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Maine & Maritimes 10-K 2008
Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SEC. 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission File No. 333-103749

Maine & Maritimes Corporation

(Exact name of registrant as specified in its charter)

Maine

(State or other jurisdiction of incorporation or organization)

30-0155348

(I.R.S. Employer Identification No.)

 

209 State Street, Presque Isle, Maine   04769
(Address of principal executive offices)   (Zip Code)

Registrant’s 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:

None

Indicate by check mark if a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes  ¨.    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  ¨.    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  ¨.

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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨.

  Accelerated filer  ¨.

Non-accelerated filer    ¨

  Smaller reporting company  x.

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  ¨.    No  x.

Aggregate market value of the voting stock held by non-affiliates at June 30, 2007: $45,032,471.

The number of shares outstanding of each of the issuer’s classes of common stock as of March 20, 2008.

Common Stock, $7.00 par value—1,677,862 shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Company’s definitive Proxy Statement to be filed pursuant to Regulation 14A no later than 120 days after December 31, 2007, which is the end of the fiscal year covered by this report, are incorporated by reference into Part III.

 

 

 


Table of Contents

MAINE & MARITIMES CORPORATION

FORM 10-K

For the Fiscal Year Ended December 31, 2007

For Glossary of Terms, see Page v

TABLE OF CONTENTS

 

PART I

Item 1.

  

Business

   1
  

General Descriptions of the Parent Company and its Subsidiaries

   2
  

Employees

   5
  

Affiliates and Associated Companies

   5
  

Financial Information about Geographic Areas

   5
  

Financial Information about Segments

   5
  

Competitive Conditions

   5
  

Company Financial Information

   6

Item 1a.

  

Risk Factors

   6

Item 2.

  

Properties

   10

Item 3.

  

Legal Proceedings

   11

Item 4.

  

Submission of Matters to a Vote of Security Holders

   13
PART II

Item 5.

  

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

   14

Item 6.

  

Selected Financial Data

   17

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   18
  

Annual Performance Summary

   18
  

Overview of Company Strategy

   19
  

Detailed Analysis of Changes in Financial Condition by Operating Segment

   23
  

Critical Accounting Policies

   28
  

Off-Balance Sheet Arrangements

   30
  

Table of Contractual Obligations

   30
  

Operating Capital and Liquidity

   31
  

Capital Resources

   33

Item 7a.

  

Quantitative and Qualitative Disclosures About Market Risk

   36

Item 8.

  

Financial Statements and Supplementary Data

   38
  

Report of Independent Registered Public Accounting Firm

   38
  

Consolidated Statements of Operations

   39
  

Consolidated Balance Sheets—Assets

   40
  

Consolidated Balance Sheets—Capitalization and Liabilities

   41
  

Consolidated Statements of Cash Flows

   42
  

Consolidated Statements of Common Shareholders’ Equity

   43
  

Statements of Long-Term Debt

   44
  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

   45
  

1. Accounting Policies

   45
  

2. Income Taxes

   54
  

3. Discontinued Operations

   56
  

4. Segment Information

   58
  

5. Investments in Associated Companies

   63
  

6. Short-Term Credit Arrangements

   64
  

7. Interest Rate Derivatives

   66

 

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8. Long-Term Debt

   66
  

9. Stock Compensation Plan

   68
  

10. Deferred Directors’ Compensation

   70
  

11. Benefit Programs

   70
  

12. Fair Value of Financial Instruments

   77
  

13. Commitments, Contingencies and Regulatory Matters

   77
  

14. Guarantor Arrangements

   82
  

15. Subsequent Events

   83
  

16. Divestitures

   83
  

17. Acquisitions

   84
  

18. Issuance of Maricor Properties Stock Acquired by Ashford Investments, Inc.

   85
  

19. Capital Leases

   86
  

20. Quarterly Information (Unaudited)

   87

Item 9.

  

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

   87

Item 9A(T).

  

Controls and Procedures

   87

Item 9B.

  

Other Information

   88
PART III

Item 10.

   Directors, Executive Officers and Corporate Governance    89

Item 11.

   Executive Compensation    90

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   90

Item 13.

   Certain Relationships and Related Transactions, and Director Independence    90

Item 14.

   Principal Accounting Fees and Services    90
PART IV

Item 15.

   Exhibits, Financial Statement Schedules    91
   SIGNATURES    92
   SCHEDULE I    93
   SCHEDULE II    97
   INDEX TO EXHIBITS    98
   CEO / CFO CERTIFICATIONS   

 

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Table of Contents

Glossary of Terms

 

AFUDC

    Allowances for the cost of equity and borrowed funds used during construction

AMEX

    American Stock Exchange

APP

    Aroostook Partnership for Progress

Ashford

    Ashford Investments, Inc.

CES

    Competitive Energy Supplier

CMP

    Central Maine Power Company

Cornwallis

    Cornwallis Court Developments Ltd

DOE

    Department of Energy

DSM

    Demand-Side Management

EA

    Energy Atlantic, LLC

Eastcan

    Eastcan Consulting Engineers

EPS

    Earnings per Share

Evergreen

    Evergreen Wind Power, LLC

FAME

    Finance Authority of Maine

FASB

    Financial Accounting Standards Board

FSP

    FASB Statement of Position

FERC

    Federal Energy Regulatory Commission

FIN

    FASB Interpretation Number

Gould

    Gould Electric Company

HCI

    HCI Systems Assets Management, LLC

IBEW

    International Brotherhood of Electrical Workers

ISFSI

    Independent Spent Fuel Storage Installation

ISO-NE

    ISO-New England

kV

    Kilovolt

LIBOR

    London InterBank Offering Rate

LOC

    Letter of Credit

MAM

    Maine & Maritimes Corporation

MAM USG

    MAM Utility Services Group

M&R

    Morris & Richards Consulting Engineers

Me&NB

    Maine & New Brunswick Electrical Power Company, Ltd

Mecel

    Mecel Properties Ltd

MEPCO

    Maine Electric Power Company, Inc.

MPC

    Maine Power Connection

MPS

    Maine Public Service Company

MPUC

    Maine Public Utilities Commission

MPUFB

    Maine Public Utility Financing Bank

MTI

    Maricor Technologies, Inc.

MWH

    Megawatt hour

NOI

    Notice of Inquiry

NPPBC

    Net Periodic Postretirement Benefit Cost

NPPC

    Net Periodic Pension Cost

NRC

    Nuclear Regulatory Commission

OATT

    Open Access Transmission Tariff

OCI

    Other Comprehensive Income

Pace

    Pace Engineering Limited

PBO

    Projected Benefit Obligation

PCB

    Poly Chlorinated Bi-phenol

RES

    RES Engineering, Inc.

ROE

    Return on Equity

 

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SAB

    SEC Staff Accounting Bulletin

SEC

    Securities and Exchange Commission

SFAS

    Statement of Financial Accounting Standards

SOS

    Standard Offer Service

T&D

    Transmission and distribution

TMG

    The Maricor Group

TMGC

    The Maricor Group, Canada Ltd

TMGNE

    The Maricor Group New England

VEBA

    Voluntary Employee Benefit Association

WPS

    WPS Resources Corporation, now known as Integrys

WPS-PDI

    WPS-Power Development, Inc.

WS

    Wheelabrator-Sherman

 

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Table of Contents

PART I

 

Item 1. Business

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. Maine Public Service Company and its wholly-owned inactive Canadian subsidiary Maine & New Brunswick Electrical Power Company, Ltd (“Me&NB”);

 

  2. MAM Utility Services Group (“MAM USG”), a wholly-owned United States subsidiary;

 

  3. Energy Atlantic, LLC (“EA”), an inactive subsidiary; and

 

  4. The Maricor Group (“TMG”) and its wholly-owned United States subsidiary The Maricor Group New England, Inc. (“TMGNE”), TMG’s wholly-owned Canadian subsidiary The Maricor Group, Canada Ltd (“TMGC”) and TMGC’s wholly-owned Canadian subsidiary Mecel Properties Ltd (“Mecel”), all of which are classified as discontinued operations.

MAM is also a 50% owner of Maricor Properties Ltd (“Maricor Properties”), a Canadian company formerly wholly-owned by MAM, and its wholly-owned Canadian subsidiary Cornwallis Court Developments Ltd. (“Cornwallis”).

Maricor Technologies, Inc. (“MTI”) was a former wholly-owned subsidiary of MAM. Substantially all of the assets of MTI were sold on April 13, 2007, and the legal entity of MTI was dissolved on June 28, 2007. The activity of MTI through dissolution of the company is reported in discontinued operations.

MAM was also a 50% owner of Maricor Ashford, an inactive joint venture with Ashford Investments, Inc. (“Ashford”). As of September 12, 2007, MAM sold its 50% ownership of Maricor Ashford to Ashford.

Maine & Maritimes Corporation and Subsidiaries

LOGO

 

Shading indicates continuing operations.

 

(1) Inactive companies.

 

(2) Companies classified as discontinued operations in these financial statements

 

(3) Equity investments.

 

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General Descriptions of the Parent Company and its Subsidiaries:

Continuing Operations:

 

   

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 regulated electric transmission and distribution utility and an unregulated utility services company, both operating within the State of Maine and classified for financial reporting purposes as continuing operations. MAM also had investments in mechanical, electrical and plumbing/fire protection engineering, facility asset lifecycle management and energy efficiency companies within the United States and Canada, and a facilities asset lifecycle management and sustainability software development company in the United States. As of December 31, 2006, these operations were reclassified for financial reporting purposes to discontinued operations. MAM is headquartered in Presque Isle, Maine.

 

   

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 MPS’s 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 73,000. 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”), now known as Integrys.

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 Company’s 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.

The economy of MPS’s service area, 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. The growing of broccoli has added diversity to the region’s agricultural economic base. Tourism, particularly related to snowmobiling and skiing, appears to be playing an increasing role in the area’s economy. The medical industry also represents a positive and growing economic force within the region, serving as a leading employer and job creation sector. Additionally, a 42 megawatt wind farm was commissioned during 2006 in Mars Hill, Maine. However, data appears to suggest that the northern Maine economy continues to lag behind national economic trends and is experiencing population losses, particularly among the service area’s youth and young

 

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adults. Attracting new businesses and jobs to northern Maine in an effort to reverse outward migration trends appears to be a continuing challenge for the area’s leaders and businesses, including MPS.

To combat the economic challenges in its service area, MPS participates in 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 helping to execute an economic development program. The efforts of Aroostook Partnership for Progress (“APP”) are intended to increase the area’s emphasis on economic development through improved focus on and funding for economic development.

Electric sales in the Company’s territory are seasonal, and the Company’s 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 MPS’s construction program is completed during the spring, summer and fall months.

MPS is subject to certain environmental standards and regulations. One of the larger environmental initiatives impacting MPS is the poly chlorinated bi-phenol (“PCB”) mitigation effort. 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 impact of this program is described further in Item 2, “Properties,” of this Form 10-K.

 

   

Maine & New Brunswick Electrical Power Company, Ltd., is an inactive Canadian subsidiary of MPS, which, prior to deregulation and generation divestiture, owned MPS’s Canadian electric generation assets. Me&NB was incorporated in 1903 under the laws of the Province of New Brunswick, Canada.

 

   

MAM Utility Services Group is a newly-formed wholly-owned subsidiary of MAM. MAM USG was incorporated in the State of Maine on September 27, 2007. The purpose of MAM USG is to provide utility-related services to clients on projects that MPS could not or would not be required to provide under State and Federal regulations. This includes transmission line and substation design and build services for generator projects outside the MPS service territory and contract work within MPS’s territory that MPS is not required to provide. MAM USG will focus on areas such as transmission infrastructure to support renewable generation, utility asset maintenance contracts and other utility-related services. In compliance with the MPUC’s Rules and its Reorganization Order in Docket 2002-676, these services must be provided under a separate subsidiary. MAM USG is in the business development stage and currently has no employees.

Equity Investments

 

   

Maricor Properties Ltd is a Canadian real estate development, redevelopment and investment company. It develops or invests in public and private facility projects involving the renewal or development of building infrastructure within revitalization districts. Maricor Properties Ltd was organized on May 28, 2004, in Halifax, Nova Scotia, Canada. On June 30, 2006, Maricor Properties issued stock to Ashford Investments, Inc. (“Ashford”), resulting in 50% ownership for both MAM and Ashford. Prior to this stock issuance, Maricor Properties was a wholly-owned subsidiary of MAM. Ashford is an Atlantic Canadian real estate development, investment and management firm, which provides management services to Maricor Properties and its subsidiaries. As part of the corporate strategy, MAM is seeking to divest its 50% share of Maricor Properties during 2008.

 

   

Cornwallis Court Developments Ltd. is a wholly-owned Canadian subsidiary of Maricor Properties, acquired on October 7, 2005. Cornwallis owns and operates the J. Angus MacDonald Building located in Halifax, Nova Scotia, Canada.

 

   

MAM was also an equal partner in Maricor Ashford Ltd, a joint venture with Ashford. Maricor Ashford was a real estate development and redevelopment company based in Moncton, New

 

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Brunswick, Canada. Since August 2006, this joint venture has been inactive. On September 12, 2007, MAM sold its 50% share of Maricor Ashford to Ashford.

