While MAM and its subsidiaries exercise diligent asset management and asset inspections, it cannot warrant that such risks can be fully eliminated. MPS and its electric wires and information technology infrastructure are particularly at risk to vandalism and acts of terrorism. While the Company takes steps to protect against such illegal acts through various risk insurance policies and other protective measures, including restricting access to assets, it cannot warrant that they cannot happen.
MAM is subject to systemic risks associated with information technology systems that could impact the calculative outcome of billing determinations or the unintended release of confidential consumer information. MAM goes to significant lengths to stress test its systems and protect against such events; however, the Company cannot warrant that such risks do not exist.
Alternative Generation Options
MPS does face technology and product substitution risks associated with the evolution of distributed generation, non-utility generation, and other alternative fuel forms. The primary risk in this area is non-utility generation, which the utility successfully competed with to date. However, as electric commodity prices increase, the viability of alternative fuel from non-utility generation may become more practical. Such projects could result in reduced usage of MPSs delivery system.
As of December 31, 2005, MPS owned approximately 380 circuit miles of transmission lines and approximately 1,767 miles of distribution lines, all in Aroostook County and a portion of Penobscot County in northern Maine. In addition, MPS owns eight buildings that consist of office, warehouse and/or operating facilities within its service area, as well as various tracts of vacant land. Substantially all of the properties owned by MPS are subject to the liens of its First and Second Mortgage Indentures and Deeds of Trust.
In response to a Maine environmental regulation to phase out PCB transformers, MPS has implemented a program to eliminate transformers on its system that do not meet the new State environmental guidelines. The program is in the process of testing almost 7,400 distribution transformers over a ten-year period. MPS is currently in its fifth year of this ten-year program. In addition, transformers that pass the inspection criteria will be refurbished and refitted with lightning arrestors and animal guards. The current estimated cost of the ten-year program is $2.7 million and, as of December 31, 2005, $1.40 million has been spent to remediate approximately 45% of the transformers in this effort.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47), effective for fiscal years ending after December 15, 2005. FIN 47 clarifies the term conditional asset retirement obligation, used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, as referring to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. Based on this interpretation, MPS recognized an associated asset retirement obligation of $1.30 million with the PCB Transformer phase-out program, described more fully in Note 1 of these Consolidated Financial Statements.
Additional assets of the Company include three office buildings owned by Maricor Properties Ltd and its subsidiaries Cornwallis Court Developments Ltd and Mecel Properties Ltd. These office buildings are located in Moncton, New Brunswick and Halifax, Nova Scotia. The Moncton, New Brunswick multi-tenant office building consists of approximately 40,000 square feet and is located along a downtown thoroughfare. The facility houses The Maricor Group, Canada Ltds Moncton operations, in addition to third party tenants. The J. Angus MacDonald Building, located in downtown Halifax, is a 60,000 square foot facility, and is fully leased to third parties, primarily Canadian government entities. The other Halifax office is approximately 10,000 square feet and is located in a revitalization district near the historic downtown Citadel. The facility houses The Maricor Group, Canada Ltds Halifax operations.
MPS System Security and Reliability
MPS has implemented a transmission inspection program, part of its asset lifecycle management efforts, and has begun implementation of a distribution inspection program. Such inspection programs include regular testing of transformers located within substations. Management believes that full implementation of asset lifecycle management programs can reduce future demands for capital expenditures related to MPSs renewal and replacement needs. However, before reducing annual capital expenditures, baseline improvements are being undertaken. While future plans will attempt to reduce capital expenditures to a level approximately equal to its rate of depreciation, interim steps may include potential consolidation of facilities to help ensure increased system reliability and reduce long-term costs. Such expenditure levels do not include the possible construction of additional transmission plant as later described.
As a result of uncertainty concerning merchant and non-merchant generation facilities within the Maritimes and northern Maine regions, MPS evaluates system security on an ongoing basis, particularly from an on-peak generation resource perspective. Through load-flow analysis and utilization of specific contingency or transmission outage scenarios, it has been determined that under a single contingency or outage condition and during peak load situations, a system-wide outage is possible if approximately 50 MWs of on-system generation are not operating. Additionally, under certain conditions, the analyses noted that a second contingency or transmission line outage could not be survived within a thirty-minute time frame when similar conditions existed after a single contingency. Although Maine Public Service Company does not have a bulk delivery transmission system as defined by the Northeastern Power Coordinating Council (NPCC), MPS is using NPCCs standards for planning criteria. It should be noted that potential contingencies that were studied focused on situations that could impact MPSs transmission and distribution systems, even though certain transmission assets are located in Canada and are owned by other companies or organizations. MPS has load reduction contingency plans to mitigate such conditions or events in the case that a major transmission outage or system outage occurred.
In order to address system security and reliability needs, MPS filed a request with the MPUC requesting authorization to construct, subject to all required permitting, a new 138 kV transmission line that would interconnect with NB Power. This filing is more fully described in Item 3 below and is incorporated by reference herein. MPS believes that the construction of the proposed transmission line,
an approximate $4 million regulated investment, would significantly improve system reliability and allow the MPS system to meet NPCC standards for single and dual transmission contingencies. MPS continues to evaluate projects and actions that could increase available and total transmission capacities.
Federal Energy Regulatory Commission 2005 Open Access Transmission Tariff Formula Rate Filing
On May 31, 2005, pursuant to Section 205 of the Federal Power Act, 16 U.S.C. Section 824d, and Title 18 CFR Sections 35.11 and 35.13 of the regulations of the FERC, MPS submitted for filing its proposed revisions to its FERC Open Access Transmission Tariff in Docket No. ER 05 (the 2005 OATT) to modify its transmission rate formula. MPS filed its updated rates under the 2005 OATT formula on June 15, 2005, pursuant to Docket ER00-1053 with an effective date of June 1, 2005, for both wholesale and retail customers, subject to a customer refund that may occur as a result of the proceeding and potential settlement negotiations. The retail transmission revenue requirement was increased by $288,670 on June 1, 2005, under the 2005 OATT. This represented an increase of 8% to the transmission component of retail delivery rates or an overall impact on total retail delivery rates of 0.7%. The primary reasons for the increase were the increase to costs due to mandated Sarbanes-Oxley requirements, and the purchase of a new Oracle-based accounting system.
As part of the settlement data request process, the Company identified adjustments to its FERC Form 1 filing for 2004, which flow through the Companys transmission rate formula. The approximate net impact of these corrections, once implemented, will be to reduce the overall increase to the projected retail transmission revenue and result in a revised projected net increase to the retail transmission revenue requirement of $238,422 instead of the previously projected increase of $388,923. This adjustment will flow through Schedule 1.1.2 of the MPS OATT to be effective June 1, 2006, and will be passed through retail rates on July 1, 2006, when the retail rates are next adjusted. The Company has reported to FERC as scheduled that the parties are proceeding with the settlement process and will continue to provide progress reports as required. Because the Company is currently in the midst of a settlement process, it cannot predict the exact dollar outcome of this proceeding at this time.
MPUC Approves the Pass-Thru of Retail Transmission Rates to MPS Retail Jurisdictional Customers, and the Increase to DSM Mil Rate, MPUC Docket No. 2003-516
Per agreement with the Maine Public Utilities Commission, the new transmission rates for retail customers (above) were put into retail rates on July 1, 2005, to coincide with MPSs related State jurisdictional compliance filing in MPUC Docket No. 2003-516 to increase the DSM Mil Rate. These rates were approved by the MPUC on June 20, 2005. Per this filing, total retail delivery rates increased by 1.1%.
Requests for Issuance of Certificates of Public Convenience and Necessity in Connection With the Construction of a Proposed Transmission Line and Various Transmission Service Reservations
On October 4, 2004, MPS filed a Petition with the MPUC requesting the issuance of Certificate of Public Convenience and Necessity (CPCN) pursuant to 35-A M.R.S.A. Section 3132 to construct a 138 kV transmission line originating at an existing substation in Limestone, Maine and extending to the Canadian Border near Hamlin, Maine.
The project was proposed in order to ensure the reliability and integrity of the MPS transmission grid under scenarios of reduced on-system generator availability and peak load growth. MPS submitted that the available firm transfer capability of the transmission system when added to the remaining on-system hydro generation was not sufficient to meet peak load conditions, should existing on-system
wood-fired generation become unavailable. The proposed line would address this by significantly increasing the load-serving capability of the northern Maine region and would serve to reinforce the vital transmission ties between northern Maine and the New Brunswick transmission grid. Additional benefits of the proposed line include the potential for increasing the number of competitive retail electric suppliers and increasing the attractiveness of the region for development of additional generation, such as wind farms, by providing increased transmission export capacity.
The MPUC Commissioners deliberated the Docket on August 29, 2005, and denied the petition, determining that there was no immediate reliability risk in northern Maine. The Commission concluded that the risk of losing on-system wood-fired generation was not sufficient to warrant the new transmission line. The Commission issued the Order on October 21, 2005, that described actions to be taken by MPS and the Northern Maine Independent System Administrator (NMISA) to reduce certain risks identified by MPS. The Company filed for reconsideration of the Order on November 8, 2005 based on the likelihood that Linekin Bay Energy Company, LLC may elect to utilize the CPCN filed in this Docket in order to construct transmission facilities necessary to connect their proposed generation project to the MPS electrical system. The Commission approved the request for reconsideration and will revisit the issue on or before March 31, 2006. Additionally, on November 23, 2005, the Commission granted an MPS request for waiver of the specific requirements of the October 21, 2005 Order until the NMISA finalizes currently proposed market rule changes that are currently scheduled to be presented to the Commission on March 1, 2006. Through December 31, 2005, approximately $844,000 was spent on this transmission project. MPS expects to seek recovery of these costs in its transmission rates and is currently pursuing other recovery options. MPS believes it is probable the amounts deferred can be recovered, either through future rate cases or through sale of the assets to a third party.
In September 2004, MPS entered into a Commitment Agreement with NB Power. Under this Agreement, which is subject to MPS obtaining all necessary regulatory approvals, MPS will reserve 35 MW of transmission capacity on the NB Power system in conjunction with the construction of a new 345 kV transmission line to be constructed from Point Lepreau near Saint John, NB to Orrington, Maine. NB Power will own and operate the portion of the line on its side of the border, while Bangor Hydro-Electric Company (BHE) will own and operate the portion of the line on the U.S. side of the border known as the Northeast Reliability Interconnect (NRI). BHE filed for a Certificate of Public Convenience and Necessity for this line on November 5, 2004, in MPUC Docket No. 2004-771. MPS filed a petition with the MPUC seeking approval to make the reservation required under the Commitment Agreement on December 13, 2004, in MPUC Docket No. 2004-775 which was subsequently changed to MPUC Docket No. 2004-538 Phase II. On October 7, 2005 MPS proposed several changes to the Commitment Agreement, to include a reduction in the reservation quantity from 35 MW to 20 MW. Hearings on Phase II were conducted on December 6 and 7, 2005. A Commission Order is expected during March 2006. As noted above, MPSs obligations under the Commitment Agreement are dependent upon securing regulatory approval. MPS cannot predict the outcome of Phase II of this case at this time.