Discontinued Operations

 

   

The Maricor Group was a facilities engineering and solutions company providing mechanical, electrical and plumbing/fire protection engineering consulting design services, energy efficiency solutions, facilities condition assessments, lifecycle asset management solutions, and emissions reduction services. TMG operated 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 was headquartered in Presque Isle, Maine, with offices in Boston, Massachusetts; Moncton and Saint John, New Brunswick; and Halifax, Nova Scotia. MAM divested its TMG operations as part of an overall shift in strategy described more fully in Item 7, “Management’s Discussion and Analysis.” The legal entities of TMG, TMGNE and TMGC are expected to be dissolved upon sale of Mecel Properties.

 

   

The Maricor Group New England, Inc. was the New England subsidiary of The Maricor Group offering its parent company’s defined services primarily within New England, particularly the Commonwealth of Massachusetts with an office in Boston, Massachusetts. TMGNE, formerly RES Engineering, Inc. (“RES”), was acquired by TMG on June 15, 2004. TMGNE operations ceased on August 31, 2007.

 

   

The Maricor Group, Canada Ltd was the Canadian subsidiary of The Maricor Group offering its parent company’s defined services primarily within the eastern Canadian provinces, particularly Atlantic Canada. Headquartered in Moncton, New Brunswick, TMGC maintained offices in Saint John, New Brunswick, as well as Halifax, Nova Scotia. TMGC acquired its first mechanical and electrical engineering services company, Eastcan Consulting Engineers (“Eastcan”), on December 1, 2003. On June 1, 2004, TMGC acquired Morris & Richards Consulting Engineers (“M&R”). On May 12, 2006, TMGC acquired the assets of Pace Electrical Engineering (“Pace”), an electrical engineering firm based in Moncton. All of these companies were operating divisions of TMGC, and were divested in June 2007.

 

   

TMGC is also the parent company of Mecel Properties Ltd. Mecel was formerly a Canadian subsidiary of Maricor Properties Ltd and owns the office building that housed the Halifax, Nova Scotia operating division of The Maricor Group, Canada Ltd. It was acquired by Maricor Properties on June 1, 2004, in conjunction with the acquisition of M&R by TMGC. Under the terms of the sale of stock of Maricor Properties to Ashford, MAM retained 100% of the economic ownership of this subsidiary, with the provision that either 50% of Mecel would be purchased by Ashford or that Mecel would be transferred to TMGC at a later date. On September 12, 2007, in order to fulfill this requirement, TMGC acquired Mecel. TMGC is seeking to divest its ownership of Mecel during the first half of 2008.

 

   

Maricor Technologies, Inc., formed on February 14, 2005, developed information technology and software products for sustainable governance of facilities, infrastructure and buildings. MAM divested its MTI operations on April 13, 2007, as part of an overall change in strategy described in Item 7, “Management’s Discussion and Analysis.” The legal entity of MTI was dissolved on June 28, 2007.

 

   

Energy Atlantic, LLC is a licensed, but currently inactive, CES of retail electricity. 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 Company’s (“CMP’s”) territory from March 1, 2000, through February 28, 2002, and 20% of the medium non-residential SOS in MPS’s territory from March 1, 2000, through February 28, 2001.

 

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Employees

At the end of 2007, the Company and its subsidiaries had the following number of employees:

 

     Employees
     2007    2006

Maine Public Service Company

   131    135

The Maricor Group

      77

Maricor Technologies, Inc.

      6
         

Total

   131    218
         

The Company’s consolidated payroll costs were $10.5 million for 2007 and $13.0 million for 2006. Payroll for continuing operations was $7.8 million in both 2007 and 2006. Changes to payroll costs of continuing operations were normal pay increases for the year, offset by the savings from positions eliminated in 2006. Payroll for discontinued operations decreased from $5.2 million in 2006 to $2.7 million in 2007, due to the sale of assets and closure of MTI in April, the sale of assets of TMGC in June and the closure of the TMGNE office in August. We anticipate no payroll expenses for the discontinued operations in 2008.

Approximately 37% of MPS’s 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. This agreement was amended October 25, 2006, to reflect the freeze on future salary and service accruals in the Company’s Pension Plan and the related increase to the employer’s 401(k) contribution. There were no amendments to the agreement in 2007.

No employees of the Company are covered under collective bargaining agreements that will expire within one year.

Affiliates and Associated Companies

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 Plant’s 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 approximately 180 miles long, which connects the New Brunswick Power (“NB Power”) system with the New England Power Pool (“NEPOOL”).

Financial Information about Geographic Areas

See Note 4 to the attached financial statements.

Financial Information about Segments

See Note 4 to the attached financial statements.

Competitive Conditions

See Item 1a. below.

 

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Company Financial Information

The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, 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 Company’s site under Investor Relations, Corporate Governance, is the Code of Business Conduct and Ethics, as well as the Company’s policy regarding Insider Trading and Dissemination of Inside Information.

 

Item 1a. Risk Factors

As with all companies, MAM is exposed to certain risk factors as a result of its operations. Management has identified the following key risk factors for the Company’s continuing operations and specific risks remaining for the discontinued operations.

Risk Factors Associated with Continuing Operations

Legislation and Regulation

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. The MPUC and FERC regulate the rates MPS is allowed to charge its customers. This includes determination of our allowed rate of return and rate structure, construction and operation of facilities, approval of depreciation and amortization rates and recovery of certain incremental costs, such as storm damage. The timing of rate changes and the results of regulatory proceedings could materially impact our results.

MPS adjusts its transmission rates annually; the last change was on July 1, 2007. MPS was involved in rate cases in 2006 for each of its rates: distribution rates under MPUC Docket No. 2006-024, establishment of the 2006 transmission rates under FERC Docket No. ER00-1053, and recovery of stranded costs for the period from January 1, 2007, through December 31, 2009, under MPUC Docket No. 2006-506. The only rates anticipated to change in 2008 are the transmission rates, which will be determined based on the formula established in FERC Docket No. ER00-1503. The change in any rates could have a positive or negative impact on earnings and cash flow, but the ultimate impact is unknown at this time.

MPS is also subject to local regulations, which may impact the location of our transmission and distribution facilities, and our ability to make repairs and upgrades to our facilities.

Other changes in legislation and regulation could impact MAM’s earnings and operations positively or negatively. Such changes could include tax rates changes or environmental or workplace law changes.

Construction of New Transmission Facilities

MPS, working with CMP, is seeking to develop a 345 kV transmission line to connect northern Maine to the ISO-New England (“ISO-NE”) control area, together with related system upgrades. MPS expects this line, if built, will increase reliability and competition and meet new load growth requirements from potential renewable generation projects. This project is being undertaken coincident with an on-going system impact study at ISO-NE, which was triggered by interconnection requests in connection with proposed new generation projects. Local, state and federal regulatory approvals and permits are required for this project. We may or may not be able to obtain the approvals required for this proposed transmission project. Other factors, such as cost and availability of materials, labor and subcontractors may increase the cost of the project or delay its completion.

 

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The Company has submitted notice to ISO-NE that, subject to certain conditions, it will seek to become a member of ISO-NE. Among the conditions is the requirement that the cost of the transmission project be included in the ISO-NE regional transmission rates. The Company cannot predict the outcome of this request, and it is possible that the conditions necessary for membership will not be met.

Finally, the Company will be seeking financing for this project. Financing risks, including the type, cost and availability of financing, are also risks in the development of this line.

Development of MAM Utility Services Group

MAM USG was formed on September 27, 2007. We perceive a high demand for the services MAM USG offers; however, the Company operates in a competitive market, and does not have an exclusive franchise. Competition for contracts comes from other engineering firms and utility construction contractors, and is a risk associated with the development of this business. While there is a potential risk of not developing a sufficient client base, the initial cost should be low because of MAM USG’s ability to develop this business line without a significant initial capital investment.

There are also risks when MAM USG secures contracts. Such risks include inaccuracy of cost estimates on fixed rate projects, risks from the use of subcontractors, collections risk, completion of construction risk and professional liability for engineering services. These risks are mitigated by Management’s experience with estimating utility engineering and construction costs, the negotiation of contracts, and professional liability insurance coverage.

Attraction and Retention of Qualified Employees

MPS and MAM USG are heavily dependent on the attraction and retention of qualified employees, including engineers and electricians. MAM maintains competitive wage and benefits packages for its employees, as well as certain third-party contractor arrangements to mitigate this risk. Inability to access enough qualified employees could result in deterioration of MPS’s service quality and MAM USG’s ability to compete in the marketplace.

Economy of the Region and General Economic Conditions

MPS operations are restricted to a territory in Aroostook County and northern Penobscot County, Maine. Our business follows the economy of the region we serve. During 2007, as energy supply rates increased, MPS experienced an increase in the number of disconnection notices to customers and payment arrangements for overdue bills. With the rise in heating costs this winter, we are anticipating potentially slower collections or an increase in uncollectible accounts during 2008. MPS has adjusted its reserve for uncollectible accounts based on the current indicators, and we will continue to closely monitor collection rates.

Limited population growth and economic expansion in the region could also negatively impact the utility’s ability to maintain their customer base. Potato farming and processing and the manufacturing of forest products, principally lumber, plywood, and oriented strand board, continue to be dominant economic forces within MPS’s service area. Temporary plant shutdowns and slow economic growth can reduce our earnings. MPS participates in APP, a public/private partnership for economic progress. The efforts of APP are intended to increase the area’s emphasis on economic development.

Competitive Conditions

Except for consumers served by municipal electric utilities within MPS’s service area, MPS has a nearly exclusive franchise to deliver electric energy in its service territory. MPS has little exposure to risk from competition.

 

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MAM USG operates in competitive markets and does not have an exclusive franchise. Competition for contracts comes from local and regional electrical engineering firms.

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.

Holding Company Structure

MAM is a holding company whose main assets are its investments in its subsidiaries, particularly MPS. The Company’s ability to pay dividends on common stock and satisfy required principal and interest payments on outstanding debt obligations is dependent on dividends from subsidiaries. There are regulatory restrictions on the amount of dividends MPS is allowed to pay MAM, particularly a provision limiting these dividends to 100% of the two-year rolling average of MPS’s net income. However, this limitation does not apply to the stranded cost free cash flows.

Interest Rate and Debt Covenant Risk

MAM, TMG and MPS have financial and other covenants on their financing arrangements. In the event of a default, the 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 with the debt agreements. The Company was in compliance with all debt covenants as of December 31, 2007.

As of December 31, 2006, MAM and TMG did not meet the interest coverage ratios required by these debt covenants. Both Bank of America and Katahdin Trust Company provided waivers for compliance with the debt covenants for the fourth quarter of 2006. Since that time, MAM and TMG have maintained compliance with all of their debt covenants.

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.

Pension Plan Investments

The MPS Pension Plan assets are invested in equity and fixed income investments. Changes in the stock market and accounting standards can materially impact MPS’s obligations under this plan, including the Plan’s impact on expense and cash flows. The Company has partly mitigated its risk through the freeze of future salary and service accruals under the Company’s Pension Plan, which went into effect on December 31, 2006.

Information Technology

Problems with computers and technology could result in billing errors or unintentional release of confidential consumer information. MAM goes to significant lengths to test its systems and protect against such events; however, the Company cannot warrant that such risks do not exist.

Environmental Risks

MAM, and particularly MPS, bear environmental risks associated with the former ownership of nuclear, diesel and oil-fired generation, as well as the ownership of transformers containing Poly Chlorinated Bi-phenols (“PCB’s”). Further, MPS has potential risks concerning claims related to electro-magnetic fields. While the Company takes significant steps to ensure prudent environmental practices, it cannot assure that risks do not exist

 

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from past or future environmental practices. Additionally, while the Company does not believe electro-magnetic fields represent a danger, particularly due to its lack of ownership of bulk transmission, it cannot warrant that claims could not be filed.

Aging Infrastructure and Reliability

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, which could result in harm to property or person, increased expenses and/or a reduction in revenue. 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. MPS also increased its capital expenditures in 2007 and its budgeted capital investments in 2008 to address this risk.

Weather

MPS’s electric wires infrastructure is 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’s infrastructure assets in the field, requiring incremental maintenance expense or loss of potential earnings due to outages.

Vandalism, Terrorism and Other Illegal Acts

MPS is subject to the risks of damage to others’ properties or human harm due to the failure of infrastructure. While MPS exercises 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 also particularly at risk for 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 will not happen.

This risk also applies to certain third-party generation and other electrical facilities. As a transmission and distribution company, MPS is allowed to charge ratepayers for only the use of its lines and other T&D facilities. This rate is based largely on energy consumption. The energy is supplied by an SOS or CES. The energy supplier facilities are subject to the same sort of risks as MPS facilities, including extreme weather conditions, breakdowns, acts of terrorism and other occurrences that could impact the availability of supply, and, in turn, MPS’s revenue.

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, with which the utility has successfully competed 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 MPS’s delivery system.

Discontinued and Real Estate Operations

These risks are specific to the discontinued unregulated engineering, real estate and software subsidiaries.

Professional Liability

TMG and its subsidiaries are subject to risks associated with engineering design errors and/or omissions. As noted above, MAM USG provides construction, engineering and design services in connection with electric

 

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generation infrastructure projects, and, therefore, is subject to similar risks. The sales of TMGC assets and the closure of TMGNE operations eliminated exposure on future projects, but MAM could still be liable for errors and omissions on past projects for several years. The Company carries insurance to mitigate these risks.

Final Settlement of Remaining Obligations

There are certain liabilities which remain from either the operations or sales and closures of the unregulated engineering and software companies. MAM has estimated these remaining obligations and accrued for known liabilities, such as the lease of office space formerly used by TMGNE in Hudson, Massachusetts, the remaining two payments to the former Pace principals and insurance deductibles for expected claims. These accruals reflect the best information available at the time of filing; however, actual results may vary materially from our estimates.