Maine & Maritimes Corporation became a holding company effective June 30, 2003. All 1,574,582 shares of MPS common stock were converted on that date into an equal number of shares of MAM common stock, which are listed and traded on the American Stock Exchange under the symbol MAM. As of March 1, 2006, there were 753 holders of record of the Companys common stock.
Dividend data and market price related to the common stock are tabulated as follows for 2005, 2004 and 2003:
Dividends declared within the quarter are paid on the first day of the next quarter.
To date, the Companys payment of dividends has been based on dividends from MPS, which are limited by restrictions imposed by the MPUC. MPS dividends to MAM are subject to a common dividend payout ratio (dividends per share divided by earnings per share), which cannot exceed 1.0 (i.e. 100%) on a two-year rolling average.
The most recent and current financial and cash flow performance of the Company resulted in no shareholder dividend during the fourth quarter of 2005. Until such performance improves, the Company cannot warrant that it will continue to pay dividends on a quarter-on-quarter basis. The Companys Board of Directors has adopted a dividend policy which provides for a dividend based on 55% to 80% of the net income contribution from MPS, provided that the Company is projected to generate net earnings per share and requisite free cash flows from its regulated and unregulated operations.
The Company has determined that the common stock dividends paid in 2005 are fully taxable for federal income tax purposes. These determinations are subject to review by the Internal Revenue Service, and shareholders will be notified of any significant changes.
Securities Authorized for Issuance Under Equity Compensation Plans.
The Company maintains two equity compensation plans. The 2002 Stock Option Plan included 150,000 shares available for issuance. Of this total, 21,000 options have been issued for executive compensation. See Note 9, Stock Compensation Plan, in Item 8. An additional 20,000 shares were originally available for issuance to the Companys Board of Directors pursuant to the Stock Plan for Outside Directors. There are 7,046 of these shares remaining available for future issuance.
Sale of Unregistered Securities
In February 2005, MAM issued 9,500 shares of preferred stock in conjunction with the acquisition of software now owned by MTI. The entity to which these securities were issued was HCI Systems Asset Management, LLC. No underwriter was used in this transaction. The securities were issued under the exemption provided by Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering.
As mentioned previously, the Company established a stock repurchase program in January 2005 as part of the Dividend Policy announced when the January 3, 2005, dividend was declared. Execution of the share repurchase program will be based on market conditions and is subject to the MAM cash position and investment opportunities. There were no stock repurchases by the Company during 2005.
In June 2004, the Company issued 54,332 shares of its common stock in connection with two acquisitions. On June 1, 2004, the Company, through its Canadian subsidiary, Maricor Ltd, now doing business as The Maricor Group, Canada Ltd, acquired all of the outstanding common shares of Morris & Richard Consulting Engineers Limited, a Canadian-based engineering firm. The persons who acquired the securities were the former principals of M&R. On June 17, 2004, the Company completed a second acquisition by its subsidiary Maine & Maritimes Energy Services Company, now doing business as The Maricor Group, of RES Engineering, Inc., now The Maricor Group New England, of Boston and Hudson, Massachusetts. The person acquiring the shares was the former principal of RES. No underwriter was used in either transaction. Refer to Note 14 to the Consolidated Financial Statements, Acquisitions. The securities were issued under the exemption provided by Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering.
A five-year summary of selected financial data (2001-2005) is as follows:
Summary of Selected Financial Data(1)
(1) Data from periods ending prior to June 30, 2003, is from MPS.
(2) For 2005, 2004, 2003 and 2002, total assets reflect the reclassification of accrued removal obligations as a liability from accumulated depreciation. For 2005, the estimated accrued removal obligation includes the PCB Mitigation Project as required under FIN 47.
See Item 1a. Risk Factors and Item 7a, Quantitative and Qualitative Disclosures about Market Risk, incorporated in this section by this reference, concerning material risks and uncertainties which could cause the data reflected herein not to be indicative of the Companys future financial condition or results of operations.
(3) Total assets reflect assets from Discontinued Operations of $235 for 2005, $467 for 2004, $2,024 for 2003, $6,324 for 2002, and $5,632 for 2001.
(4) Common Shareholders Equity reflects equity from Discontinued Operations of $229 for 2005, $451 for 2004, $1,559 for 2003, $5,674 for 2002, and $3,206 for 2001.
This Managements Discussion and Analysis contains certain forward-looking statements, as defined by the SEC, such as forecasts and projections of expected future performance or statements of Managements plans and objectives. These forward-looking statements may be contained in filings with the SEC and in press releases and oral statements. The reader can identify these statements by the fact that they do not relate strictly to historical or current facts. They use words such as anticipate, estimate, expect, project, intend, plan, believe and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These statements are based on the current expectations, estimates or projections of Management and are not guarantees of future performance. Some or all of these forward-looking statements may not turn out to be what the Company expected. Actual results could potentially differ materially from these statements. Therefore, no assurance can be given that the outcomes stated in such forward-looking statements and estimates will be achieved.
Factors that could cause actual results to differ materially from our projections include, among other matters, electric utility restructuring; future economic and demographic conditions within MPSs service area and unregulated markets; changes in tax rates; interest rates or rates of inflation; ability to raise capital; pace and success of merger and acquisition efforts; terrorism; changes in the construction industry; changes in Canadian currency rates; length of sales cycles; developments in state, provincial and national legislative and regulatory environments in the United States and Canada; ability to recruit individuals with necessary skill sets; increased competition by existing or new competitors in the Companys unregulated markets; changes in technology; new innovations; changes in NAFTA; increased environmental regulations and other regulatory or market-based conditions.
Financial results were diminished for the year 2005 compared to 2004 and 2003 due to a myriad of cost factors. During the year MPSs performance was lower than historically expected with cost of service rising such that its return on its distribution rate base was inadequate. TMG did not achieve its targets as a result of a lack of adequate capitalization, costs associated with transitioning acquisitions from small privately held firms to publicly traded company standards, lagging business development, and the slowed pace of accretive acquisitions. MTIs performance was impacted by its lack of business development and need to upgrade its software solutions. Maricor Properties was in a start-up phase during 2005 as real estate assets were leased-up and/or acquired. While MAMs overall financial performance in 2005 was less than anticipated, it made meaningful progress in advancing its growth strategy that remains in its infancy. Management is taking steps to improve future performance and believes it must increase its speed and focus on growing its unregulated operations.
Collectively, MAMs unregulated diversification and growth strategy remains in its infancy stages. It continues to experience cash flow challenges. Management is taking steps to bridge necessary cash flows until 2007 when MAMs cash flow situation should improve. Improved economic performance of existing unregulated subsidiary operations is important and steps are being taken to improve such performance. However, Management believes that adequate capitalization, increased pace of acquisitions, and enhanced business development are critical keys to MAMs unregulated organizations collective financial performance, both in the near and long-terms.
Management does recognize a number of short-term financial and operating challenges; however, we believe our long-term outlook is encouraging. To improve long-term shareholder value and earnings, Management believes that the Company must increase its pace of organic and inorganic unregulated growth, while forming capital in an equally timely manner supportive of such growth. As previously noted, Management does not believe a status quo or stay as you are strategic option exists to create
long-term shareholder value for MAM. Further, given the impact of electric deregulation, generation divestiture, and disaggregation of the electric utility industry within Maine, combined with the lagging economy of MPSs service area, Management does not believe reverting solely to its core regulated wires business can generate adequate long-term shareholder value. However, Management also believes that its regulated operations performance must be continually enhanced. As a result of increasing costs of service, MPS filed in March 2006 a request for a distribution rate increase. The outcome of this docket will not be known, in all probability, until the third quarter of 2006. Although a request for an increase in distribution rates has been made, MPS cannot predict the outcome or the rate of increase that may be allowed. Further, given recent interest in MPSs service area by several wind generators, there are over 500 MWs of proposed wind generation planned for the utilitys service area. Should these projects move forward, they hold potential for contract work associated with the construction of additional transmission and substation facilities, as well as the potential rebuilding of part or all of MPSs transmission system funded by the developers. While MPS cannot predict with certainty that these projects will be constructed, Management does believe they are potentially positive projects for its service area.
Through more timely execution of MAMs inorganic unregulated growth strategy, including formation of growth capital, as well as improved organic growth, and MPSs proposed distribution rate increase, Management is focused on increasing earnings across all business lines. Should the Company not achieve a level of unregulated growth consistent with the need to create long-term shareholder value within a reasonable timeframe, Management and the Board of Directors will need to assess strategic alternatives to its current growth strategy. Resulting actions could involve the sale or partial sale of certain or all unregulated assets or other alternatives, recognizing the need to act prudently in protecting and enhancing long-term shareholder value. Further, if the Company does not receive an adequate distribution rate increase to cover its utility costs and allowing for a fair return on rate base, Management will need to assess its strategic options to preserve and grow shareholder value. However, Management does believe that the timely and efficient implementation of the Companys growth strategy, cost control within its utility operations, and implementation of prudent rate increase requests when warranted can result in achieving desired long-term shareholder value.
Given MAMs need to reinvest in its future and expand its scale to improve its overall financial performance, particularly its unregulated operations, Management cannot warrant that it will continue to pay dividends at historic levels or on a continuing basis until its cash flows and earning performances improve. Further, Management believes that it must address the under capitalization issues facing the Company before considering a dividend for its common shareholders. However, it is the goal of Management to expeditiously enhance the performance of the Company and to continue as a yield and growth-at-a-reasonable price stock. Management believes its strategy is sound and that meaningful progress is being made in the firms overall structural and economic transition.
MAMs overall strategy was developed in response to a number of converging macro-economic trends that Management believes will drive market opportunities both in the near and long-term. The year 2005 underscored the reality that turbulence within the energy industry, exacerbated by geo-political conflicts and growing third-world demand for energy, are predicted to have significant price, supply, and security impacts on businesses and organizations within North America. While an increasing emphasis is being placed on supply-side issues by North American governments, we see expanding governmental mandates and a renewed customer-driven need to improve energy efficiency and control energy-related costs. As energy-related issues remain at the forefront of public policy issues, and an increasing cost and reliability concern for businesses and organizations, MAM believes there will be an increasing demand for energy efficiency-related services and solutions, including an expanded market-place interest in on-site and alternative energy electric generation.