Divestiture of Unregulated Real Estate

MAM intends to divest its unregulated real estate investments. This process involves many risks, including, but not limited to, identification of suitable purchasers, completion of due diligence and negotiation of the terms of the sale. At this time, no material gain or loss is anticipated on the sale of these investments. However, actual results could vary.

Equity Price Risk

Market price protection was given by MTI under the terms of the sale of the MTI assets to HCI Systems Assets Management, LLC (“HCI”) on April 13, 2007. Under this agreement, HCI converted its remaining 6,500 preferred shares to 26,000 common shares on that date. If MAM’s stock price is less than $25 on March 31, 2008, HCI is entitled to additional shares of common stock. The 3,000 preferred shares previously converted to common shares by HCI do not have this feature.

Foreign Operations

Mecel Properties and Maricor Properties, including its subsidiary Cornwallis, operate 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.

 

Item 2. Properties

As of December 31, 2007, MPS owned approximately 380 circuit miles of transmission lines and approximately 1,791 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 Company is in the process of testing over 13,000 distribution transformers over a ten-year period. In 2008, MPS began its eighth year of this ten-year program. The cost of testing the transformers is expensed as incurred; replacement transformers and the cost to install those transformers are capitalized. In addition, transformers that pass the inspection criteria will be refurbished and refitted with lightning arrestors and animal guards. The total cost of the ten-year program is estimated to be $3.0 million and, as of December 31, 2007, $2.3 million has been spent to remediate approximately 61% of the transformers in this effort.

 

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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 asset retirement obligation associated of $699,000 with the PCB Transformer phase-out program, described more fully in Note 1 of these Consolidated Financial Statements.

 

Item 3. Legal Proceedings

Legal Proceedings

Surplec, Inc.

On April 30, 2007, Surplec, Inc.,(“Surplec”), the supplier of a transformer for a substation constructed by MPS in connection with a 42 MW wind project owned by Evergreen Wind Power, LLC (“Evergreen”), brought suit against MPS, UPC Wind Management LLC, and Evergreen, (collectively “Defendants”) in the United States District Court District of Maine, located in Bangor, Maine, seeking collection of approximately $228,000 it claimed was still owed for a 30/40/50 MVA Transformer (the “Transformer”) which MPS had purchased on behalf of Evergreen. On November 8, 2007, Surplec and the Defendants reached a settlement agreement in this matter, under which all claims were dismissed with prejudice and MPS remitted the remaining $219,000 owed on the Transformer. Accordingly, MPS incurred no liability associated with the claims, except sharing equally with Evergreen the nominal cost of transportation and inspection expenses associated with returning the Transformer to Surplec for refurbishment.

Regulatory Matters

Notice of Inquiry Regarding Allowance of Electric Utilities in Maine to Reenter Energy Supply Business

On July 25, 2007, the Maine Public Utilities Commission issued a Notice of Inquiry (“NOI”) regarding the reentry of electric utilities into the energy supply business. The NOI was issued based on a State of Maine Legislative Resolve that directs the MPUC to undertake a review of the issues involved with transmission and distribution (“T&D”) utilities entering the energy supply business. The Resolve specifies that for purposes of the review, “energy supply business” includes owning, operating, or having an interest in electric generation facilities, load management activities or demand-side management activities. The Resolve required that the MPUC submit a report containing its findings and recommendations for further action and legislation to implement its recommendations to the Joint Standing Committee on Utilities and Energy no later than January 15, 2008. The MPUC initiated this Inquiry to obtain information, viewpoints and recommendations from interested persons on the issues raised in the Resolve. MPS actively participated in the NOI process. On January 15, 2008, the MPUC issued its Report to the Legislature, recommending that the Restructuring Act not be changed at this time.

Federal Energy Regulatory Commission 2007 Open Access Transmission Tariff Formula Rate Filing

On May 21, 2007, MPS filed its updated rates under the 2007 Open Access Transmission Tariff (“OATT”) formula pursuant to Docket ER00-1053 for both wholesale and retail customers. The revenue increases were approximately $54,000 for wholesale customers and $345,000 for retail customers. These new transmission rates are subject to a customer refund that may occur as a result of the proceeding and potential settlement negotiations.

 

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Stakeholder Initiative Regarding the Competitiveness and Reliability of the Northern Maine Power Grid

On November 16, 2006, the MPUC issued an Order in Docket No. 2006-513 concluding that northern Maine lacks a competitive power market. In an effort to deal with this lack of competition and the system reliability issues raised by the Company’s unsuccessful bid to secure a certificate for the construction of a new transmission line, the MPUC held a three-day stakeholders conference in December 2006, in an attempt to resolve, on a collaborative basis, the issues raised in these cases. As a result of this effort, two parallel initiatives have been launched:

(a) the stakeholders were asked to develop a protocol allowing for the possibility of generation suppliers obtaining long-term power delivery commitments through the Standard Offer process and not through the Company. This could encourage the construction of new generation in the Company’s service territory, and/or secure the availability of existing on-system generating sources on a long-term (multi-year) basis. At this time, the Company cannot predict whether all of the stakeholders will reach agreement on any such protocol initiative, or whether it will be finalized and accepted by the MPUC;

(b) the stakeholders were asked to address the feasibility of one or more proposals for transmission projects interconnecting the northern Maine grid with the ISO New England grid, possibly by means of a tap into the MEPCO 345 kV transmission line that connects the high voltage systems of Maine and New Brunswick, Canada.

On July 26, 2007, MPS and CMP, pursuant to Section II 46-48 of the ISO New England (“ISO-NE”) OATT, requested that ISO-NE study a transmission upgrade that would interconnect MPS with the ISO operated transmission system. The preliminary study results indicate economic and reliability benefits would accrue to Maine, as well as the entire New England region, as a result of constructing a new high-voltage transmission line that would interconnect MPS with ISO-NE. Accordingly, while the results remain preliminary, MPS and CMP have begun preparations to file for approval of the new line with the MPUC during 2008. Coincident with this effort, on February 26, 2008, MPS conditionally requested ISO’s consent to MPS becoming a member of ISO-NE, more specifically an Additional Participating Transmission Owner as set forth in Section 11.05 of the Transmission Operating Agreement. The request was conditioned on a number of significant factors and necessary approvals, including (a) that the costs of new line and portions of MPS’s existing transmission system be included in New England regional rates in a manner that northern Maine consumers will obtain economic benefits from joining ISO-NE that outweigh the costs to them; (b) that the new line be constructed, energized and included in the ISO-NE Regional Network Service (“RNS”) transmission rate; and (c) that the MPUC grant a Certificate of Public Convenience and Necessity for the project and concur with MPS becoming an Additional Participating Transmission Owner. MPS cannot predict the outcome of this effort.

Maine Public Utilities Commission 2006 Distribution Rate Case

On January 11, 2006, MPS filed a notice with the MPUC under Docket No. 2006-24 that it intended to seek a 4% increase in overall electric rates. Subsequently, on March 13, 2006, the Company filed for an increase in distribution revenue of $3.24 million, a 9.9% increase in average electric delivery rates. The Company participated in discovery on its request and updated its filing on June 15, 2006. The supplemental filing revised the Company’s request to increase distribution revenue by $2.68 million, an 8.64% increase in average electric delivery rates.

During June 2006, the Company entered into settlement discussions with the parties to Docket No. 2006-24. The discussions led to a Stipulation that was filed with the MPUC on June 23, 2006. The Stipulation proposed an increase to the Company’s distribution revenue of $1.75 million, effective July 15, 2006. Additionally, the Company agreed to defer its increase in the Demand-Side Management (“DSM”) mil rate and its decrease in the transmission component of its delivery rate until July 15, 2006, as described below. The net effect of the three retail rate changes was an increase to annual retail delivery revenue of approximately $1.33 million or an average increase to the Company’s electric delivery rate of 3.84%. The Stipulation was approved by the Commission on July 5, 2006, and new distribution rates implementing the net retail revenue change became effective July 15, 2006.

 

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The Stipulation required adjustment of the amortization of the Oracle system from a seven-year amortization period to a ten-year amortization period, retroactive to the capitalization of the system in 2004. The impact of this retroactive adjustment of approximately $128,000 was recognized in the second quarter of 2006. The Stipulation also required that one-third of the hosting fee and travel expenses associated with the Delinea contract for support of the Oracle system remain with MAM and its unregulated subsidiaries, instead of being charged to MPS. MPS also agreed to file regular reports indicating its performance under certain service quality index standards as part of this Stipulation.

MPUC Approves the Pass-Through 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 MPUC, the new transmission rates for retail customers were put into retail rates on July 15, 2006, to coincide with MPS’s distribution rate increase. These rates were approved by the MPUC on July 5, 2006. Per this filing, the DSM mil rate was increased by 20%, or approximately $111,000, and the retail transmission rate was decreased by 13.43%, or approximately $534,000.

Maine Public Utilities Commission 2006 Stranded Cost Rate Case

The Company filed its 2006 Stranded Cost case on August 31, 2006, in MPUC Docket No. 2006-506. The filing is an update of the Stipulation in the prior Stranded Cost case, MPUC Docket No. 2003-666. MPS proposed that stranded cost rates remain the same as those agreed to in the prior filing. The initial case conference was held on September 26, 2006, and the Stipulation was approved by the Commission on November 30, 2006, with no impact on rates for the period beginning January 1, 2007, and ending December 31, 2009. The Stipulation also included an annual provision to reconcile actual sales volume to the projections made by MPS. This provision increased revenue approximately $91,000 during 2007.

Federal Energy Regulatory Commission 2006 Open Access Transmission Tariff Formula Rate Filing

On May 31, 2006, 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 “2006 OATT”) to modify its transmission rate formula. MPS filed its updated rates under the 2006 OATT formula on June 15, 2006, pursuant to Docket ER00-1053, with an effective date of June 1, 2006, 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 decreased by approximately $534,000 on July 15, 2006, under the 2006 OATT. This represented a 13.43% decrease to the transmission component of retail delivery rates. The primary reasons for the decrease were a shift in costs between transmission and distribution and the settlement of the 2005 Open Access Transmission Tariff through rates, as described more fully below.

A settlement between the parties to the 2006 OATT was provided to the FERC on December 22, 2006. The significant elements of the settlement included a 10.5% return on equity (“ROE”) on transmission assets, recovery of 90% of the expenditures associated with Line 3875 in transmission rate base to be amortized over three years, the inclusion of new depreciation rates beginning January 1, 2007, and an Oracle allocation consistent with the distribution rate case. This settlement was approved on February 8, 2007.

 

Item 4. Submission of Matters to a Vote of Security Holders

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 AMEX under the symbol “MAM”. As of March 1, 2008, there were 616 holders of record of the Company’s common stock, with 1,677,862 shares outstanding. As of December 31, 2006, the number of outstanding shares was 1,638,379.

Dividend data and market price related to the common stock are tabulated as follows for 2007 and 2006:

 

     Market Price    Dividends
     High    Low    Paid Per Share    Declared Per Share

2007

           

First Quarter

   $ 19.25    $ 15.20    $             —    $             —

Second Quarter

   $ 29.20    $ 18.70          

Third Quarter

   $ 32.00    $ 22.03          

Fourth Quarter

   $ 39.99    $ 27.08          
                   

Total Dividends

         $    $
                   

2006

           

First Quarter

   $ 17.86    $ 13.75    $    $

Second Quarter

   $ 16.29    $ 13.65          

Third Quarter

   $ 19.50    $ 15.00          

Fourth Quarter

   $ 17.22    $ 14.15          
                   

Total Dividends

         $    $
                   

Any dividends declared within the quarter are paid on the first day of the next quarter.

The financial and cash flow performance of the Company resulted in no shareholder dividends during 2006 or 2007 and suspension of the Company’s previous dividend policy. Although the Company cannot definitively predict when it will resume paying dividends quarterly, with the improvement in cash flows during 2007, the increase in consolidated earnings and the repayment of the debt associated with the discontinued operations, the Company will likely be in a position to reinstitute a dividend to common shareholders toward the end of 2008 or early in 2009.

Securities Authorized for Issuance Under Equity Compensation Plans.

 

Plan Category

   Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
   Weighted-average
exercise price of
outstanding options,
warrants and rights
   Number of securities
remaining available for
future issuance under equity

compensation plans
(excluding securities reflected

in column (a))
     (a)    (b)    (c)

Equity compensation plan approved by security holders

   3,932    $ 30.28    151,219

Equity compensation plan not approved by security holders

        n/a   
            

Total

   3,932       151,219
            

 

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The Company maintains two equity compensation plans. The 2002 Stock Option Plan included 150,000 shares available for issuance. Of this total, 26,250 shares were issued through June 1, 2006. With the resignation of the former CEO in August 2006, 15,750 of these options were forfeited. Three months after this resignation, in November 2006, an additional 6,568 options expired, leaving 3,932 options remaining outstanding, and 146,068 remaining available for issuance. These options will remain outstanding for their respective ten-year terms, with 1,966 expiring on May 31, 2012, and the remaining 1,966 expiring on May 31, 2013. See Note 9, “Stock Compensation Plan,” in Item 8 for more information on these stock options.

An additional 20,000 shares were originally available for issuance to the Company’s Board of Directors pursuant to the Stock Plan for Outside Directors. Under this plan, 14,849 shares have been issued, with 5,151 remaining available for issuance.

In addition to the Stock Plan for Outside Directors, the directors’ fees can be paid in any combination of three forms. Directors can choose to receive their fees in cash or defer all or a portion of the fees in two deferral programs. The first provides a return equal to the 5-year Treasury Note rate. The second deferral program is tied to the performance of the Company’s stock. Under this program, the deferred directors’ fees for the quarter are converted to a number of shares of stock for tracking purposes, and the value of the previous deferrals is adjusted to reflect the stock price as of the end of the quarter. Under this program, the equivalent of 31,318 shares was held by directors as of December 31, 2007. The unfunded obligation for these deferred fees of $1.1 million is reported in the Consolidated Balance Sheets within the line “Miscellaneous Liabilities.”

Sale of Unregistered Securities

In February 2005, MAM issued 9,500 shares of preferred stock in conjunction with the acquisition of software previously owned by MTI. These securities were issued to 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. In February 2007, 3,000 shares of preferred stock were converted into 12,078 shares of common stock. The remaining 6,500 preferred shares were converted into 26,000 shares of common stock in April 2007. If the price of MAM’s stock is below $25 as of March 31, 2008, additional common shares will be issued.

Company Purchases of Equity Securities

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 2007 or 2006.

 

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Stock Performance Graph

The following graph compares Maine & Maritimes Corporation’s cumulative stockholder return since December 31, 2002, with the Peer Group index, comprised of the AMEX Composite and S&P Utility Index. The graph assumes that the value of the investment in the Company’s common stock and each index (including reinvestment of dividends) was $100 on December 31, 2002.

LOGO

 

     12/02    12/03    12/04    12/05    12/06    12/07

Maine & Maritimes Corporation

   100.00    114.83    90.27    54.75    53.66    117.53

AMEX Composite

   100.00    143.18    175.20    215.26    257.04    299.37

S&P Utilities

   100.00    126.26    156.91    183.34    221.82    264.81

 

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Item 6. Selected Financial Data

A five-year summary of selected financial data (2003 through 2007) is as follows:

Five-Year Summary of Selected Financial Data

(The information in the table and its footnotes is presented in thousands of dollars except per share amounts)

 

     2007     2006     2005     2004     2003  

Income Statement Data:

          

Revenues

   $ 37,520     $ 35,601     $ 34,299     $ 33,733     $ 31,739  

Income From Continuing Operations

     2,625       667       941       2,279       2,937  

Loss From Discontinued Operations

     (993 )     (6,588 )     (1,161 )     (961 )     (131 )
                                        

Net Income (Loss) Available for Common Stock

   $ 1,632     $ (5,921 )   $ (220 )   $ 1,318     $ 2,806  
                                        

Basic Earnings Per Share of Common Stock From Continuing Operations

   $ 1.57     $ 0.41     $ 0.58     $ 1.42     $ 1.86  

Basic Loss Per Share of Common Stock From Discontinued Operations

     (0.59 )     (4.03 )     (0.71 )     (0.60 )     (0.08 )
                                        

Basic Earnings (Loss) Per Share of Common Stock From Net Income (Loss)

   $ 0.98     $ (3.62 )   $ (0.13 )   $ 0.82     $ 1.78  
                                        

Diluted Earnings Per Share of Common Stock From Continuing Operations

   $ 1.57     $ 0.41     $ 0.58     $ 1.40     $ 1.85  

Diluted Loss Per Share of Common Stock From Discontinued Operations

     (0.59 )     (4.03 )     (0.71 )     (0.60 )     (0.08 )
                                        

Diluted Earnings (Loss) Per Share of Common Stock From Net Income (Loss)

   $ 0.98     $ (3.62 )   $ (0.13 )   $ 0.80     $ 1.77  
                                        

Dividends Paid per Common Share

   $     $     $ 0.95     $ 1.52     $ 1.48  
                                        

Balance Sheet Data:

          

Total Assets(1)

   $ 135,625     $ 148,314     $ 151,303     $ 150,676     $ 141,269  
                                        

Capitalization:

          

Long-Term Debt Outstanding

   $ 31,590     $ 32,725     $ 35,155     $ 39,380     $ 30,680  

Less amount due within one year

     4,163       2,703       2,612       2,225       1,450  
                                        

Long-Term Debt(2)

     27,427       30,022       32,543       37,155       29,230  

Common Shareholders’ Equity(3)

     42,941       41,527       47,785       48,140       46,988  
                                        

Total Capitalization

   $ 70,368     $ 71,549     $ 80,328     $ 85,295     $ 76,218  
                                        

 

   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 Company’s future financial condition or results of operations.

 

(1) Total assets reflect assets from Discontinued Operations of $755 for 2007, $8,973 for 2006, $14,015 for 2005, $8,871 for 2004, and $962 for 2003.

 

(2) Long-term debt reflects long-term debt owed by Discontinued Operations of $0 for 2007, $2,182 in 2006 and $2,200 in 2005 and 2004. The amount due within one year for 2006 includes $18 owed by Discontinued Operations.

 

(3) Common Shareholders’ Equity reflects (deficit) equity from Discontinued Operations of $(4,966) for 2007, $(4,127) for 2006, $676 for 2005, $1,062 for 2004, and $1,691 for 2003.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This filing contains certain “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995, related to the expected future performance of our plans and objectives, such as forecasts and projections of expected future performance or statements of Management’s plans and objectives. These forward-looking statements may be contained in filings with the SEC and in press releases and oral statements. We use words such as “anticipate,” “estimate,” “predict,” “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 will differ, and some of the differences may be material.

Factors that could cause actual results to differ materially from our projections include, among other matters, legislation and regulation; construction of new transmission facilities; development of MAM USG; attraction and retention of qualified employees; economy of the region and general economic conditions; competitive conditions; holding company structures; interest rate and debt covenant risk; pension plan investments; information technology; environmental risks; aging infrastructure and reliability; weather; vandalism, terrorism and other illegal acts; alternative generation options; professional liability; final settlement of remaining obligations of discontinued operations; divestiture of unregulated real estate; equity price risk; and foreign operations. Therefore, no assurances can be given that the outcomes stated in such forward-looking statements and estimates will be achieved.

Annual Performance Summary

In last year’s Form 10-K, we stated that 2007 “was a pivotal year for Management and the Board of Directors”. That proved to be true. During the year, we successfully implemented our change in strategy by divesting our unregulated and unprofitable business lines, shown below as Discontinued Operations, and embraced a strategy of performing utility and utility-related services. The success of this simple yet profound shift is evident in our financial performance for the year.

Net Income and Earnings per Share

 

(Dollars in Thousands Except per Share Amounts)    2007     2006     2005  

Income (Loss) from Continuing Operations

      

Regulated Electric Utility

   $ 3,732     $ 2,129     $ 2,264  

Other*

     (1,107 )     (1,462 )     (1,323 )
                        

Income from Continuing Operations

     2,625       667       941  
                        

Loss (Income) from Discontinued Operations

      

Unregulated Engineering Services

     (746 )     (5,293 )     (847 )

Unregulated Software Technology

     (247 )     (1,297 )     (318 )

Unregulated Energy Marketing

           1       (1 )

Other*

           1       5  
                        

Loss from Discontinued Operations

     (993 )     (6,588 )     (1,161 )
                        

Net Income (Loss)

   $ 1,632     $ (5,921 )   $ (220 )
                        

Basic Income (Loss) Per Share

   $ 0.98     $ (3.62 )   $ (0.13 )
                        

 

* The “Other” line in Continuing Operations includes activities of the holding company (including corporate costs directly associated with unregulated operations and common costs not allocated to the regulated utility), MAM Utility Services Group and inter-company eliminations. “Other” in Discontinued Operations is inter-company eliminations.

 

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Our total revenues increased while our operating expenses decreased due to meeting our objectives of streamlining operations and lowering corporate overhead costs. The end result was a dramatic increase in our 2007 Operating Income over 2006 and 2005. We worked on lowering our overall debt balances, which reduced net interest expenses by nearly 11%. In 2007, income from Continuing Operations was approximately four times greater than 2006 and almost three times greater than 2005. The “bottom line” is a dramatic improvement in our Net Income Available to Shareholders, which produced consolidated net income of $1.6 million in 2007, compared with a significant loss in 2006.

This transformation led to a striking improvement in our stock price, which increased more than two and a half times during the year, ending calendar year 2006 at $15.18 per share and reaching a high closing price of $39.99 on December 12, 2007. This price was an eighteen-year high for the Company, and nearly an all-time high. This trend dramatically increased our average volume of shares and attracted a number of new investors.

Overview of Company Strategy

While we celebrate our successes of 2007, we are not content with just this progress. It is of critical importance that we operate efficiently and continue to pursue investments to further enhance the Company’s performance and the future interests of our shareholders. To that end, our strategy focuses on two key areas:

 

  1. Efficiently managing and maximizing our regulated utility operations, and

 

  2. Utilizing our core management competencies to pursue other unregulated opportunities in utility-related services.

Utility Operations

Maine Public Service Company, our regulated electric transmission and distribution utility, has been serving customers in our territory since incorporating in 1917. For the past 90 years, it has been our objective to provide our customers with safe, reliable and competitively-priced electricity service.

MPS remains focused on managing and investing in our utility asset infrastructure. MPS made substantial investments in our core electrical system, and anticipates maintaining this level of investment over the next few years. Capital expenditures for 2007 were approximately $6.2 million. For 2008 through 2012, capital expenditures are expected to be approximately $7 million per year, with each year’s capital budget being reviewed and approved by our Board. These capital expenditures are relatively large compared to past years as a result of matching our strong cash flows during the next four years from our regulatory asset stranded cost collections with our capital improvement plans. The investments in these assets will help provide regulated returns to our shareholders during their useful life, assuming favorable regulatory treatment.

Our valued employees at MPS take pride in providing quality customer service while seeking opportunities to improve efficiencies. These efficiencies include implementing automated meter reading for the majority of our customers as well as automating our electrical equipment to protect against system damage, improving response to power outages, and lowering overall costs by performing functions electronically instead of traveling to remote locations.

While we are optimistic about the future for MPS, we recognize that our utility has challenges similar to other small geographically remote utilities, as well as some challenges unique to our Company. These challenges include, but are not limited to:

 

   

Relatively slow customer growth, approximating 1% per year,

 

   

Low customer densities,

 

   

Currently connected electrically to Canada, not the United States,

 

   

Slow economic growth within our region,

 

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Difficulty in attracting and retaining quality employees due to our geographic location,

 

   

Rapidly amortizing regulatory assets,

 

   

Aging infrastructure,

 

   

Climate and weather conditions in our service territory, and

 

   

Federal and State regulations.

Even with these challenges, we believe we can be successful in providing a quality return to our shareholders. By aggressively managing our regulated assets and providing high quality customer service, we believe we can continue to provide our customers with safe, reliable and competitively priced transmission and distribution service while providing a competitive regulated rate of return for our shareholders.

To offset some of these challenges, MPS is pursuing the development of a large transmission line, which would connect our service territory to the New England electrical grid. The construction of this transmission line, known as the Maine Power Connection (“MPC”), is being jointly pursued by MPS and Central Maine Power Company, the largest electric utility in the State of Maine. Coincident with potential development of this line is the siting of additional electricity generation within and adjacent to our service territory. This confluence of factors could have several benefits to MPS including:

 

   

Increasing transmission revenues from use of the line by electricity generators,

 

   

Increasing MPS’s asset base,

 

   

Enhancing the competitive electricity market in Northern Maine,

 

   

Attracting potential economic development to our region in the form of new industrial, commercial, and residential customers,

 

   

Providing a unique conduit for generators in Canada to potentially ship their product to the southern New England market where electricity supply is needed,

 

   

Providing a larger scale of transmission users which may stabilize or reduce rates for current transmission customers,

 

   

Enhancing electric system stability and security for existing customers,

 

   

Connecting much needed “green power” such as wind, and other renewable electricity producing resources to enhance the power mix for the New England grid, and

 

   

Providing MPS’s sister company, MAM USG, with additional opportunities to provide shareholder returns.

This MPC project is being undertaken simultaneously with an on-going system impact study at ISO-NE, which was triggered by interconnection requests in connection with proposed wind generation projects. The Company has submitted notice to ISO-NE that, subject to certain conditions, it seeks to become a member of ISO-NE. Among the conditions is the requirement that the cost of the transmission project be included in the ISO-NE regional transmission rates. The Company cannot predict the outcome of this request, and it is possible that the conditions necessary for membership will not be met. It is also possible that MPS will seek to have all or a portion of the MPC project costs covered by the parties requesting interconnection pursuant to its Large Generation Interconnection Agreement and tariff.

Unregulated Services

A key component of our new strategy is to provide complementary services to our regulated utility operations by leveraging our core competencies. We formed an unregulated subsidiary in September 2007 to pursue these initiatives. This subsidiary, MAM Utility Services Group, will provide electrical contracting, engineering, planning, procurement, and project management services to developers, generators, and others in the private and public sectors. MAM USG is currently in the process of negotiating contracts to provide these services.

 

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While this subsidiary is in its early developmental stages, we believe that it offers a growth component for our shareholders in addition to the stable annuity provided by the regulated utility.

Discontinued Operations

We consider our accomplishments during 2007 in divesting our discontinued operations to be a significant success. Our prioritized efforts to divest the unregulated software technology, engineering and real estate companies were largely completed during the year. As of December 31, 2007, the only assets remaining from our prior strategy (diversifying into a broader range of businesses) is limited to the ownership of Mecel Properties and one share (50%) of Maricor Properties. We are working diligently to divest these remaining investments, and anticipate completion of these sales by the end of 2008.