While energy costs and reliability remain a concern, businesses and organizations are facing a significant financial challenge as they realize the economic threats created by escalating deferred maintenance liabilities. As businesses and organizations underfunded their capital renewal and asset maintenance programs year after year, many are now faced with staggering deferred maintenance liabilities. In many cases the deferred maintenance on facility and energy-related assets threatens the continued viability of such assets. Increasingly, MAM believes businesses and organizations are requiring more intensive capital expenditure planning, working to ensure that every capital dollar spent is the most optimal investment they can make. Further, to address burgeoning deferred maintenance liabilities, organizations are looking to advanced business processes that can help extend the functional and economic lifecycle of physical assets. MAM believes that by enhancing the energy efficiency and controlling organizations energy-related expenditures that an entity can free-up capital to address their deferred maintenance liabilities. Further, by designing and building new energy-related and energy efficient facilities-related infrastructure, operating costs can be reduced while built environment assets are renewed.
While energy and deferred maintenance liabilities are of growing concern within the marketplace, Management believes there is an increasing North American awareness of climate change and the need to address emissions reductions. We believe that energy efficiency, alternative on-site generation, and sustainable asset management techniques are key to reducing emissions from the built environment. We continue to see growing business interests and government mandates to address climate change, particularly within the northeast United States and Canada. As more and more businesses and governments adopt a sustainable approach to their actions, we believe opportunities will evolve related to the market demand for sustainable asset management and energy-related solutions.
As evidenced by the passage of the Sarbanes-Oxley Act and other regulatory actions, there are increasing interests in and growing mandates to improve the transparency of asset governance reporting. Businesses and organizations are being pressed to provide increasing details concerning the performance of owned assets, both from an economic and environmental perspective. Consequently, we also see an emergence of market interests in improved asset governance reporting, a critical part of MTIs sustainability-centric solutions that also address organizations energy, emissions reductions, and deferred maintenance needs.
We believe the convergence of these issues will create a substantial marketplace demand, with current solutions and services being minimal. Addressing these issues and advancing businesses and organizations achievement of a stakeholder-centric triple bottom line requires the integration of physical, intellectual, and technology-based assets that when combined result in dynamic solutions to growing challenges regarding the aging infrastructure, climate change, energy pricing and security, and our ability to support the changing needs of society. Through the amalgamation of diverse, but relevant skills and technologies in the building sciences, engineering, information technology, and energy consulting fields, MAM is positioning itself to be a leading professional services, product and asset-based solutions company.
MAMs unregulated operations are increasingly focused on sustainable solutions, progressively building professional services competencies to provide products, services, and solutions, such as, but not limited to (a) sustainable university and college campus planning with a strong focus on on-campus energy infrastructure, (b) energy efficiency evaluations and solutions focused on the governments, hospitals, universities, schools, institutional and office commercial markets, (c) sustainable asset management ranging from facility infrastructure condition assessments to capital planning to facility renewal, (d) on-site energy asset development including co-generation, alternative fuel and distributed generation solutions, (e) energy supply management, (f) sustainable real estate development and renewal, including public and private partnerships such as the construction and ownership of university dormitories, (g) sustainable and transparent asset governance and reporting, and (h) LEED engineering design services.
MAMs execution strategy involves a combination of organic and inorganic strategies. However, key to amassing the requisite talent and core competencies is a proposed aggressive acquisitions program. Simply hiring one individual talent at a time will not enable the necessary ramping-up of the business to achieve the required scale and desired level of profitability. Recognizing that there are limited acquisition opportunities across North America, MAMs efficiency in identifying potential targets, undertaking due diligence, forming capital and closing transactions in a timely manner is critical. Given that few, if any, potential acquisition candidates exist today that provide the array of proposed integrated sustainable services, products, and assets, MAM recognizes its need to acquire companies that bring discreet portions of the value proposition and amalgamate integrated services offerings across acquired companies through the organic development of a high level business development and transaction structuring organization. Such a high level, organically grown business development staff will require experienced individuals with a high degree of relative domain knowledge, as well as experience in structuring financial transactions, often referred to as financial engineers. Through these senior staff members, solutions to clients needs are crafted using multiple discreet offerings or capabilities, integrated into a seamless solution. Each individual offering will continue to be sold on a one-off basis, such as selling engineering design services. However, the more complex and higher value integrated offerings will be sold and managed by a higher level business development organization currently being organized and staffed.
While Management believes MAMs strategy is well-aligned with existing and projected macro-economic trends, it believes its success will depend on the Companys ability to expeditiously (a) recruit, train and execute a high level business development organization, (b) to identify, undertake due diligence, acquire and integrate multiple companies providing required core competencies and (c) to form adequate working and growth capital to support the Companys organic and inorganic growth strategies. Management further believes, given its holding company structure, that the Companys unregulated operations must achieve increased scale, allowing for necessary critical mass to support corporate-related costs and ensure meaningful contribution to earnings per share.
MAMs strategy includes the continuing operation of its regulated utility, Maine Public Service Company. However, given the projected decline in its regulatory rate base, Management believes earnings may decline somewhat and then become more stable. MPS will continue to be challenged by cost pressures and, while a long-term meaningful contributor to earnings per share, Management does not believe it can create growing long-term shareholder value unless unregulated operations are grown in a more expeditious manner.
Net Income and Earnings per Share
* The Other line includes activities of the holding company, including corporate costs directly associated with unregulated operations, common costs not allocated to the regulated utility and inter-company eliminations.
Net income above is allocated based upon the segment allocation as presented in Item 8, Note 4 of the Notes to Consolidated Financial Statements, Segment Information.
In 2005, Maine & Maritimes continued implementation of its growth and diversification strategy by acquiring real estate, forming a real estate joint venture, and actively seeking further mergers and acquisitions. In addition, Maricor Technologies, an early stage information and software products development venture, was formed in the first quarter of 2005 to serve the sustainable lifecycle management and facilities and infrastructure governance target markets.
Total revenues increased $2.84 million or 7.6% compared with 2004. Earnings results during 2005 reflect the challenges and evolution of our growth strategy which began in late 2003 and is still in its formative years. During 2005, the Company sustained a consolidated net loss of $220,000 compared with a net profit of $1.32 million in 2004. In 2005, MAMs utility operations contributed $2.26 million in net income, which was offset by TMGs losses of $689,000, MTIs start-up losses of $318,000, Maricor Properties start-up losses of $115,000, and $1.36 million in other corporate costs directly associated with the unregulated subsidiaries, common costs not allocated to the regulated utility and inter-company eliminations. Greater detail is provided for each segment later in this section.
There are a number of factors influencing the downward change in earnings from the prior year. Most notably are the following categories and approximate pre-tax expense impact:
· A continuing reduction in MPSs allowed rate of return on its stranded costs of approximately $522,000,
· Higher costs of compliance and governance mostly due to Sarbanes-Oxley of $658,000,
· Costs to retain key employees in all business segments of $95,000,
· Increase in workers compensation insurance expenses at MPS of $205,000,
· Increased amortization costs of software at MTI of $298,000,
· One time write-off of external costs associated with a terminated acquisition of $123,000,
· Increased transportation expenses at MPS of $244,000, due to increases in fuel costs, repair and labor costs,
· Increased expenses related to software research and development for MTI of $102,000, and
· Increased rental expenses of $18,000.
Other categories of cost increases include, but are not limited to, continued integration costs, increased investments in business development, added software maintenance costs, additional interest expense, and sales administration costs on new products and services for our unregulated businesses.
Consolidated net income in 2004 decreased by $1.49 million from 2003. As described more fully below, the decrease in income is the result of losses from the Companys discontinued EA operations, losses associated with start up operations and integration of The Maricor Group acquisitions, and increased general and administrative costs associated with Sarbanes-Oxley compliance costs, implementation of the Companys Oracle-based financial system and increased regulatory compliance costs.
Consolidated Interest Expense
Interest Expense is accrued on the Companys long-term debt and short-term credit arrangements in accordance with debt agreements and was $3.0 million, $2.4 million, and $1.6 million for the years ending December 31, 2005, 2004, and 2003, respectively. Increases in interest expense were a result of increased debt for acquisitions, as well as increased borrowings to fund operations resulting from the deferring of MPSs stranded cost recovery and continued investments in unregulated subsidiaries start-up related operating costs in excess of their revenues. Interest expense has also been impacted by increases in interest rates on variable rate borrowings.
Income Tax Expense/Benefit
Income tax expense for MPS was $1.5 million, $1.2 million and $1.4 million in 2005, 2004 and 2003, respectively. The income tax benefit for the unregulated subsidiary was $1.7 million, $797,000 and $98,000 in 2005, 2004 and 2003, respectively.
Taxes Other Than Income
Taxes other than income, which are mostly property taxes for MPS and payroll taxes for all companies, were $1.8 million in 2005, $1.7 million in 2004, and $1.5 million in 2003.
Consolidated Capital & Construction Program
Expenditures on capital improvements, additions, replacements and equipment for the years ended December 31, 2005, 2004, and 2003, along with estimated expenditures for 2006 are as follows:
Maine & Maritimes has made significant progress in implementing its overall growth strategy. However, it continues to be faced with challenges post-deregulation and generation divestiture associated with transitioning from a vertically integrated regulated electric utility to a diversified portfolio of both regulated and unregulated businesses. Our short-term challenges include (a) cash flow limitations anticipated during 2006, but significantly improving beginning in 2007 as a result of recovery of deferred stranded cost collections, (b) lagging earnings, (c) the lack of speed of implementation of MAMs overall growth strategy, (d) the need to improve market traction of unregulated operations business development efforts and expand into higher value product and service lines, (e) the ability to raise adequate capital without significant dilution to shareholders, and (f) increasing and continuing costs from being a micro-cap publicly traded company associated with acquisition integration costs (those costs associated with transitioning the acquisition of smaller private companies to publicly traded company standards), compliance and regulatory reporting. These issues individually and collectively reflect the reality that MAMs current scale of unregulated operations cannot adequately carry the burden of corporate allocations and direct costs. These relatively fixed corporate costs include, but are not necessarily limited to governance, holding company administration, risk management, regulatory compliance and reporting costs. While the scale of unregulated operations does not fully support its allocation of corporate costs, their contribution to these relatively fixed costs limit the cost burden on regulated operations.