Dividend Policy

With the improvement in our cash flows during 2007, the increase in consolidated earnings, and the related pay-down of total debt, the Company will likely be in a position to reinstitute a dividend to common shareholders toward the end of 2008 or early in 2009. Cash priorities for 2008, as discussed by Management and the Board, are as follows:

 

  1. Investment in MAM USG projects that provide adequate returns for shareholders (generally defined to be at or above average regulated rates of return);

 

  2. Repayment of remaining unregulated debt related to previous strategy (approximately $3.7 million at December 31, 2007); and

 

  3. Re-establishment of a dividend to common shareholders, when fiscally prudent and adequate cash flows are available after consideration of all cash priorities noted above.

Similar to the dividend policy stated in the 2006 Form 10-K, dividends are subject to declaration by the Board, which establishes the amount of each quarterly Common Stock dividend and fixes the record and payment dates. Common Stock dividends, when declared, are generally paid on the first day of January, April, July, and October. Our prior dividend was suspended in 2005 after 78 consecutive quarters of paying a dividend.

Cash Flows

In 2008, we expect cash flows provided by operating activities will come from MPS, the regulated electric transmission and distribution utility, as well as MAM USG, the electrical service provider to developers, generators, and others in the private and public sectors.

Cash flows at MPS will remain higher than our net income would indicate, due to the collection of previously deferred regulatory assets being collected. These cash flows are “stranded cost free cash flows.” The largest regulatory asset is deferred fuel, which is expected to be collected through 2012. This asset represents past cash expenditures that will be amortized as collected in rates over time. Therefore, while the portion of revenue associated with recovery of this stranded cost is a cash inflow, the related amortization of the deferred fuel asset is non-cash.

The stranded cost free cash flows will be utilized in accordance with our cash priorities listed above. An estimate of these cash inflows, net of income taxes, is listed below (in thousands of dollars):

 

2007

 

2008

 

2009

 

2010

 

2011

 

2012

$5,165

  $5,433   $5,941   $6,179   $6,683   $1,645

This table presents the regulatory treatment from MPUC Docket No. 2006-506. Stranded cost rates from January 1, 2007 through December 31, 2009, were set by this Docket. A projection of the recovery period for the balance of stranded costs remaining at December 31, 2009, was also included in the Docket; however, the

 

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schedule for recovery of these costs will not be approved by regulatory order until the next stranded cost rate case, anticipated to be filed in 2009. Also, other factors, such as our capital expenditures being included as income earning regulated assets, costs of providing our regulated services, and competitiveness of rates at the time, could necessitate filing a distribution rate case during or soon after the stranded cost free cash flow period, which may result in significant rate changes for our customers. We cannot predict at this time whether this impact will be positive or negative to MPS’s net income.

Due to its infancy, the impact of MAM USG on cash flow is difficult to predict. However, any contracts signed are expected to have positive incremental cash flows and related earnings for MAM on a consolidated basis.

Taxes Other Than Income

Taxes other than income consist of property and payroll taxes. This expense decreased from $1.8 million in 2006 to $1.7 million in 2007. Taxes other than income were also approximately $1.7 million in 2005.

Income Tax Expense (Benefit)

The tax provision for the regulated entity was approximately $2.5 million in 2007, compared to $1.6 million in 2006, and $1.5 million in 2005. The increase is due to the improvement in MPS earnings in 2007, resulting from both increased revenue and reduced expenses.

The income tax benefit for unregulated continuing operations decreased from $1.1 million in 2006 and $878,000 in 2005 to $560,000 in 2007, primarily due to the reduction in the loss for this segment.

Other Income (Deductions)

Other income (deductions) consists of equity in the earnings of Maine Yankee, MEPCO and Maricor Properties, interest and dividend income, and other, smaller non-operating income and expense items. The $79,000 loss in 2007 is representative of the company’s on-going, non-operating activity. In 2006, the equity in income of associated companies included the profit recognized on the issuance of one share of Maricor Properties to Ashford, which resulted in income of $257,000. This additional income was partly offset by the $81,000 write-off of unrecoverable cancelled transmission plant.

Interest Charges

Interest charges decreased $142,000, from $1.3 million in 2006 to $1.2 million in 2007. Most of this decrease, approximately $107,000, is a result of the increased stranded cost carrying charges, primarily on the deferred fuel balance. With this balance at its maximum at December 31, 2006, the carrying charges recognized on the balance, an offset to interest expense, were also at their highest. Interest expense also decreased $35,000, due to the repayments of debt during 2007, primarily the $1.7 million MAM note with Bank of America.

From 2005 to 2006, interest charges increased $438,000, from $908,000 to $1.3 million. The increase is due to higher average balances outstanding, including the higher-rate MAM debt.

 

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Consolidated Capital and Construction Program

Cash expenditures for capital improvements, additions, replacements and equipment for the years ended December 31, 2007, 2006, 2005, and 2004, along with estimated expenditures for 2008 are as follows (in thousands of dollars):

 

     2008    2007    2006    2005    2004
     (Unaudited
Estimates)
                   

Maine Public Service

   $ 7,121    $ 6,178    $ 3,502    $ 4,822    $ 6,276

The Maricor Group

               49      238      258

Maricor Technologies, Inc.

               244      446     

Other Subsidiaries

               30      23      265
                                  

Total

   $ 7,121    $ 6,178    $ 3,825    $ 5,529    $ 6,799
                                  

The significant increase in MPS’s projected capital expenditures for 2007 and 2008 is due to the necessary improvements identified by the distribution and transmission inspection programs, which will be partly funded by the stranded cost free cash flows. MPS anticipates that its system will require such higher levels of capital expenditures for the next several years.

Detailed Analysis of Changes in Financial Condition by Operating Segment

Regulated Utility Operations—Continuing Operations

The following discussion includes the operations of MPS and Me&NB:

 

     2007    2006    2005

Net Income—Regulated Electric Utility (in thousands)

   $ 3,732    $ 2,129    $ 2,264

Earnings Per Share from Regulated Electric Utilities

   $ 2.24    $ 1.30    $ 1.38

MPS contributed $0.94 or 72% more to earnings per share in 2007 than in 2006. This improved performance is due to a combination of increases in revenue and decreases in expenses, explained more fully below.

Regulated Utility Operating Revenue

Consolidated revenues and Megawatt Hours (“MWH”) for the years ended December 31, 2007, 2006, and 2005, are as follows (in thousands of dollars):

 

     2007    2006    2005
     Dollars    MWH    Dollars    MWH    Dollars    MWH

Residential

   $ 15,272    179,865    $ 14,511    178,520    $ 14,220    180,108

Large Commercial

     5,022    170,376      5,094    169,764      5,227    170,906

Medium Commercial

     5,760    107,577      5,569    105,759      5,521    106,525

Small Commercial

     7,406    93,846      6,996    91,964      6,890    92,960

Other Retail

     919    3,392      863    3,380      829    3,394
                                   

Total Regulated Retail

     34,379    555,056      33,033    549,387      32,687    553,893
                       

Other Regulated Operating Revenue

     3,072         2,568         1,627   
                             

Total Regulated Revenue

   $ 37,451       $ 35,601       $ 34,314   
                             

Regulated utility revenue increased $1.9 million or 5.2% from 2006 to 2007. Effective July 15, 2006, distribution revenue increased approximately $1.8 million, DSM revenue increased $111,000, and transmission revenue decreased by $534,000, resulting in an annualized net revenue increase of $1.3 million. These higher rates, in effect for approximately half of 2006, were in effect for all of 2007. For more information on regulatory orders approving the most recent rate increases, see Part I, Item 3, “Legal Proceedings.”

 

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Residential customer revenue was up $761,000 or 5.2%. Volume increased 1,345 MWH or 0.8%, resulting in $109,000 of the increase, the remainder of which is due to higher rates. Medium and small commercial customer revenue volume increased 1.9%, increasing revenue by approximately $239,000. Rate increases increased medium and small commercial customer revenue by approximately $362,000. The large commercial customers were the only customers for which revenue decreased from 2006 to 2007, falling $72,000 or 1.4%. Volume increased slightly, up 612 MWH or 0.4%, but this increase was more than offset by lower average rates. The reduction in average rates is a result of a shift in the mix of large commercial customers; our lowest rate industrial customers made up a greater percentage of our large commercial sales volume in 2007 than in 2006.

There are many positive and negative factors which may have an impact on our future financial statements. For example, while the fuel cost trends may lead to more difficulty in accounts receivable collections, the actual uncollectible experience in 2007 remained consistent with the past. Further, two mills classified as large commercial customers announced temporary shutdowns during 2008. The length of the shutdowns and their ultimate impact on regulated utility operating revenue in 2008 is undetermined at this time. This loss of revenue is partly offset by an increase in transmission wheeling revenue from additional generation. The final net impact of each of these factors is not yet known, but Management is continuously monitoring collections and the overall economy of its service territory for the potential impact on 2008 revenue.

A significant contributor to the overall increase in MPS revenue was the $504,000 or 19.6% increase in other regulated operating revenue. The majority of this increase was due to additional wheeling revenue. MPS’s transmission rates are based on the Company’s revenue requirement (transmission expenses plus the allowed return on assets) less the wheeling revenue earned. The rates go into effect on July 1 each year, and are calculated from the financial results of the previous calendar year. The additional wheeling revenue earned during 2007 will offset the revenue requirement in the establishment of the rates that will go into effect on July 1, 2008. This additional wheeling revenue was partly offset by the decrease in revenue from billable work from 2006 to 2007.

Overall, regulated retail revenue increased approximately $346,000 or 1% from 2005 to 2006, due to the rate increase. The impact of the revenue increase was partly offset by the approximately 4,506 MWH or 1% decrease in volume year over year.

Residential customer revenue was the majority of the increase in revenue dollars from 2005 to 2006, up $291,000. Similarly, medium and small commercial customer revenue increased $48,000 and $106,000, respectively. In each of these classes of customers, the volume decrease was approximately 1%. The decrease in volume is due to the warmer weather experienced in the utility’s service territory, primarily during the first quarter of 2006. Large customer revenue decreased approximately $133,000, due to two large commercial customers that were not operating for a portion of 2006. As of the end of 2006, both customers were back in operation.

Other regulated operating revenue increased $941,000 or 58% from 2005 to 2006. During 2006, MPS obtained work on various billable projects, including the Evergreen Wind Farm project in Mars Hill, Maine, which contributed to this increase.

 

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Regulated Utility Expenses

For the years ended December 31, 2007, 2006, and 2005, regulated operation and maintenance are as follows (in thousands of dollars):

 

     2007    2006    2005

Regulated Operation and Maintenance

        

Labor

   $ 5,060    $ 5,139    $ 4,824

Benefits

     1,968      2,195      1,709

Outside Services

     1,199      1,256      965

Holding Company Management Costs

     1,901      2,174      2,947

Insurance

     548      544      376

Regulatory and Licensing

     1,160      1,056      861

Transportation

     855      818      902

Maintenance

     566      704      733

Other

     1,541      1,380      1,035
                    

Total Regulated Operation and Maintenance

   $ 14,798    $ 15,266    $ 14,352
                    

MPS operation and maintenance expenses decreased $468,000 or 3.1% from 2006 to 2007. The largest decreases in expenses by category were:

 

   

Labor expenses decreased $79,000 or 1.5% from 2006 to 2007. This reduction is from the cost savings from the 2006 reduction in force, offset by $193,000 of severance expenses and normal pay increases.

 

   

Benefits expenses decreased $227,000 or 10.3% year-over-year. Workers’ compensation insurance premiums decreased $96,000, due to improved claims experience. Pension and post-retirement medical expenses decreased $95,000, due to the decrease in pension expense as a result of the December 31, 2006, pension freeze, offset by the 401(k) make-up contributions.

 

   

Holding company management costs decreased $273,000 or 12.6% from lower common costs, due to the reduction in the overall size and cost of MAM management and external consulting arrangements from 2006 to 2007.

 

   

Maintenance expenses also decreased, down $138,000 or 19.6%. The majority of the decrease is the $127,000 decrease in expense associated with our financial system hosting contract. As part of the 2006 distribution rate case, the costs of this contract are split one-third MAM unallocated (reported in “Other” continuing operations) and two-thirds MPS. This split began July 1, 2006, and was in effect for all of 2007, compared to half of 2006. The renegotiation of the contract, described more fully in Note 13 to the Consolidated Financial Statements, also reduced the overall cost of the contract.

Offsetting these decreases were increases in regulatory and licensing expenses, and other operation and maintenance expenses, as follows:

 

   

Regulatory and licensing expenses increased $104,000 or 9.8%, due to higher regulatory assessments in 2007. These assessments are expected to continue at these rates or higher in 2008.

 

   

Other expenses increased $161,000 or 11.7% over prior year. Bad debt expense increased $51,000 or 37% from 2006 to 2007. In light of the economy of the region and rising energy costs, we will continue to closely monitor our collections experience. Other factors leading to this increase include a $49,000 increase in telephone, electricity supply and other utility charges and miscellaneous severance expenses of $25,000.

From 2005 to 2006, MPS operation and maintenance expenses increased $914,000 or 6.4%. Costs increased in most categories, with the largest increases as follows:

 

   

Labor and benefits increased $801,000 or 12.3%, including $176,000 for severance costs for former MPS employees as a result of the reduction in force in September 2006, and a $290,000 increase in

 

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expense associated with the contingent health care premium. Under the MPS health insurance plan, the Company retains a portion of the risk, and if the claims experience is worse than historical rates, MPS may be liable for an additional premium.

 

   

Expense for outside services increased $291,000. External vegetation management costs were up $174,000 compared to 2005.