The most recent and current financial and cash flow performances of the Company resulted in no shareholder dividend during the fourth quarter of 2005. Until such performance improves, the Company cannot warrant that it will resume paying dividends on a quarter-on-quarter basis. In the near-term, the Company may be required to reinvest in the Company and in investments that have the potential for increasing long-term shareholder value. Such a transition may be viewed as a delayed response to the financial and business model impact of deregulation and resulting generation divestiture.
Management believes it is essential that we continue to expand our unregulated revenue opportunities through both organic and inorganic growth to provide the scale necessary to cover corporate costs and generate positive cash flows and earnings to help ensure long-term shareholder value. Although MAM has a long history within its regulated market, changes associated with deregulation and its new unregulated operations outside our utilitys traditional regulated service area reflect in many ways the characteristics of a start-up to early stage growth company, requiring establishment of brand recognition and creditability in the marketplace. In order to succeed in our growth strategy, Management believes that MAM must increase its focus on and leveraging of growth capital, while increasing the pace of acquisitions. Management does not believe a status quo stay as you are or return to our utility core strategy is economically viable in the long-run.
Management believes that the passage of the 2005 US Energy Policy Act and resulting changes to the Public Utility Holding Company Act (PUHCA) may have a significant impact on the regulated electric utility or network utility industries. Specifically, we anticipate a potentially robust electric utility or network utility consolidation market during the foreseeable future. Such consolidation may result in the electric utility wires industry becoming a decreasing per unit cost industry with continued unbundling of products and services analogous to the evolution of the telecommunications industry. Management believes that through consolidation and the increasing of scale of operations, large utilities may achieve a number of leverageable synergies that result in decreased per unit costs, such as billing, metering, customer service, information technology, regulatory, governance and administrative. While Management cannot be assured of this potential trend, most recent activity appears to reflect this trend. Consequently, monitoring the impact and implications of the repeal of PUCHA will be an important aspect of determining MAMs long-term strategy.
During 2006, MAM will experience working capital challenges. This challenge is directly attributable to primarily two factors. These include, but are not necessarily limited to, the historical decision to defer full recovery of MPSs stranded costs associated with its Wheelabrator-Sherman non-utility generator contract until the 2007 through 2012 timeframe and the lagging pace of revenues and earnings of unregulated operations through both organic and inorganic activities. While 2006 presents a cash flow challenge related to the deferring and levelizing stranded cost recovery, free cash flows are projected to improve significantly from 2007 through 2012. This is due to the expiration of the Wheelabrator-Sherman contract in December 2006 and the collection of associated deferred stranded cost revenues during the next approximate six years. Management and the Board are taking actions to address our short-term operational cash flow short fall during 2006, such as leveraging equity positions associated with unregulated real estate assets, improving overall performance of all business segments, controlling capital expenditures, and instituting more rigid cost controls. It is likely that the Company and its subsidiaries may require increased short-term borrowings to bridge the deferral of the stranded costs cash collections and until increased market traction and scale of unregulated operations can be attained.
As noted, Management believes the scale of unregulated operations must be increased to address the burden of corporate-related costs. During 2005, MAM continued its acquisition efforts, acquiring certain software assets through Maricor Technologies, Inc., and purchasing Cornwallis Court Developments Ltd, the owner of a 60,000 square foot fully leased office facility in Halifax, Nova Scotia. However, significant time and effort during the year were spent evaluating a potential acquisition, Steven Winter Associates, Inc., a leading building sciences and energy efficiency professional services firm. Based on a number of factors, the decision was made not to acquire the firm. Consequently, anticipated revenues and earnings did not evolve from the proposed acquisition. MAM, particularly as it relates to the continued growth of TMG and TMGC, must intensify its efforts to target, evaluate, and acquire leading and accretive firms within the sustainable building sciences, energy efficiency, asset development and management, and professional consulting engineering space. However, Management cannot predict with certainty its ability to identify and successfully acquire such firms on a timely basis.
Related to MAMs ability to acquire accretive firms on a timely basis is its ability to raise capital to fund such acquisitions. Management believes the financing of future actions will involve differing forms of debt and equity, including, but not necessarily limited to, private placement of common stock, preferred stock issuance, convertible debt, conventional debt and venture capital. The actual cost of capital of such strategies depends on the exact structure and transaction, as well as the actual share price at the time of a transaction. In addition, depending on the structure and transaction, as well as the success of an acquisition or financing, share dilution may occur. In contrast, Management also believes that shareholder value can be created through the targeted and timely acquisition of key companies within TMGs competitive space that add value to the firms value proposition.
In addition to acquisitions, MAM and more particularly TMG and MTI, must increase their market traction through improved business development efforts and increased sales of higher value products and services. TMG and TMGC have historically utilized a seller-doer professional services model. Given the start-up costs of a full-time professional business development and transaction structuring staff, adequate funding and staffing have not been available to date to enhance organic sales growth. TMGC has started the process of staffing a professional business development staff with the required domain knowledge to structure higher value customer-centric solutions. However, given cash flow and earnings challenges, organic growth tends to be more challenging in the near-term than acquisitions. Nonetheless, Management is pursuing a strategy to increase TMGs focus on expanding professional business development.
Prior to late 2005, MTIs marketing was done through a channel market agreement with its sister company, TMG. In order to enhance market traction and improve sales, MTI has employed its own full-time sales staff and is pursuing a broader range of channel marketing partners. While MTI is
challenged financially to adequately staff its business development and transaction structuring staff, progress is being made. Nonetheless, improving market penetration is a key challenge and opportunity for MTI.
Management has and continues to evaluate means to control corporate-related costs to decrease holding company cost allocations to its subsidiaries. While actions have been put in place to control and/or limit costs, most are deemed essential costs, particularly due to MAMs publicly traded status. Costs associated with corporate services tend to have a minimum threshold of cost that can service increasingly larger subsidiary operations without requiring a correlated increase in corporate-related costs. Consequently, Management does not believe significant reductions in corporate-related costs can be achieved and that increasing the scale of unregulated operations is the most viable means to offset such costs.
While Management believes cash flows will improve beginning in 2007 and is encouraged by the progress of unregulated operations, it also recognizes that a successful regulatory ruling concerning MPSs distribution rate case is important. MPS continues to monitor its costs, however, there is a minimum scale of operations required to ensure reliable customer service and effective asset management. Given the low customer density and highly forested characteristics of MPSs service area, the utility faces the need to manage and maintain a disproportionate number of miles of line per customer served, recognizing the rural nature of its service area. Further, natural increases in costs associated with insurances, workers compensation, increasing diesel fuel costs, increasing costs of direct material inputs and inflation, to name a few, are outpacing the rate of increases in MPSs allowed rates. Given the limited year-on-year load growth of MPSs service area, natural increases in costs continue to outpace growth.
Management does recognize a number of short-term financial and operating challenges. However, we believe our long-term outlook is encouraging. To improve long-term shareholder value and earnings, Management believes that the Company must increase its pace of organic and inorganic growth, while forming capital in an equally timely manner supportive of such growth. As previously noted, Management does not believe a status quo or stay as you are strategy will create long-term shareholder value for MAM. Further, given the impact of electric deregulation, generation divestiture, and disaggregation of the electric utility industry within Maine, combined with the lagging economy of MPSs service area, Management does not believe reverting to its core regulated wires business can generate adequate long-term shareholder value. Through more timely execution of MAMs inorganic growth strategy, including formation of growth capital, as well as improved organic growth, Management is focused on increasing earnings across all business lines. Should the Company not achieve a level of unregulated growth consistent with the need to create long-term shareholder value within a reasonable timeframe, Management and the Board of Directors will need to assess strategic alternatives to its current growth strategy. Resulting actions could involve the sale or partial sale of certain or all unregulated assets or other alternatives, recognizing the need to act prudently in protecting and enhancing long-term shareholder value. Management does believe that the timely and efficient implementation of the Companys growth strategy can result in long-term shareholder value.
Unregulated Engineering Services
The building sciences, energy efficiency, asset management and development, and engineering services segments growth strategy expands MAMs business and revenue models to a professional services model allowing for revenue generation through a combination of pricing options including, but not necessarily limited to fee-for-service hourly rates, flat fees, percentage-of-construction projects, shared savings, and performance contracting. Through the delivery of customer-centric technical consulting, engineering design and sustainable solutions regarding the asset management, development,
renewal, and expansion of facilities and on-site energy utilities infrastructure serving such facilities, we ultimately seek to purchase, design, construct, own, lease and/or operate on-site energy infrastructure and facilities. Revenues from such potential asset-based projects range from fee-for-service design fees to long-term leases to long-term contracts for output. This operating segment includes The Maricor Group parent company and its subsidiaries, The Maricor Group New England and The Maricor Group, Canada Ltd. Its primary geographic markets are New England and Atlantic Canada with an expanding focus across the country of Canada. Its vertical market focus includes local, state, provincial and national governments, schools, universities, hospitals, institutional and non-retail commercial.
Unregulated engineering services operations began in November 2003 with the creation of The Maricor Group and The Maricor Group, Canada Ltd followed by the acquisition of Eastcan Consultants, Inc. in Moncton, New Brunswick, Canada in December of that year. Morris & Richard Consulting Engineers, Ltd., located in Halifax, Nova Scotia, Canada and RES Engineering, Inc. located in Hudson and Boston, Massachusetts were acquired on June 1, 2004, and June 15, 2004, respectively.
The results by division are as follows:
TMGs (the parent company) loss of approximately $386,000, or ($0.24) per share in 2005, compares to a loss of $423,000 or ($0.26) per share in 2004. The 2005 loss consisted of $117,000 of interest expense, $45,000 of corporate D&O and medical insurance, $144,000 of legal and consulting costs, and other smaller expenses. The 2004 loss was largely attributable to sales, marketing and integration costs during the start-up and acquisition periods for this segment.
The Maricor Group New England division lost $243,000 or ($0.15) per share in 2005, and had net income of $55,000 or $0.03 per share in 2004. This division was acquired in June 2004. The 2004 results represent only six months of activity, compared to twelve months in 2005. TMGNEs loss was attributable to, but not necessarily limited to, costs associated with consolidating operations from Hudson to Boston, Massachusetts, employee transitioning costs associated with the geographic consolidation and purchase of RES, and lagging market traction due to insufficient business development efforts.
The Maricor Group, Canada Ltd division lost $60,000, or ($0.04) per share in 2005 and $120,000 or ($0.07) per share in 2004. The 2004 loss at TMGC was also largely attributable to sales, marketing and integration costs during the start-up and acquisition periods. The 2004 results for TMGC include only six months of activity for the M&R division, which was acquired in June 2004, and a full year of activity for the Eastcan division, which was acquired in December 2003.
Management has and is undertaking steps to address the lagging performance of TMG and its subsidiaries. Business operations related to TMGNEs Hudson office have ceased, as operations are consolidated in its expanded Boston office, reflecting the reality that most of the subsidiarys market and customer base is in the Greater Boston area. While overall staffing experienced some downsizing due to the consolidation of the two offices, additional hires have been and are being made, seeking to
upgrade skills sets in the process. In addition, as MAM migrates toward greater decentralization, subsidiaries are encouraged to be more independent and entrepreneurial, operating under enterprise-wide policies, in an attempt to minimize corporate allocations and unnecessary bureaucracy. Such decentralization is designed to promote decision-making closer to the customer and actual profit and loss center. Further, as mentioned, there is an increased focus on sales, expanding from the seller-doer model only to a full-time professional business development staff capable of selling and structuring higher value offerings in the sustainable lifecycle asset management and energy efficiency areas, while implementing continuing cost controls. However, the long-term profitability of TMG and its subsidiaries is clearly dependent upon achieving increased revenues resulting from increased investments in marketing and sales personnel and processes, diversifying sales away from a predominance of design engineering services and the seller-doer model to high level business development, structuring staff capable of selling higher margin products and services, and increasing the overall scale of the unregulated subsidiaries through timely strategic acquisitions.
Unregulated Engineering ServicesOperating Revenue
TMG and its subsidiaries revenues for the years ended December 31, 2005, 2004 and 2003 (in thousands of dollars) :
Total revenue is up 55% from 2004 to 2005, primarily due to the acquisitions of M&R and RES in June 2004. These subsidiaries contributed $2.19 million more revenue in 2005 than 2004. Revenue at the Moncton division, which operated for a full year in both 2004 and 2005, was $1.33 million in 2005, compared to $1.11 million in 2004, up 20% year-over-year.
The principal types of projects producing revenue for the three companies were the original acquisitions primary historical business line, mechanical and electrical engineering design and design/build projects on a fee-for-service basis with an increasing emphasis on energy efficiency, particularly within Canada. Increasingly, TMG is focusing on sustainable facility lifecycle asset management, energy efficiency and emissions reductions offerings, as well as development of end-user energy assets, such as central utility plants, all typically higher value and higher margin offerings.
Unregulated Engineering Services Operating Expenses
The Operation and Maintenance expenses above consist primarily of $5.15 million of direct labor expenses, direct contract costs, marketing, sales, and business development expenses, labor, overheads, and consulting services for developing business relationships and re-branding this business segment as The Maricor Group of companies. The remaining expenses of approximately $778,000 consist of legal,
consulting, insurance, travel, occupancy, office supplies and other administrative and general expenses. These costs increased $1.97 million or 49% over 2004. The majority of this increase, approximately $1.79 million, was from including the full year of activity for TMGNE and TMGC in 2005, compared to only the partial year in 2004 from the time of acquisition of M&R and RES through December 31.
Unregulated Real Estate Subsidiary Results
The following section details the operations of the unregulated real estate operating segment, including Maricor Properties Ltd and its subsidiaries, Mecel Properties Ltd, and Cornwallis Court Developments Ltd.
Unregulated real estate operations began in June 2004 with the formation of Maricor Properties and the acquisition of Mecel Holdings from the original owners of Morris & Richard Consulting Engineers, which was purchased by TMG. Mecel Holdings, later eliminated and changed to Mecel Properties, Ltd, owns an approximate 10,000 square foot facility leased to TMGCs Halifax, Nova Scotia division. These lease revenues are eliminated in consolidation. In August 2004, Maricor Properties purchased an approximate 40,000 square foot office building located at 77 Vaughan Harvey Boulevard in the downtown area of Moncton, New Brunswick. The vacant facility was in need of revitalization, which was undertaken using the expertise of TMGC to upgrade the facilities mechanical and electrical systems, with additional architectural, aesthetic and landscaping improvements. The facility was partially leased (approximately 40%) during 2005 to a third party tenant and TMGCs Moncton division. Lease revenues from TMGCs Moncton division are also eliminated in consolidation. In late 2005, Management was successful in leasing-up the facility with leases with third parties being signed during early 2006 and tenant improvements under construction in early 2006 as well. The leasing of the facility will have a positive impact on Maricor Properties in 2006.
In October 2005, Maricor Properties acquired Cornwallis Court Developments Ltd, the owner of an approximate 60,000 square foot office facility fully leased near the Citadel in downtown Halifax, Nova Scotia. The facility is predominately leased to the Nova Scotia provincial government and the Canadian federal government under long-term leases. In addition, during the year Maricor Properties entered into a new 50/50 joint venture, Maricor Ashford Ltd, with Ashford Investments Ltd, an Atlantic Canadian real estate development, investment and management company. The joint venture was created to expand both organizations investment goals, as well as to implement a more aggressive development program and expand third party facilities management activities. In approximately one and a half years, Maricor Properties, with little capital investment by its parent company, has amassed real estate with appraised values of over $10.2 million CDN, as compared to an approximate purchase price of $9.1 million CDN, including approximately $1.5 million in renovations and tenant up-lifts in the Vaughan Harvey Building. Maricor Properties current properties are nearly completely leased, not including several thousand square feet reserved for the expansion of TMGC in Moncton.
Maricor Properties net loss in 2005 was $93,000 more than the net loss for 2004. It should be noted that 2004 represented approximately half a year of performance due to its creation mid-year 2004. Of this loss in 2005, $80,000 was attributable to depreciation expense on the buildings. As noted, throughout 2005, Maricor Properties primarily leased space to the TMGC division of The Maricor Group, with only one third-party tenant. However, beginning with the acquisition of Cornwallis Court Developments Ltd, and the signing of additional leases in 2006 at the Vaughan Harvey Boulevard building, Maricor Properties has expanded its third-party tenant base, cash flows and expected earnings. Maricor Properties does expect additional expenses in 2006 associated with Maricor Ashford Ltd and its planning and implementation of potential real estate development projects proposed within Atlantic
Canada. In addition, Maricor Ashford Ltd continues to evaluate and consider additional investments in existing real properties within Atlantic Canada.
Prior to the creation of Maricor Ashford Ltd, facility management was performed under contract by Ashford Properties, a subsidiary of Ashford Investments. Subsequent to the development of the joint venture, Maricor Ashford has assumed responsibility for Maricor Properties and its subsidiaries real estate and currently utilizes a services agreement that effectively seconds members of Ashford Properties facility management staff until an adequate critical mass of owned and third party property management contracts can be secured to justify the expansion of its facility management staff.
Unregulated Software Technology Results
Maricor Technologies, Inc., was created in February 2005, followed by the acquisition of certain lifecycle asset management and capital budget planning software assets from Delinea Strategic Asset Management. MTI incurred a loss of $318,000 during 2005. Of this amount, $298,000 is attributable to the amortization of software costs, partly offset by an income tax benefit of approximately $119,000. Throughout 2005, the focus of MTI was on expansion of its asset management and capital planning software solutions supporting its existing customers, while increasing its market competitiveness. Additional 2005 focus was directed toward customer retention post-acquisition of the iPlan and Building Blocks software solutions. MTI was highly successful in 2005 in retaining its existing customer base and has begun its marketing and sales expansion targeting new customers and expanded channel marketing partners.
Recognizing increasing market demand for facilities-related software solutions that support sustainability and energy management, MTI entered into technology agreements with the Battelle Memorial Institute and GridLogix to support a streamlined energy capital planning process for facilities and demand-side management programs. These new products are projected for release during the first half of 2006.
Regulated Utility Operations
The following discussion includes the operations of MPS and Me&NB:
MPSs core T&D earnings were $2.26 million for 2005, compared to $3.04 million and $3.13 million in 2004 and 2003, respectively. As explained more fully below, the operating expenses of the utility increased approximately $1.47 million in 2005, compared to 2004. Operation & maintenance expense increased $287,000, or 2%, while amortization of stranded costs increased $522,000. These decreases in net income were partly offset by an increase in regulated utility revenue of $580,000, or approximately 2%, and the expiration of a special discount for which MPS did not have recovery from ratepayers, which reduced 2004 non-operating income by $153,000.
Regulated Utility Operating Revenue
Consolidated revenues and Megawatt Hours (MWH) for the years ended December 31, 2005, 2004 and 2003, are as follows (in thousands of dollars) :
Revenue in all regulated retail customer classes increased in 2005, compared to 2004. Sales to residential customers in 2005 increased $390,000 or 2.8% over 2004. This increase was driven primarily by the 3,701 MWH or 2.1% increase in volume, partly due to an increase in the number of customers, and partly due to an increase in the volume of usage by customers.
While large commercial customer sales volume decreased slightly over 2004, revenue increased from $5.06 million in 2004 to $5.23 million in 2005, an increase of $168,000 or 3.3%. The largest increase was $183,000 from one large customer which was in business for all of 2005, but only three months of 2004.
The volume of sales to medium service customers decreased approximately 1%, or 1,082 MWH, due to a 1% decrease in the number of customers. Revenue dollars increased slightly, up $33,000. Small commercial sales had the largest increase in volume, up 2,928 MWH or 3.3% in 2005, compared to 2004. The increase in volume is primarily among the local potato growers and their higher costs for storage of the 2004 crops in 2005. This additional volume resulted in an increase in revenue of $239,000 or 3.6%.
Other operating revenue decreased by $256,000 from 2004 to 2005. The largest decreases were in miscellaneous and other electric revenues, associated with contracted utility work.
For 2004, the regulated retail sales volume was 548,685 MWH, an increase of 1.6% over 2003 sales of 540,214 MWH. Sales to residential customers in 2004 were consistent with sales in 2003, increasing by 972 MWH or 0.6%. The increase in revenue from residential customers was primarily attributable to the November 1, 2003 rate increase. The volume of sales to large commercial customers increased 5,796 MWH or 3.5% from 2003 to 2004. Several of the Companys large commercial customers have undergone renovations or expanded production during 2004, leading to the increase in volume.
Sales to medium commercial customers increased 1.4% or 1,534 MWH from 2003 to 2004. There was a 2.3% increase in the number of medium service customers, year over year. Small commercial customer sales volume of 90,032 MWH in 2004 was consistent with the sales of 89,882 MWH in 2003.
Other regulated retail revenue increased slightly from 3,357 MWH in 2003 to 3,376 MWH in 2004.
Other operating revenue increased $670,000 from 2003 to 2004. The largest increase was transmission revenue, which is up approximately $290,000 due to increases in the FERC transmission rates. Special discounts also increased $234,000.
For more information on regulatory orders including the most recent rate increases, see Part I, Item 3, Legal Proceedings.