 

   

Other expenses are up $345,000. The largest increase is bad debt expense. In 2005, bad debt expense was adjusted to recognize that MPS bears no risk associated with the collection of SOS receivables, resulting in a “negative expense” of $105,000. In 2006, bad debt expense increased $244,000, returning to more normal levels.

 

   

Regulatory expenses increased $195,000 year-over-year. The distribution rate case increased regulatory expense by approximately $136,000 from a combination of internal costs which were immediately expensed, and amortization of the external legal costs that were deferred and will be amortized over the next three years. The 2006 OATT process, including the update of the formula calculation, increased expense approximately $37,000, while the assessment for the Power Pact program increased approximately $44,000.

 

   

With the freeze of pension service and salary accruals effective December 31, 2006, a one-time curtailment expense of $98,000 was recorded in 2006 in accordance with SFAS 88.

These increases were offset by the $774,000 decrease in holding company management costs. The decrease was a result of the change in interpretation of how the common cost allocation percentages are calculated, as a result of the 2006 distribution rate case, which lowered the allocation to MPS from approximately 80% in 2005 to approximately 72% in 2006. Also, the overall common cost pool decreased approximately $129,000 from 2005 to 2006, as a result of decreased labor expense from the decentralization of the human resource, information technology and accounting functions.

For the years ended December 31, 2007, 2006, and 2005, stranded cost amortization expenses are as follows (in thousands of dollars):

 

     2007    2006     2005  

Stranded Cost Amortization

       

Wheelabrator-Sherman

   $    $ 7,702     $ 7,045  

Maine Yankee

     2,882      2,926       3,215  

Seabrook

     1,538      1,538       1,538  

Wheelabrator-Sherman Restructuring Payment

          1,451       1,451  

Deferred Fuel

     5,541      (3,195 )     (2,996 )

Cancelled Transmission Plant

     256      258        

Cost Incentive Refund

     250             

Special Discounts

     280      280       280  
                       

Total Stranded Cost Amortization

   $ 10,747    $ 10,960     $ 10,533  
                       

In 2007, stranded cost expenses reflect the impact of the stranded cost rate case, MPUC Docket No. 2006-506, the completion of the amortization of the Wheelabrator-Sherman restructuring payments and the expiration of MPS’s purchase power agreement with Wheelabrator-Sherman. The expenses reported for 2005 and 2006 are based on the stranded costs rates established in MPUC Docket No. 2003-666.

The Wheelabrator-Sherman expenses reported in 2005 and 2006 were the payments for purchased power, offset by the receipts from the sale of that energy. With the expiration of this contract on December 31, 2006, no additional energy has been purchased. The offsets to expense of $3.2 million in 2006, and $3.0 million in 2005 are the deferral of the net expense of the purchased power contract beyond the total expense allowed for recovery in Docket No. 2003-666. MPS is now recovering its deferred fuel costs. The amortization of the deferred fuel stranded costs, a non-cash expense, was $5.5 million in 2007.

 

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Under Docket No. 2003-666, MPS was also allowed recovery of a new stranded cost, the cost incentive refund, amortization of which began January 2007, and totaled $250,000 for the year.

In September 2006, MPS began amortization of its cancelled transmission plant, in accordance with the settlement of the 2006 OATT. Amortization expense of $256,000 was recognized during 2007, compared to $258,000 in 2006. This settlement included the write-off of approximately $81,000 of these cancelled plant costs, reported in Other Income (Deductions) in 2006.

Other Continuing Operations

Other continuing operations includes the activity of MAM, the holding company, such as the common costs not allocated to MPS, the unregulated costs of the holding company that cannot be allocated as common costs, and intercompany eliminations. Beginning in 2007, this segment also includes MAM Utility Services Group.

 

     2007     2006     2005  

Net Loss—Other (in thousands)

   $ (1,107 )   $ (1,462 )   $ (1,323 )

Loss Per Share from Other Continuing Operations

   $ (0.66 )   $ (0.89 )   $ (0.81 )

The decrease in the net loss of this segment is a result of the reduction in the common cost pool, combined with the reduction in the percentage of common costs not chargeable to MPS. Additionally, in 2006 there were charges for severance expenses and the write-off of previously deferred due diligence expenses upon termination of the efforts to acquire an engineering firm.

Unregulated Engineering Services—Discontinued Operations

The following table presents the results of the Unregulated Engineering Services segment, including TMG and its subsidiaries TMGNE and TMGC, classified as Discontinued Operations (in thousands of dollars):

 

     2007     2006     2005  

Loss on Sale

   $ (154 )   $ (4,717 )   $  

Goodwill Impairment Loss

           (2,546 )      

Loss From Operations

     (1,062 )     (1,497 )     (1,342 )

Benefit of Income Taxes

     470       3,467       495  
                        

Net Loss—Unregulated Engineering Services

   $ (746 )   $ (5,293 )   $ (847 )
                        

Loss Per Share from Unregulated Engineering Services

   $ (0.45 )   $ (3.23 )   $ (0.52 )
                        

The activity of TMG ceased with the sale of the assets of TMGC in the second quarter of 2007, and the closure of TMGNE’s Boston office in August 2007. The results presented above include the revisions to the estimated loss on sale, as a result of higher costs to close the Boston office compared to the sale of TMGNE that was anticipated at December 31, 2006. The loss from operations is the results of TMGC through the sale of its assets and the results for TMGNE for the year, including the costs of terminating operations and transitioning TMGNE contracts. None of the expenses are expected to continue in 2008. However, the expense of professional liability insurance and any potential adjustments to the estimated lease payments for the TMGNE space in Hudson, Massachusetts, will impact 2008 operating results.

 

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Unregulated Software Technology—Discontinued Operations

The following table presents the results of the Unregulated Software Technology segment, classified as Discontinued Operations (in thousands of dollars):

 

     2007     2006     2005  

Loss on Sale

           (1,033 )      

Loss From Operations

     (411 )     (1,120 )     (540 )

Benefit of Income Taxes

     164       856       222  
                        

Net Loss—Unregulated Software Technology

   $ (247 )   $ (1,297 )   $ (318 )
                        

Loss Per Share from Unregulated Software Technology

   $ (0.15 )   $ (0.79 )   $ (0.19 )
                        

The MTI activity presented above is the cost of their operations through the sale of assets and closure of their office in April 2007. We anticipate no further impact on earnings from the former unregulated software technology segment.

Critical Accounting Policies

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 Company’s most critical accounting policies for continuing operations include regulatory assets and liabilities, revenue recognition, income taxes and pension and post-retirement medical expenses. Certain accounting policies were also critical to the Company’s discontinued operations, including goodwill and intangible assets, but will not be critical to the Company’s on-going operations. The critical accounting policies are described in detail below.

Continuing Operations

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 probable of recovery 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 MPS’s current rate plans. MPS earns a return on substantially all regulatory assets for which funds have been spent.

The Company believes MPS’s electric transmission and distribution operations continue to meet the requirements of SFAS 71, and regulatory assets associated with those operations, as well as any generation-related costs the MPUC has determined to be recoverable from ratepayers, also meet the criteria. At December 31, 2007, $55.6 million of regulatory assets remained on MPS’s books. These assets will be amortized over various periods in accordance with MPUC approved rate orders.

Revenue Recognition

MPS records an estimate 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.

 

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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 2007 and 2006, $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 deferred $744,000 through December 31, 2006. Recovery and amortization of this special discount began in 2007. At December 31, 2007, the remaining regulatory asset of $494,000 is included in the line “Deferred Regulatory Costs” on the Consolidated Balance Sheets.

Pension and Other Post-Retirement Benefit Plans

MPS has pension and other post-retirement benefit plans, principally health care benefits, covering substantially all of its employees and retirees. In accordance with Statement of Financial Accounting Standards No. 87 (“SFAS 87”), “Employer’s Accounting for Pensions,” Statement of Financial Accounting Standards No. 106 (“SFAS 106”), “Employer’s Accounting for Post-retirement Benefits Other Than Pensions,” and Statement of Financial Accounting Standards No. 158 (“SFAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” 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 Company’s non-cash pension income or expense, or the Company’s post-retirement benefit costs. For additional information on the Company’s benefit plans, see Note 11 to the Consolidated Financial Statements, “Benefit Programs.”

Income Taxes

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, 2007, and 2006, Management evaluated the deferred tax asset valuation and determined no valuation allowance was needed.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” effective on a “catch-up” basis for fiscal years beginning after December 15, 2006. This guidance interprets SFAS 109, “Accounting for Income Taxes,” and clarifies the existing guidance regarding recognition of uncertain tax positions. Under FIN 48, a tax benefit from an uncertain tax position can only be recognized if it is more likely than not that the position is sustainable, based on its technical merits and relevant administrative practices. The amount of the tax benefit allowed to be recognized is limited to the greatest amount of benefit that is cumulatively greater than 50% likely of being realized. The guidance also notes that these tax benefits can become recognized or “derecognized” as new information becomes available. For additional information on the Company’s income taxes, see Note 2 to the Consolidated Financial Statements, “Income Taxes.”

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.

 

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Discontinued Operations

Goodwill and Acquired Intangibles

The Company’s acquisitions of RES, M&R, Eastcan and Pace resulted in goodwill and other intangible assets, which affected the amount of amortization expense and impairment expense the Company incurred. The Company 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 containing 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 relied 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 Management’s judgment in applying them to the analysis of goodwill impairment. If actual fair value is less than the Company’s estimates, goodwill and other intangible assets may be overstated on the balance sheet and a charge would need to be taken against net earnings.

For impairment testing purposes, the reporting unit was defined as the acquired operations. For these acquisitions, the operations acquired became the mechanical and electrical engineering components of TMGC and TMGNE. All goodwill associated with these acquisitions was written off during 2006, concurrent with the Company’s adjustment for discontinued operations.

Off-Balance Sheet Arrangements

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 (“SFAS 13”), “Accounting for Leases,” the Company has no other off-balance sheet arrangements. See Item 8 of this Form 10-K, Note 13 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, 2007 and 2006.

Table of Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2007 (in thousands of dollars):

 

     Payments Due By Period

Contractual Obligations

   Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years

Long-Term Debt Obligations

     31,590    $ 4,163    $ 3,782    $ 1,045    $ 22,600

Interest Payments(1)

     15,225      1,029      2,017      2,018      10,161

Operating Lease Obligations(2)

     282      106      101      75     

Capital Lease Obligations(3)

     919      227      383      269      40

Financial System Hosting Contract

     3,228      538      1,076      1,076      538

Consulting Arrangments(4)

     121      121               

Employment Agreements

     20      20               
                                  

Total

   $ 51,385    $ 6,204    $ 7,359    $ 4,483    $ 33,339
                                  

 

(1) Interest payments presented above include the estimated interest payments required on MPS’s fixed rate, long-term debt. Interest payments on variable rate short- and long-term debt have been excluded from this presentation, as the amount cannot be quantified at this time.

 

(2) 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.

 

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(3) Capital lease obligations include both required principal and interest payments.

 

(4) Consulting arrangements consist of outsourced engineering and information technology consulting.

Operating Capital and Liquidity

MAM’s operating capital and liquidity has significantly improved during 2007 for three primary reasons.

 

  1. Collection of previously deferred regulatory assets (stranded cost free cash flows);

 

  2. Proceeds from the sale of discontinued operations assets; and

 

  3. Improved financial performance of continuing operations.

Collection of Regulatory Assets

The cash collections from MPS customers for previously deferred regulatory assets, or “stranded cost free cash flows,” began January 1, 2007. As stated previously in this section, those collections for 2007, net of deferred tax payments, were $5.2 million. The collections of these previously deferred items will continue through 2016 for a total cash flow, net of deferred tax obligations, of approximately $35.0 million, with the majority collected between January 1, 2007 and December 31, 2012, which total approximately $31.0 million, net of deferred tax obligations. In accordance with utility industry practice, these deferred regulatory assets are presented on our Consolidated Balance Sheets under the heading “Regulatory Assets,” and are not reported as current assets. However, the 2008 portion of these cash flows, net of deferred income taxes, will be approximately $5.4 million which will be available to satisfy current obligations.

Proceeds from Sales of Discontinued Operations Assets

The proceeds from the sale of discontinued assets totaled approximately $1.9 million Canadian, or $1.8 million US. These proceeds were collateral for loans with Katahdin Trust Company and were used to repay the $1.0 million line of credit and $750,000 of the $2.2 million note. With the discontinuance of these operations, less working capital requirements were used to fund these unprofitable ventures during 2007. Starting in 2008, limited working capital will be needed related to the discontinued operations. Any of these obligations will be satisfied by the holding company, MAM, and include the continuance of professional liability insurances and building lease obligations. These cash requirements for 2008 and beyond are not expected to be material to our overall cash flows.

Improved Financial Performance of Continuing Operations

The overall financial performance of continuing operations dramatically improved. Net income from continuing operations increased from $667,000 in 2006 to $2.6 million in 2007. Similarly, net income for 2007 was $1.6 million, compared with a $5.9 million loss in 2006. These improvements are largely a result of MPS financial performance, the write-off of goodwill and intangible assets in 2006, and the realignment of corporate structure and related overhead costs at MAM.

2007 Cash Flow Performance

The Company’s cash and cash equivalents increased from $898,000 at December 31, 2006, to $910,000 at December 31, 2007. Net cash flow provided by operating activities increased dramatically, up approximately $6.6 million from 2006 to 2007 for the three reasons described above.