Regulated Utility Expenses
For the years ended December 31, 2005, 2004 and 2003, regulated operation and maintenance expenses and stranded costs are as follows (in thousands of dollars) :
Transmission and distribution expenses increased by $843,000 or 26.8% in 2005 compared to 2004. The largest increase in 2005 was transportation expenses allocated to transmission & distribution activities, which increased approximately $469,000 over 2004. This was a result of both an increase in the cost pool of $244,000, which includes fuel costs, repair costs and labor costs for employees working in the garage, and an increase in the rates at which the dollars are applied. Also, in past years under the PCB mitigation program, the transformers were removed from the field and brought on-site for testing. In 2005, MPS changed their testing program to now do sampling in the field, and only remove the transformer if it is contaminated, a more efficient process that costs less overall, but shifted additional dollars to expense, rather than capital costs. This has increased the expense portion of this program by approximately $95,000. Other significant costs during 2005 include additional labor overheads of $44,000, and an increase of $57,000 in external tree-trimming costs. The remaining change is due to other, smaller changes year-over-year.
Transmission and distribution expenses were $3.14 million in 2004, an increase of $28,000 or 0.9% from $3.11 million in 2003. Transmission expenses decreased approximately $8,000 during this period, offset by an increase in distribution expenses of $36,000.
Customer service expenses have decreased $342,000 or 25.4% from 2004. Historically, MPS has reserved for under- and over-collections on SOS accounts receivable, assuming the risk for these receivables. However, MPS has the right to increase or decrease the withholding rate in the next SOS contract to collect the historical under-withholding, as well as the current estimate of uncollectible amounts. Therefore, MPS does not have risk for these receivables, and has removed the reserve from this balance. This resulted in a $310,000 decrease in bad debt expense.
Customer service expenses decreased $106,000, from $1.45 million in 2003 to $1.35 million in 2004. The largest decrease was in meter reading expenses, which were reduced by $70,000 in 2004, because automatic meter reading was in place for one-third of our customers for a portion of 2003 and during 2004.
Administrative and general expenses were down slightly from $9.58 million in 2004 to $9.36 million in 2005. Legal expenses for regulatory issues decreased $132,000 year-over-year, primarily due to reduced legal costs associated with the transmission rate filings. The net health insurance cost to the company also decreased by $103,000 from 2004 to 2005. Finally, general advertising expenses decreased from $185,000 in 2004 to $80,000 in 2005. These decreases were partly offset by an increase in administrative and general salaries of approximately $177,000. The remaining change in administrative and general costs is due to other smaller changes in activity from 2004 to 2005.
Administrative and general expenses in 2004 were $9.58 million, an increase of $1.34 million from 2003. Costs allocated to MPS by MAM for services such as Sarbanes-Oxley compliance, legal and audit services and corporate governance totaled $2.28 million in 2004, compared to $876,000 for the last six months of 2003. As a result of an MPUC order in its rate case in the third quarter of 2003, MPS was allowed to recognize a regulatory asset and reduce operating expenses by $402,000 for certain voluntary early retirement costs expensed in the fourth quarter of 2002. Amortization of these costs in 2004 totaled $57,000. Other employee benefits, excluding the impact of the voluntary early retirement plan (VERP), increased approximately $315,000, primarily due to increases in employee medical expenses and pension expenses. Hosting fees for the Companys Oracle-based financial system increased expenses by $338,000 for 2004, compared to 2003. The Company has also expanded its regional economic development program, incurring an additional $97,000 of costs during 2004. Legal expenses incurred directly by MPS increased $136,000 from 2003 to 2004. Total expenditures for legal services by MPS decreased during that same period; however, more of the 2003 costs were related to regulatory proceedings, including the alternative rate plan, and therefore were deferred, than in 2004.
The increases in stranded costs from 2003 to 2004 and 2004 to 2005 reflect the increase in revenue requirements approved in MPUC Docket No. 2003-666. The rates per this docket were implemented March 1, 2004.
The stranded costs for Wheelabrator-Sherman as well as $3.0 million and $3.1 million of the stranded costs for Maine Yankee for 2005 and 2004, respectively, represent actual cash expenses during the year. Other costs represent actual amortization or recognition of regulatory assets and regulatory liabilities.
Unregulated Energy MarketingEnergy Atlantic Discontinued Operations
On March 1, 2004, EA suspended all active operations and was classified as a discontinued operation in accordance with FASB No. 144, as discussed in more detail below. EA participated in the wholesale power market from 1999 until March 1, 2000, when it began selling energy in the retail electricity market within the State of Maine. The retail market consists of two sectors, Standard Offer Service (SOS) and Competitive Energy Supply (CES). The MPUC periodically requests bids from CES providers for SOS in each utility service territory.
In connection with its February 21, 2003, announced withdrawal from the retail electricity markets in northern Maine, EA ceased all of its energy marketing activities in MPSs service territory, as well as the balance of the State, effective March 1, 2004, with the intent to stay inactive until market conditions, the availability of supply, the mandate for stringent credit requirements and the risk environment improved. EA continued to serve its existing contracts in Maine through their expiration on February 27, 2004. CES sales, primarily in northern Maine, were approximately $6.1 million in 2003.
Although Management will continue to monitor both U.S. and Canadian deregulated markets to evaluate the merits of possible re-entry into the deregulated electric energy retail market, it is doubtful that market conditions, credit requirements and risks will become favorable for re-entry. Management does not foresee re-entry into the CES market in the near future and cannot predict if or when it may re-activate EA. EA has no employees and its operations have been discontinued.
The Company recognized income (loss) from discontinued operations of $4,000, $(408,000), and $(143,000) for the years ended December 31, 2005, 2004 and 2003, respectively, classified as discontinued operations in the Statement of Consolidated Operations. The 2005 net income from discontinued operations represents the continued activity to finalize the shutdown of EAs operations. This activity is expected to be complete in April 2006. The 2004 net loss represents additional software lease expense of $181,000, recognized on the buy-out of a software lease by EA, $172,000 for employee severance payments, and a loss on disposal of fixed assets of $69,000.
The following table summarizes the statement of operations for EA and the corporate services provided to EA for each of the past three years:
The major classes of assets and liabilities of the discontinued operations included in the Companys consolidated balance sheets as of December 31, 2005, 2004 and 2003, are as follows (in thousands of dollars) :
In preparing the financial statements in accordance with generally accepted accounting principles, Management must often make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the date of the financial statements and during the reporting period. Some of those judgments can be subjective and complex, and actual results could
differ from those estimates. The Companys most critical accounting policies include regulatory assets and liabilities, revenue recognition, goodwill and intangible assets and software amortization, and which are described in detail below.
Regulatory Assets and Liabilities
Pursuant to Statement of Financial Accounting Standards No. 71 (SFAS 71), Accounting for the Effects of Certain Types of Regulation, the Company capitalizes, as regulatory assets, incurred and accrued costs that are probably recoverable in future electric rates. It also records, as regulatory liabilities, obligations to refund previously collected revenue or to spend revenue collected from customers on future costs.
Unfunded future income taxes and deferred income taxes are amortized as the related temporary differences reverse. Unamortized loss on debt retirements is amortized over the lives of the related debt issues. Nuclear plant obligations, deferred fuel costs, other regulatory assets and other regulatory liabilities are amortized over various periods in accordance with MPSs current rate plans. MPS earns a return on substantially all regulatory assets for which funds have been spent.
The Company believes that MPSs electric transmission and distribution operations continue to meet the requirements of SFAS 71, and that regulatory assets associated with those operations, as well as any generation-related costs that the MPUC has determined to be recoverable from ratepayers, also meet the criteria. At December 31, 2005, $62.37 million of regulatory assets remained on MPSs books. These assets will be amortized over various periods in accordance with MPUC approved rate orders.
MPS records an estimate for revenue for electricity delivered, but not yet billed to customers. This estimate requires MPS to make certain assumptions. A change in those assumptions could cause the amounts reported as revenues to change.
In July 2000, MPS began recording the difference between the approved tariff rate for two large industrial customers and their current special discount rates, under contracts approved by the MPUC, as accrued revenue. The resulting deferred asset will be subsequently collected in rates as approved by the MPUC. During 2005 and 2004, $280,000 was recognized as stranded costs associated with these two contracts. The MPUC approved a third special discount during 2004 in Docket No. 2004-88, under which MPS has deferred $495,000 and $248,000 as of December 31, 2005 and 2004, respectively. Recovery of this special discount has not yet begun.
Maricor Technologies, Inc. is engaged as a seller and licensor of software. Generally, revenue will be recognized in accordance with Statement of Position No. 97-2 (SOP 97-2), Software Revenue Recognition, as amended, and Statement of Position No. 98-9 (SOP 98-9), Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions. For multiple element license arrangements, the license fee is allocated to the various elements based on evidence of fair value. When a multiple element arrangement includes rights to post-contract customer support, the portion of the license fee allocated to support is recognized ratably over the term of the arrangement.
EAs sales for the years presented were CES sales to individual retail customers within the State of Maine, all of which expired by February 27, 2004. EA negotiated the price directly with the customer, maintained customer service responsibility and had collection risk. CES activity is recorded on a gross basis to include the related revenues and purchased power expenses. Additionally, EAs activity has been accounted for as non-trading since Management has determined it does not meet the definition of a trader as defined in EITF Issue 98-10, Accounting for Energy Trading and Risk Management Activities, which was amended by EITF Issue 02-03, Accounting for Contracts Involved in Energy
Trading and Risk Management Activities. Refer to Note 3 to the Consolidated Financial Statements, Discontinued OperationsEnergy Atlantic for further discussion.
Percentage-of-Completion Accounting for TMG Contracts
Revenues and profits from The Maricor Groups engineering contracts are recognized on a percentage-of-completion basis for the period. Costs incurred to date are divided by total estimated costs to obtain the percentage completed. This percentage multiplied by the total estimated profit is the gross profit earned to date on the contract. Gross profit earned to date on the contract plus costs incurred to date on the contract equals revenues recognized to date. Revenue recognized to date compared to billings to date results in either under- or over-billings. Losses on contracts are recognized in full if there is evidence that an overall loss will be sustained. The provision is computed on the basis of the total estimated cost to complete the contract and reflects all elements of costs included in contract costs. Costs incurred on approved change orders are treated as job costs for that particular job. Costs incurred on unapproved change orders are treated as costs in the period in which they are incurred if it is not probable that the costs will be recovered through a change in the contract price. If it is probable that the cost will be recovered through a change in the contract price, the costs are deferred until there is an agreed upon change in the contract price.
In accordance with normal practice in the construction industry, The Maricor Group includes in current assets and current liabilities amounts related to construction contracts realizable and payable over a period in excess of one year. Deferred contract revenue represents the excess of billings to date over the amount of contract costs and profits (or contract revenue) recognized to date on the percentage of completion accounting method on certain contracts. Deferred contract revenues related to The Maricor Groups contracts were $132,000 and $109,000 at December 31, 2005 and 2004, respectively. Unbilled contract revenue represents the excess of contract costs and profits (or contract revenue) recognized to date on the percentage of completion accounting method over billings to date on the remaining contracts. Unbilled contract revenue results when the appropriate contract revenue amount has been recognized in accordance with the percentage-of-completion accounting method, but a portion of the revenue recorded cannot be billed currently due to the billing terms defined in the contract and/or costs, recorded at estimated realizable value, related to unapproved change orders or claims incurred. Unbilled contract revenue related to The Maricor Groups contracts was $816,000 and $399,000 at December 31, 2005 and 2004, respectively.
Goodwill and Acquired Intangibles
The Companys business acquisitions may result in goodwill and other intangible assets, which affect the amount of future period amortization expense and possible impairment expense that the Company will incur. The Company has adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets, which requires that the Company, on an annual basis, calculate the fair value of the reporting units that contain the goodwill and compare that to the carrying value of the reporting unit to determine if impairment exists. Impairment testing must take place more often if circumstances or events indicate a change in the impairment status. In calculating the fair value of the reporting units, Management relies on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, and transactions and market place data. There are inherent uncertainties related to these factors and Managements judgment in applying them to the analysis of goodwill impairment. If actual fair value is less than the Companys estimates, goodwill and other intangible assets may be overstated on the balance sheet and a charge would need to be taken against net earnings.
MAM selected November 30 as the date for their annual impairment test. Management has concluded that no impairment exists as of the test date of November 30, 2005, or at December 31, 2005.
Amortizable Intangible Assets
The Company has identifiable intangible assets from the acquisition of unregulated mechanical and electrical engineering companies. These intangible assets are identified as the expected profit from the backlog of projects in progress as of the date of acquisition and from the value derived from the client lists from these service firms. These assets are amortized over their estimated useful lives, which are approximately one year for the backlog and three years for the client lists.
Pension and Other Post-Retirement Benefit Plans
MPS has pension and other post-retirement benefit plans, principally healthcare benefits, covering substantially all of its employees and retirees. In accordance with Statement of Financial Accounting Standards No. 87 (SFAS 87), Employers Accounting for Pensions, and Statement of Financial Accounting Standards No. 106 (SFAS 106), Employers Accounting for Post-retirement Benefits Other Than Pensions, the valuation of benefit obligations and the performance of plan assets are subject to various assumptions. The primary assumptions include the discount rate, expected return on plan assets, rate of compensation increase, health care cost inflation rates, expected years of future service under the pension benefit plans and the methodology used to amortize gains or losses. Changes in those assumptions could also have a significant effect on the Companys non-cash pension income or expense or the Companys post-retirement benefit costs. For additional information on the Companys benefit plans, see Note 10 to the Consolidated Financial Statements, Benefit Programs, which is incorporated in this section by this reference.
Capitalized Software Costs
Maricor Technologies allocated $1.56 million to software costs related to the acquisition of their lifecycle asset management software in February 2005. Since that point, Maricor Technologies has capitalized an additional $101,000 of software development costs for software held for sale, in accordance with Statement of Financial Accounting Standards No. 86 (SFAS 86), Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. The estimated useful life is determined by product, and ranges from three to five years. Management has made a determination that no impairment exists at December 31, 2005.
Maricor Technologies expensed approximately $113,000 of research and development costs during 2005.
Statement of Financial Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes, requires an asset and liability approach to accounting and reporting income taxes. SFAS 109 prohibits net-of-tax accounting and requires the establishment of deferred taxes on all differences between the tax basis of assets or liabilities and their basis for financial reporting. For the years ended December 31, 2005, and 2004, management evaluated the deferred tax asset valuation and determined that no valuation allowance was needed.
MPS has deferred investment tax credits and amortizes the credits over the remaining estimated useful life of the related utility plant. MPS records regulatory assets or liabilities related to certain deferred tax liabilities or assets, representing its expectation that, consistent with current and expected ratemaking, these taxes will be recovered from or returned to customers through future rates.
Except for operating leases used for office and field equipment, vehicles and computer hardware and software, accounted for in accordance with Financial Accounting Standards No. 13 (FAS 13),
Accounting for Leases and noted in Note 12 to these financial statements, the Company has no other off-balance sheet arrangements. See Item 8 of this Form 10-K, Note 12 to Consolidated Financial Statements, Commitments, Contingencies and Regulatory Matters, under Off-Balance Sheet Arrangements for a summarization of payments for leases for a period in excess of one year for the years ended December 31, 2005 and 2004.
Maricor Properties Ltd is an equal partner in Maricor Ashford Ltd, a joint venture with Ashford Investments, Ltd., an unaffiliated real estate management company. Maricor Ashford Ltd is a real estate development and redevelopment company based in Moncton, New Brunswick, Canada. Management reviewed the characteristics of this joint venture in accordance with Financial Accounting Standards Board Interpretation No. 46(R), Consolidation of Variable Interest Entities, an Interpretation of ARB 51 (FIN 46(R)), and determined that Maricor Properties Ltd is not the primary beneficiary of this joint venture. Accordingly, the activity of Maricor Ashford Ltd has been recorded in these financial statements under the equity method, and Maricor Ashford Ltd is not consolidated with these financial statements. Maricor Properties investment in the joint venture totaled $46,000 at December 31, 2005. Also, Maricor Properties recognized $52,000 or 50% of the loss of Maricor Ashford as equity earnings in 2005.
Table of Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2005 ( in thousands of dollars ):
* MPS has one lease for a right-of-way with an undefined term. Because the amount of the liability cannot be determined, this lease has been excluded from the More than 5 years column. This lease payment is approximately $30,000 per year.
Maricor Properties Leases
Maricor Properties leases office space to the Moncton and Halifax operating divisions of The Maricor Group, Canada Ltd. Maricor Properties also has leases for office space to outside third parties. All of these leases are operating leases and any intercompany profit from rental revenue has been eliminated in consolidation. The minimum lease revenue expected from the third party lease arrangements does not include utilities and maintenance expenses that will be paid by the third parties.
5-Year Minimum Lease Payments for External Party Leases
The Companys cash and cash equivalents decreased from $1.19 million at December 31, 2004, to $781,000 at December 31, 2005. Net Cash Flow Provided by Operating Activity decreased by approximately $2.27 million, largely the result of decreased net income in unregulated operations, increased accounts receivable, decreased accounts payable, and increased benefit obligations.
The Companys Statements of Consolidated Cash Flows, of the Companys Consolidated Financial Statements as presented in Item 8 of this Form 10-K, reflects the Companys liquidity and sources of operating capital. Cash flow provided by operating activities in 2005 was $2.49 million, while net loss for the year was $220,000. The change in deferred regulatory and debt issuance costs was $4.08 million, principally the deferral of additional WS stranded cost, which was partially offset by an increase in deferred income taxes of $1.67 million. Net cash flow provided by financing activities totaled $4.62 million. During 2005, the Company had debt retirements of $6.46 million, including re-financings at MAM and TMG, as well as MPS bond repayments, and other note repayments, $2.2 million in long-term debt for refinancing acquisition debt, as well as MPSs refinancing of its short-term borrowings (see Notes 6 and 8 to the Consolidated Financial Statements). In 2005, the Company also paid $1.23 million in dividends and increased short-term borrowings by $10.11 million. In 2005, $7.53 million of net cash flow was used for investing activities. The Company invested $5.92 million in fixed assets, and $1.96 million in the acquisition of Cornwallis Court Developments Ltd. During 2005, $350,000 was received for the partial redemption of Maine Yankee common stock.
Cash flow provided by operating activities in 2004 was $4.76 million, while net income for the year was $1.32 million. The change in deferred regulatory and debt issuance costs of $4.42 million, principally the deferral of additional WS stranded cost, which was partially offset by an increase in deferred income taxes of $808,000, were both less than 2003. Net cash flow provided by financing activities totaled $4.53 million. During 2004, the Company borrowed $10.2 million in long-term debt to fund $4.2 million for two engineering companies and a real estate acquisition, as well as MPSs refinancing of its short-term borrowings. In 2004, the Company paid $1.83 million in dividends, used $1.5 million for sinking fund payments to retire long-term debt and reduced short-term borrowings by $2.34 million. In 2004, $12.44 million of net cash flow was used for investing activities. The Company invested $8.51 million in Fixed Assets; $6.28 million at MPS, $258,000 at TMG and $1.97 million at Maricor Properties Ltd, principally its purchase of the Vaughan Harvey Property in Moncton, New Brunswick, Canada. In addition, the Company invested $3.5 million in TMG, principally its purchase of Morris & Richard Consulting Engineers, Ltd. and RES Engineering, Inc. Finally, $601,000 was deposited in a restricted investment, primarily related to the above acquisitions. During 2004, $200,000 was received for the partial redemption of Maine Yankee common stock.
As part of the refinancing of short-term borrowing during 2005, MAM and certain of its subsidiaries agreed to certain financial and other covenants, such as debt service coverage ratios. In the event of a default, the various lenders could require immediate repayment of the debt. A default could also trigger increases in interest rates, difficulty obtaining other sources of financing and cross-default provisions within the debt agreements.
Due to negative cash flows from stranded cost deferrals for MPS and cash requirements for TMG, Maricor Properties and MTI, Management is working to ensure the Company has adequate credit facilities for 2006 to cover sinking fund payments, construction activities and other financial and working capital obligations.
The Company has the ability to raise capital through the issuance of common and preferred stock. The Company is authorized by its Articles of Incorporation to issue up to 5,000,000 shares of common stock and 500,000 shares of preferred stock. MPS can also issue $2.5 million of first mortgage bonds and $15.8 million of second mortgage bonds without bondable property additions.
The Companys common stock was used to finance the acquisition of The Maricor Groups subsidiaries. In the event that the price of MAM common stock is below a specified price when the current shareholders wish to sell it, The Maricor Group has agreed to pay the difference. There were 41,151 shares outstanding pursuant to this kind of agreement as of December 31, 2005. At a market price of $15.49 per share on that date, the total exposure was approximately $814,000.
In accordance with rate stipulations approved by the MPUC, for ratemaking purposes, MPS is required to maintain a capital structure not to include more than 51% common equity for the determination of delivery rates.