The Company’s “Statements of Consolidated Cash Flows,” of the Company’s Consolidated Financial Statements as presented in Item 8 of this Form 10-K, reflects the Company’s liquidity and sources of operating capital. Cash flow provided by operating activities in 2007 was $9.6 million, while the net income for the year was $1.6 million, due to the improved financial performance and the discontinuance of unprofitable operations.

 

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The change in deferred regulatory and debt issuance costs was $9.7 million. In 2006, there were additional deferrals of Wheelabrator-Sherman (“WS”) stranded cost, as the payments we made for the output of the WS plant exceeded the recovery we were allowed. This trend reversed in 2007, as MPS no longer had the obligation under the WS contract and was allowed under regulation to begin the collection of these previously deferred regulatory assets beginning January 1, 2007. Net cash flow used by financing activities totaled $5.1 million for debt retirements. In 2007, $4.5 million of net cash flow was used for investing activities. The Company invested $6.2 million in fixed assets at MPS for its electrical system infrastructure. During 2007, MPS received $250,000 for the partial redemption of Maine Yankee common stock. Lastly, the remaining obligations for stock contingencies from previous acquisitions were settled in 2007 for a total of $414,000.

Cash flow provided by operating activities in 2006 was $3.0 million, while the net loss for the year was $5.9 million, due to the losses and impairment of goodwill in discontinued operations. The change in deferred regulatory and debt issuance costs was $5.1 million, primarily due to the deferral of additional WS stranded cost, which was partially offset by a $2.3 million increase in deferred income taxes. Net cash flow provided by financing activities totaled $93,000. During 2006, the Company had debt retirements of $2.4 million, including MPS bond repayments, and other note repayments. The Company also increased short-term borrowings by $2.6 million in 2006. In 2006, $2.5 million of net cash flow was used for investing activities. The Company invested $3.2 million in fixed assets, and received $850,000 for the partial redemption of Maine Yankee common stock. MAM paid $244,000 for settlement of stock contingencies from previous acquisitions.

When MAM divested its unregulated operations in TMG, the proceeds from the sales, after settlement of any remaining obligations of the unregulated operations, were applied toward the debt owed by TMG to Katahdin Trust Company. This totaled $1.8 million of debt repaid in 2007.

MAM and MPS have a deferred income tax liability of approximately $21.9 million as of December 31, 2007, $12.3 million of which is associated with the deferred fuel stranded costs. This deferred tax liability is down from $26.4 million in 2006. The reason for the large change is the turnaround in deferred taxes on the collection of previously deferred regulatory assets related to stranded costs which now become part of our current tax obligation. Cash flow numbers for stranded cost recovery reported above are reported net of these current tax obligations, as a portion of the stranded cost free cash flow will be required to settle these liabilities.

On June 13, 2006, MAM entered into an agreement to borrow up to $1.7 million from Bank of America. This loan had interest payable on the last day of each month beginning June 30, 2006, until full payment of any outstanding principal, at a rate of the Bank’s prime rate plus 1%. Minimum principal payments in the amount of $140,000 at the end of each month began on January 31, 2007, and ended on December 31, 2007, when the loan was fully repaid.

On October 7, 2005, MPS arranged a three-year, $10 million revolving working capital line of credit with Bank of America as Agent, secured by $6.0 million of first mortgage bonds. This line of credit replaces the former $6 million line of credit with Bank of New York as Agent. Interest rates on the new facility are 30-, 60-, or 90-day LIBOR plus 1.375% or Bank of America’s prime rate. This line of credit is subject to certain financial covenants, measured quarterly beginning December 31, 2005. These covenants include a minimum tangible net worth, a minimum debt service coverage ratio and a maximum debt-to-total capital ratio. As of December 31, 2007, $8.0 million was outstanding on this line of credit, with $2.0 million available.

In early 2007, a $4.0 million line of credit was renegotiated to a term note as part of a bank covenant waiver agreement with Bank of America described in more detail below. Originally on October 21, 2005, MAM arranged a three-year $4.0 million revolving line of credit with Bank of America. Of this $4.0 million line, $1.7 million was in the form of a letter of credit (“LOC”) securing a loan from Royal Bank of Canada (“RBC”). The RBC loan was used as a portion of the funds to acquire Cornwallis Court Developments Ltd. and is currently secured by a guarantee from MAM, a guarantee from Mecel Properties, and a collateral mortgage from Mecel Properties. The remaining $2.3 million was amended into a term loan which is secured by a general security interest in the business assets of MAM, excluding the assets of MPS. The interest rate is 30-, 60- or 90-day

 

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LIBOR plus 2.5% or Bank of America’s prime rate. The loan agreement contained certain financial covenants, measured quarterly, which requires MAM to maintain a minimum tangible net worth, a minimum debt service coverage ratio and a maximum debt-to-total capital ratio.

Previous to June 2007, TMG had a revolving credit arrangement with Katahdin Trust Company for borrowings up to $1 million. This revolving credit arrangement, arranged on November 29, 2005, was for a one-year term and subject to extension with the consent of the bank. This facility was renewed on November 29, 2006, with an amendment of the interest rate margin from 2.75% to 3.25%. In June 2007, this line was fully paid with the proceeds from the sale of the assets of TMGC.

As part of the refinancing of short-term borrowings during 2005, MAM and certain of its subsidiaries agreed to certain financial and other covenants, such as debt service coverage and earnings before interest and taxes (“EBIT”) 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 financings and cross-default provisions within the debt agreements. A default on the MPS line of credit with Bank of America is a cross-default on the MAM line of credit with Bank of America. In addition, MAM has guaranteed a TMG facility with Katahdin Trust Company and a Maricor Properties term loan with RBC.

MAM and MPS have met all debt covenants for the year 2007 and expect to be in compliance with all debt covenants for the foreseeable future. MAM did not meet the interest coverage ratio required under the MAM Credit Agreement with Bank of America or the TMG facility with Katahdin Trust Company for the third and fourth quarters of 2006. Bank of America and Katahdin Trust Company granted waivers from compliance with the interest coverage ratio for both quarters. This waiver agreement included interim revisions to the interest coverage ratio covenants for 2007 and revised covenants for 2008 thereafter. It also included a conversion of the Bank of America $4.0 million line of credit from a revolving credit agreement to a $2.3 million term note and retained the RBC $1.7 million letter of credit. This revised agreement became effective March 13, 2007, and was reported in our 2006 Form 10-K. The applicable interest rate is now 30-, 60- or 90-day LIBOR plus 2.5% or Bank of America’s prime rate plus 0.5% for base loans. With this conversion, minimum principal balances must be repaid at a rate of $140,000 per month, beginning January 31, 2008. On February 7, 2008, $1 million was repaid on the Bank of America term loan, as cash was available for early repayment without penalty. We estimate MAM cash flows will be sufficient to fully repay the remaining balance of the term note during 2008 leaving only the letter of credit outstanding pending a sale and subsequent lifting of the RBC $1.7 million letter of credit by the purchaser of MAM’s investment in Maricor Properties.

Capital Resources

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 $4.5 million of second mortgage bonds without bondable property additions.

In February 2008, MAM and MPS reached agreement on amendments to their debt agreements with Bank of America. We anticipate these rate changes to be effective in March or April 2008. The amendments include various reductions in interest rates on the lines of credit and decreased letter of credit fees on the MPS and MAM Bank of America financing. The letter of credit fees are estimated to save $555,000 over the remaining term of the bonds, through 2021. The savings related to the interest rate reductions on the lines of credit are dependent on the level of borrowing under those lines.

On February 5, 2008, MPS successfully completed an early extinguishment of our FAME debt with the final payment of $1.1 million, which was originally due in June 2008. With that payment, the FAME notes were fully satisfied. In conjunction with our early payment, the proceeds of the FAME Capital Reserve Fund were wired to MPS by the trustee. MPS used these proceeds to pay down its existing line of credit. These notes were originally

 

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signed on May 29, 1998. At that time, FAME issued $11.5 million of its Taxable Electric Rate Stabilization Revenue Notes, Series 1998A (MPS) (the “1998 Notes”) on behalf of MPS.

On July 9, 2007, $750,000 was paid down on the TMG $2.2 million term Katahdin Trust Company note with a substantial portion of the sale proceeds from the TMGC Moncton Division. The terms of the remaining $1.5 million note were amended at that time. The repayment schedule was adjusted to include five months of interest only beginning July 29, 2007, 36 payments of principal and interest in the amount of $37,500 each with the first payment beginning December 31, 2007, and one final payment of all unpaid principal, accrued interest and any unpaid late charges due on December 29, 2010. This loan is guaranteed by MAM and contains certain financial covenants, measured quarterly, which require MAM to maintain a minimum tangible net worth, a minimum debt service coverage ratio and a maximum debt-to-total capital ratio and require TMG to maintain a minimum debt service coverage ratio.

On July 5, 2006, Maricor Properties borrowed $2.5 million Canadian from Merrill Lynch Mortgage Lending to refinance temporary debt at RBC. The US equivalent of this borrowing was $2.2 million at the borrowing date and $2.5 million at December 31, 2007. The new debt is a 10-year mortgage loan, with monthly payments of principal and interest based on a 25-year amortization schedule throughout the term of the loan and the remaining loan balance payable at the end of the term. The interest rate is variable, calculated as the greater of (a) 135 basis points over the yield on the Government of Canada mortgage benchmark bond most closely approximating the term of the loan, or (b) a floor of 5.20%. As of the borrowing date, the interest rate was 6.011%. This loan is secured by the Vaughan Harvey Blvd. property in Moncton, New Brunswick, and is guaranteed by Ashford Investments Inc., which is a 50% equity owner of Maricor Properties.

On August 4, 2006, Maricor Properties also borrowed $4.1 million Canadian from Merrill Lynch Mortgage Lending to refinance the J. Angus MacDonald Building. The US equivalent of this borrowing was $3.6 million at the borrowing date, and $4.1 million at December 31, 2007. The proceeds were used to repay the Standard Life mortgage. The debt is a 10-year mortgage loan, with monthly payments of principal and interest based on a 25-year amortization schedule throughout the term of the loan, and the remaining loan balance payable at the end of the term. The interest rate is variable, calculated as the greater of (a) 135 basis points over the yield on the Government of Canada mortgage benchmark bond most closely approximating the term of the loan or (b) a floor of 5.20%. As of the date of borrowing, the interest rate was 5.695%. This loan is secured by the J. Angus MacDonald Building, and is guaranteed by Ashford Investments Inc. and Maricor Properties.

The Maine Public Utility Financing Bank (“MPUFB”) has issued its tax-exempt bonds on behalf of MPS for the construction of qualifying distribution property. Originally issued for $15M and reduced with generating asset sale proceeds, the 1996 Refunding Series had $13.6 million outstanding at December 31, 2007, and is due in 2021. On October 19, 2000, the 2000 Series of bonds was issued in the amount of $9.0 million, with these bonds due in 2025. The proceeds of the 2000 Series were placed in trust to be drawn down for the reimbursement of issuance costs and for the construction of qualifying distribution property. For both tax-exempt bond series, a long-term note was issued under a loan agreement between MPS and the MPUFB, with MPS agreeing to make principal and interest payments on the bonds to the MPUFB. Concurrently, pursuant to a letter of credit and reimbursement agreement, the Bank of New York had separately issued its direct pay LOC for the benefit of the holders of each series of bonds. Both LOC’s were due to expire in June 2006.

Bank of America LOCs are in place to secure the MPUFB bonds. These LOCs are due to expire on January 31, 2009, and are subject to renewal at that time with the bank. To secure MPS’s obligations under the letter of credit and reimbursement agreement for the 1996 Refunding Series, MPS issued second mortgage bonds in the amount of $14.4 million in June 2002. For the 2000 Series, MPS issued first and second mortgage bonds, in the amounts of $5 million and $4.53 million, respectively, to secure MPS’s obligation under the letter of credit and reimbursement agreement for this series. For both series, MPS has the option of selecting weekly, monthly, annual or term interest rate periods. For both series, MPS has continued to use the weekly interest rate period. Since issuance, the average of these weekly rates was 2.85% and 2.22% for the 1996 Refunding Series and the 2000 Series, respectively. In September 2003, MPS executed an interest rate swap agreement with Fleet National

 

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Bank, now Bank of America, for the remaining terms of the issues with an effective fixed rate of 4.57% for the 1996 series and 4.68% for the 2000 series. By its rate order in Docket No. 2003-85, the MPUC approved the execution of the agreements and allowed recovery of the additional interest costs.

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 related 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 MPS’s 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 shall be April 1, 2001 through March 31, 2003.) This limitation does not apply to the stranded cost free cash flows. 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, 2007, 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.

 

   

MAM’s 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 Energy Atlantic (now inactive), 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.

Maine Yankee

MPS owns 5% of the common stock of Maine Yankee Atomic Power Company, 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 Maine Yankee nuclear plant, MPS believes it is entitled to recover substantially all of its share of such costs from its customers. As of December 31, 2007, MPS is carrying on its consolidated balance sheet a regulatory asset and a corresponding liability in the amount of $4.8 million, which

 

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reflects MPS’s 5% share of Maine Yankee’s 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, Maine Yankee 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, Maine Yankee 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, Maine Yankee 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 that reflected substantially similar terms to those proposed by Maine Yankee in its October 2003 filing. MPS’s 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, Maine Yankee 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. Maine Yankee’s 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 completed its current common stock redemption program.

Regulatory Proceedings

For regulatory proceedings, see Part I, Item 3, “Legal Proceedings,” which is incorporated in this section by this reference.

 

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

The following represents Maine & Maritimes Corporation’s more significant risks. While every effort is made to describe the character of the organization’s 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) MAM and its subsidiaries are faced with interest rate risk on the MAM $4.0 million Bank of America line of credit and $1.5 million term note with Katahdin Trust Company, and the MPS line of credit.