In the order approving the reorganization of MPS and the formation of Maine & Maritimes Corporation, the parties stipulated to the following conditions. The following relate to the availability of capital resources for MAM via its relationship with MPS:
· MPS will not make any loan to, or guarantee or assume any obligation of, MAM or any of its affiliates without prior MPUC approval.
· The MPUC will not place additional restrictions, in advance, on the dividend policy of MPS. The Board of Directors of MPS will continue to set dividend policy for MPS with due regard for the financial performance, needs and health of MPS and the maintenance of a safe, efficient and reasonable capital structure. Commencing on July 1, 2003, if at any time MPSs common dividend payout ratio (dividends per share divided by earnings per share) exceeds 1.0 (i.e. 100%) on a two-year rolling average basis, MPS will notify the MPUC in writing within thirty (30) days of the end of the calendar quarter (the initial two year period was April 1, 2001 through March 31, 2003.) The required notification should explain the circumstances (extraordinary or not) of this event and the financial condition of MPS. Moreover, the MPUC reserved the right in the future, should financial circumstances warrant, to impose limitations on the dividend policy of MPS. As of December 31, 2005, this limitation has not been exceeded; therefore, such notification to the MPUC has not been required.
· Securities issuances by MPS will be done independently of MAM and subject to such MPUC approvals as required. The proceeds of any securities issued by MPS will be used exclusively by MPS for its business.
· MAMs total non-utility investment, excluding accumulated unregulated retained earnings, will not exceed fifty million dollars (US$50,000,000) and such amount will exclude retained earnings from EA, provided that MPS may at any time seek an enlargement of this limitation for good cause shown.
· Without prior MPUC approval, MAM will not sell, pledge or otherwise transfer any common stock of MPS.
· To protect and maintain the financial integrity of the regulated utility, MPS and MAM agreed to maintain the common equity ratio of MPS at a level of not less than forty eight percent (48%) of the total capital at all times, provided that the MPUC may establish, for good cause shown, a lower ratio in connection with its authorization of a future debt issuance proposed by MPS. Total capital is defined as the sum of the following components: common equity, preferred equity, long-term debt, current maturities long-term debt, long-term capital leases, current maturities long-term capital leases, and short-term debt.
Reorganization Into Holding Company
On October 4, 2002, MPSs Board of Directors authorized MPS to reorganize into a holding company structure. As a result, on June 30, 2003, MPS became a wholly-owned subsidiary of MAM, the new holding company, following shareholder and several regulatory bodies. Me&NB remained a
subsidiary of MPS, and will remain so until all obligations have terminated, at which time it is proposed the subsidiary may be dissolved. The ownership of EA was also transferred to the holding company, MAM. To achieve this corporate structure, stock in MPS was exchanged for stock in the new holding company through a reverse triangular merger. MPS undertook the reorganization in order to maintain its focus on its core regulated business, while at the same time positioning MAM for more diversified growth.
Following the July 1, 2003, completion of the reorganization, shares of MPS common stock were converted on the books (with no exchange of certificates) into the same number of shares of common stock of MAM. The MAM common stock shares are currently traded on the AMEX under the ticker symbol MAM.
MPS owns 5% of the common stock of Maine Yankee Atomic Power Company (MY), which operated an 860 MW nuclear power plant in Wiscasset, Maine, that has ceased power operations and is now in the final stages of decommissioning.
Based on the decommissioning of the Yankee Atomic nuclear plant, MPS believes it is entitled to recover substantially all of its share of such costs from its customers and, as of December 31, 2005, is carrying on its consolidated balance sheet a regulatory asset and a corresponding liability in the amount of $10.8 million, which reflects MPSs 5% share of Maine Yankees most recent estimate of the remaining decommissioning costs, less actual decommissioning payments made since then, and discounted by a risk-free interest rate.
In accordance with its 1999 FERC rate case settlement, on October 20, 2003, MY filed a revised formula rate schedule with the FERC, proposing an effective date of January 1, 2004, when major decommissioning activities were expected to be nearing completion. The filing contained a revised decommissioning cost estimate and collection schedule to assure that adequate funds are available to safely and promptly decommission the Plant and operate and manage the independent spent fuel storage installation (ISFSI). In the filing, MY also requested a change in its billing formula and an increase in the level of collection for certain post-retirement benefits. To meet these needs, MY proposed to collect an additional $3.77 million per year through October 2008, over current decommissioning collection levels, exclusive of any income-tax liability, for the decommissioning and spent-fuel management expense, and to collect the amounts needed to replenish its Spent Fuel Trust for funds previously used for ISFSI construction from November 2008 through October 2010. On September 16, 2004, the FERC approved the new rates pursuant to a settlement reached by the active parties which reflected substantially similar terms to those proposed by MY in its October 2003 filing. MPSs share of this increase, approximately $189,000, will be recovered as stranded costs.
Federal legislation enacted in 1987 directed the Department of Energy (DOE) to proceed with the studies necessary to develop and operate a permanent high-level waste repository at Yucca Mountain in Nevada. The project has encountered significant delays, and the DOE indicated that the permanent disposal site was not expected to open before 2012, although originally scheduled to open in 1998. Maine Yankee cannot predict when or whether the Yucca Mountain project or any other project that would provide interim storage will be completed.
As an interim measure, until the DOE meets its contractual obligation to dispose of its spent fuel, MY constructed an ISFSI, utilizing dry-cask storage, on the Plant site and completed the transfer of the spent fuel and a comparatively small amount of greater-than-Class C waste to the ISFSI in February 2004. MYs current cost estimate is based on an assumption of long-term on-site storage. In accordance with a plan approved by the Securities and Exchange Commission, Maine Yankee has started the redemption of its common stock periodically through 2008.
For regulatory proceedings, see Part I, Item 3, Legal Proceedings, which is incorporated in this section by this reference.
The following represents Maine & Maritimes Corporations more significant risks. While every effort is made to describe the character of the organizations risks, it cannot warrant that this list is all inclusive. The Company, where possible, does take steps in each of the following areas to attempt to mitigate such risks.
(a) The Company had material interest rate risk until MPS fixed interest rates on three variable rate debt issues on September 9, 2003, with a derivative interest rate swap transaction. Upon execution of the interest rate swaps on September 9, 2003, MPS effectively fixed through maturity the rates on the 1996 Series due in 2021 and the 2000 Series due in 2025 at 4.57% and 4.68%, respectively. The rate on the 1998 Notes due in 2008 was also fixed at 2.79% through maturity. As of December 31, 2005, the 1996 and 2000 Series and the 1998 FAME Notes had outstanding balances of $13.6 million, $9.0 million and $5.01 million, respectively. The fixed rates are higher than the previous floating rates and continue to be as of the date of this filing. Although incurring no up-front cost to execute the swaps, MPS is currently incurring increased interest expenses. However, Management believes that the fixing of interest rates over the terms of the debt will serve to protect both shareholders and consumers from what it believes to be upward variable interest rate pressures. See Item 8 of this Form 10-K, Note 7 to the Consolidated Financial Statements, Accumulated Other Comprehensive Income (Loss), which is hereby incorporated by this reference, for a discussion on the impact on MPSs financial statements and further description of the interest rate swaps.
As discussed in previous Form 8-K, 10-K and 10-Q quarterly filings, MPS had partially mitigated its risk by purchasing a 6% interest rate cap on its two tax-exempt bonds, the 1996 Series and the 2000 Series, issued on MPSs behalf by the Maine Public Utility Financing Bank. The interest rate cap on the 1996 and 2000 Series expired in November 2003. MPS also purchased a 7% interest rate cap, which expires in 2008, for MPSs Taxable Electric Rate Stabilization Revenue Notes issued in 1998 on its behalf by the Finance Authority of Maine (FAME). Further discussion on these debt issues and the associated interest rate caps is contained in Item 8 to the Consolidated Financial Statements, Long-Term Debt, and is hereby incorporated by this reference.
(b) The Companys unregulated real estate development and investment subsidiary, Maricor Properties Ltd, and its subsidiaries, Cornwallis Court Developments Ltd and Mecel Properties Ltd, are subject to certain risks and uncertainties including, but not necessarily limited to interest rate risks associated with variable interest rates, shifts in local real estate market conditions; market-based competition; the inability to fully lease rental properties; facility performance related to unforeseen or unknown structural, mechanical and/or electrical systems failures; unexpected increases in property rehabilitation costs; new government regulations; and tenant credit and default risks.
(c) Transactions with Me&NB; The Maricor Group, Canada Ltd; and Maricor Properties Ltd are subject to foreign currency translation risk. Income and expenses are translated at average rates of exchange for the period of time the income is earned or the expenses are incurred. Assets and liabilities are translated at year-end exchange rates.
(d) The Maricor Group and its subsidiaries incurred equity price risk when it bought the stock of certain of its subsidiaries. Part of the consideration was MAM stock. In the event that the price of MAM common stock was below a specified price when the seller wished to dispose of it, The Maricor Group (or the applicable subsidiary) agreed to pay the difference. There are currently 41,151 shares outstanding pursuant to this kind of agreement. At a market price of $15.49 per share at December 31, 2005, the total exposure is approximately $814,000. A $1.00 change in the market price would impact this exposure by approximately $41,000.
Market price protection of a different sort was given by Maricor Technologies when it acquired the HCI assets. Part of the consideration there was MAM preferred stock which is convertible into 26,000 shares of MAM common stock on February 15, 2008, subject to some other conditions. To the extent that the market price of MAM common stock is then below $25 per share, the number of shares issuable on conversion is ratably increased, which could result in further dilution of MAMs common stock.
To the Board of
Directors and Shareholders of
We have audited the accompanying consolidated balance sheets and consolidated statements of long-term debt of Maine & Maritimes Corporation (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, shareholders equity and cash flows for the years then ended. Our audits also included the financial statement schedules for the years ended December 31, 2005 and 2004, listed in the Index at Item 15(a)(2). These financial statements and financial statement schedules are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Our audits were performed for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The schedules listed in the index at Item 15(a)(2) are presented for purposes of complying with the Securities and Exchange Commissions rules and are not part of the basic financial statements. In our opinion, the schedules referred to above presents fairly, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole for the years ended December 31, 2005 and 2004.
Caturano & Co., Ltd.
Report of Independent Registered Public Accounting Firm
To the Directors
and Shareholders of
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on Page 102 present fairly, in all material respects, the results of the operations of Maine & Maritimes Corporation and its subsidiaries and their cash flows for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 16(a)(2) on Page 105, 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 the Companys management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, 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 audit provides a reasonable basis for our opinion.
MAINE & MARITIMES CORPORATION AND SUBSIDIARIES
(In thousands of dollars, except share information)