 

      

The Company also 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 4.42% and 4.53%, respectively. The rate on the 1998 Notes due in 2008 was also fixed at 2.79% through December 2007. As of December 31, 2007, the 1996 and 2000 Series and the 1998 Notes had outstanding balances of $13.6 million, $9.0 million and $1.1 million, respectively. The fixed rates are higher than the previous floating rates and

 

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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 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 MPS’s financial statements and further description of the interest rate swaps.

 

       MPS purchased a 7% interest rate cap, which expires in 2008, for MPS’s 1998 Notes. 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 Company’s unregulated real estate development and investment subsidiaries, Mecel Properties Ltd and Maricor Properties Ltd, and its subsidiary, Cornwallis Court Developments 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 MAM’s investment in Maricor Properties Ltd are subject to foreign currency translation risk. Income and expenses are translated at average exchange rates 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) MAM’s 3,000 Series A-1 preferred shares were converted to 12,078 common shares in February 2007. The Series A-2 preferred shares were converted to 26,000 common shares on April 13, 2007. To the extent the market price of MAM common stock is below $25 per share on March 31, 2008, the number of shares issuable on conversion is ratably increased, which could result in further dilution of MAM’s common stock.

 

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Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Maine & Maritimes Corporation:

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, 2007 and 2006, and the related consolidated statements of operations, common shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedules for the years ended December 31, 2007, 2006 and 2005, listed in the Index at Item 15(a)(2). These financial statements are the responsibility of the Company’s 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. An audit includes 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 Company’s 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, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, 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 Commission’s 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, 2007, 2006 and 2005.

Vitale, Caturano & Co., Ltd.

Boston, MA

March 13, 2008

 

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MAINE & MARITIMES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands of dollars, except share information)

 

    Year Ended December 31,  
    2007     2006     2005  

Operating Revenues

  $ 37,520     $ 35,601     $ 34,299  

Operating Expenses

     

Regulated Operation & Maintenance

    14,798       15,266       14,352  

Unregulated Operation & Maintenance(1)

    1,319       2,161       1,968  

Depreciation

    2,817       2,894       2,782  

Amortization of Stranded Costs

    10,747       10,960       10,533  

Amortization of Intangibles

    227       155       365  

Taxes Other Than Income

    1,733       1,807       1,705  

Provision for Income Taxes—Regulated

    2,531       1,575       1,506  

Benefit of Income Taxes—Unregulated(1)

    (560 )     (1,068 )     (878 )
                       

Total Operating Expenses

    33,612       33,750       32,333  
                       

Operating Income

    3,908       1,851       1,966  
                       

Other Income (Deductions)

     

Equity in Income (Loss) of Associated Companies

    20       283       (50 )

Interest and Dividend Income

    19       20       24  

Allowance for Equity Funds Used During Construction

                23  

Provision for Income Taxes

    (63 )     (1 )     (2 )

Other—Net

    (55 )     (140 )     (112 )
                       

Total Other (Deductions) Income

    (79 )     162       (117 )
                       

Income Before Interest Charges

    3,829       2,013       1,849  
                       

Interest Charges

     

Long-Term Debt and Notes Payable

    2,947       2,982       2,343  

Less Stranded Costs Carrying Charge

    (1,743 )     (1,636 )     (1,427 )

Less Allowance for Borrowed Funds Used During Construction

                (8 )
                       

Total Interest Charges

    1,204       1,346       908  
                       

Net Income from Continuing Operations

    2,625       667       941  
                       

Discontinued Operations (Note 3)

     

Loss on Sales of Discontinued Operations

    (154 )     (5,750 )      

Goodwill Impairment Loss

          (2,546 )      

Loss from Operations

    (1,473 )     (2,614 )     (1,880 )

Benefit of Income Taxes

    634       4,322       719  
                       

Loss from Discontinued Operations

    (993 )     (6,588 )     (1,161 )
                       

Net Income (Loss) Available for Common Stockholders

  $ 1,632     $ (5,921 )   $ (220 )
                       

Average Shares Outstanding

    1,669,776       1,637,815       1,636,322  

Basic Earnings Per Share of Common Stock From Continuing Operations

  $ 1.57     $ 0.41     $ 0.58  

Basic Loss Per Share of Common Stock From Discontinued Operations

    (0.59 )     (4.03 )     (0.71 )
                       

Basic Earnings (Loss) Per Share of Common Stock From Net Income (Loss)

  $ 0.98     $ (3.62 )   $ (0.13 )
                       

Diluted Earnings Per Share of Common Stock From Continuing Operations

  $ 1.57     $ 0.41     $ 0.58  

Diluted Loss Per Share of Common Stock From Discontinued Operations

    (0.59 )     (4.03 )     (0.71 )
                       

Diluted Earnings (Loss) Per Share of Common Stock From Net Income (Loss)

  $ 0.98     $ (3.62 )   $ (0.13 )
                       

 

(1) Unregulated operation and maintenance expense and income tax benefit included in continuing operations is the activity of the holding company, including corporate costs directly associated with unregulated operations and common costs not allocated to the regulated utility, and operating expenses of MAM USG.

See Notes to Consolidated Financial Statements

 

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MAINE & MARITIMES CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets—Assets

(In thousands of dollars)

 

     December 31,  
     2007     2006  

ASSETS

    

Plant

    

Electric Plant in Service

   $ 104,289     $ 101,085  

Non-Utility Plant

     3       3  

Less Accumulated Depreciation

     (44,212 )     (41,948 )
                

Net Plant in Service

     60,080       59,140  

Construction Work-in-Progress

     3,035       499  
                

Total Plant Assets

     63,115       59,639  

Investments in Associated Companies

     940       1,500  
                

Net Plant and Investments in Associated Companies

     64,055       61,139  
                

Current Assets:

    

Cash and Cash Equivalents

     910       898  

Accounts Receivable (less allowance for uncollectible accounts of $247 in 2007 and $155 in 2006)

     7,921       6,709  

Accounts Receivable from Associated Companies

     377       281  

Unbilled Revenue from Utility

     1,170       1,150  

Inventory

     819       646  

Prepayments

     427       273  

Current Assets of Discontinued Operations

     756       8,658  
                

Total Current Assets

     12,380       18,615  
                

Regulatory Assets:

    

Uncollected Maine Yankee Decommissioning Costs

     4,774       7,743  

Recoverable Seabrook Costs

     9,449       10,559  

Regulatory Assets—Deferred Income Taxes

     5,481       5,923  

Regulatory Assets—Post-Retirement Medical Benefits

     2,574       2,205  

Deferred Fuel and Purchased Energy Costs

     30,859       34,689  

Cancelled Transmission Plant

     254       508  

Unamortized Premium on Early Retirement of Debt

     893       1,100  

Deferred Regulatory Costs

     1,302       1,677  
                

Total Regulatory Assets

     55,586       64,404  
                

Other Assets

    

Unamortized Debt Issuance Costs

     289       502  

Restricted Investment (at cost, which approximates market)

     2,466       2,458  

Miscellaneous Assets

     849       1,196  
                

Total Other Assets

     3,604       4,156  
                

Total Assets

   $ 135,625     $ 148,314  
                

See Notes to Consolidated Financial Statements

 

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MAINE & MARITIMES CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets—Capitalization and Liabilities

(In thousands of dollars)

 

     December 31,
     2007    2006

Capitalization (see accompanying statements):

     

Shareholders’ Equity

   $ 42,941    $ 41,527

Long-Term Debt

     27,427      27,840

Long-Term Debt of Discontinued Operations

          2,182
             

Total Capitalization

     70,368      71,549
             

Current Liabilities:

     

Long-Term Debt Due Within One Year

     4,163      2,685

Notes Payable to Banks

     8,000      11,970

Accounts Payable

     4,699      5,018

Accounts Payable—Associated Companies

     234      247

Accrued Employee Benefits

     1,377      1,424

Customer Deposits

     61      149

Taxes Accrued

     116      7

Interest Accrued

     201      246

Other Current Liabilities

     42      30

Current Liabilities of Discontinued Operations

     537      3,195
             

Total Current Liabilities

     19,430      24,971
             

Deferred Credits and Other Liabilities:

     

Accrued Removal Obligations

     5,699      5,572

Carrying Value of Interest Rate Hedge

     2,255      1,636

Uncollected Maine Yankee Decommissioning Costs

     4,774      7,743

Other Regulatory Liabilities

     343      382

Deferred Income Taxes

     21,864      26,360

Accrued Postretirement Benefits and Pension Costs

     8,226      8,631

Investment Tax Credits

     59      81

Miscellaneous Liabilities

     2,607      1,389
             

Total Deferred Credits and Other Liabilities

     45,827      51,794
             

Commitments, Contingencies, and Regulatory Matters (Note 12)

     

Total Capitalization and Liabilities

   $ 135,625    $ 148,314
             

See Notes to Consolidated Financial Statements

 

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MAINE & MARITIMES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands of dollars)

 

    Year Ended December 31,  
    2007     2006     2005  

Cash Flow From Operating Activities

     

Net Income (Loss)

  $ 1,632     $ (5,921 )   $ (220 )

Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operations:

     

Depreciation

    2,817       2,894       2,799  

Amortization of Intangibles

    227       155       365  

Amortization of Seabrook Costs

    1,110       1,110       1,110  

Write-off of Unrecoverable Cancelled Transmission Plant

          81        

Amortization of Cancelled Transmission Plant

    254       254        

Bad Debt Expense

    220       139       (105 )

Deferred Income Taxes—Net

    (2,600 )     2,303       1,057  

Deferred Investment Tax Credits

    (23 )     (25 )     (25 )

Allowance for Funds Used During Construction

                (31 )

Change in Deferred Regulatory and Debt Issuance Costs

    4,586       (5,100 )     (4,128 )

Amortization of Wheelabrator-Sherman Upfront Payment

          1,451       1,451  

Change in Benefit Obligations

    (1,036 )     475       304  

Gain from Sale of Stock of Subsidiary

          (429 )      

Change in Current Assets and Liabilities:

     

Accounts Receivable and Unbilled Revenue

    (1,548 )     (78 )     699  

Other Current Assets

    (327 )     37       78  

Accounts Payable

    (378 )     1,794       (758 )

Other Current Liabilities

    (13 )     (565 )     532  

Other—Net

    1,643       (463 )     1,448  
                       

Adjustments to Operating Cash Flows from Continuing Operations

    4,932       4,033       4,796  
                       

Adjustments Relating to Discontinued Operations—Operating Activities

    2,973       1,447       (781 )

Adjustments Relating to Discontinued Operations—Loss on Sale

    92       3,450        
                       

Adjustments to Operating Cash Flows from Discontinued Operations

    3,065       4,897       (781 )
                       

Net Cash Flow Provided By Operating Activities

  $ 9,629     $ 3,009     $ 3,795  
                       

Cash Flow From Financing Activities

     

Dividend Payments

                (1,227 )

Retirements of Long-Term Debt

    (2,715 )     (2,430 )     (4,225 )

Retirements of Long-Term Debt of Discontinued Operations

    (3,200 )            

Additions of Long-Term-Debt

    4,920              

Payments of Capital Lease Obligations

    (122 )     (47 )      

Short-Term Borrowings (Repayments), Net

    (2,970 )     2,570       6,200  

Short-Term Debt Repayments of Discontinued Operations

    (1,000 )            

Borrowings of Discontinued Operations

                211  
                       

Net Cash Flow (Used for) Provided By Financing Activities

  $ (5,087 )   $ 93     $ 959  
                       

Cash Flow From Investing Activities

     

Stock Redemption from Associated Company

    250       850       350  

Cash Paid for Stock Contingencies from Acquisition Agreements

    (414 )     (244 )     (203 )

Gain from Sale of Stock of Subsidiary

          429        

Cash Received from Sale of Discontinued Operations

    1,821              

Change in Restricted Investments

    (9 )     (5 )     (8 )

Investment in Fixed Assets

    (6,178 )     (3,183 )     (4,822 )

Investing Activities and Acquisitions of Discontinued Operations

          (324 )     (728 )
                       

Net Cash Flow Used For Investing Activities

  $ (4,530 )   $ (2,477 )   $ (5,411 )
                       

Increase (Decrease) in Cash and Cash Equivalents

    12       625       (657 )

Cash and Cash Equivalents at Beginning of Period

    898       273       930  
                       

Cash and Cash Equivalents at End of Period

  $ 910     $ 898     $ 273  
                       

Supplemental Disclosure of Cash Flow Information:

     

Cash Paid During the Period for:

     

Interest

  $ 3,281     $ 3,135     $ 2,884  

Income Taxes

  $ 153     $ 70     $ 4  

Non-Cash Activities:

     

Value of Preferred Stock Issued for Acquisition

  $     $     $ 950  

Fair Market Value of Stock Issued to Directors

  $ 26     $ 24     $ 27  

Fixed Assets Acquired by Capital Lease

  $ 502     $ 318     $  

See Notes to Consolidated Financial Statements

 

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MAINE & MARITIMES CORPORATION AND SUBSIDIARIES

Consolidated Statements of Common Shareholders’ Equity

(In thousands of dollars, except share information)

 

    Number of Shares                                        
    Common   Preferred     Common     Preferred                    
    Issued and
Out-standing
(5,000,000
shares
authorized)
  Issued and
Out-standing
(500,000
shares
authorized)
    Par
Value *
Issued
($7/ Share)
  Paid-In
Capital
    Par
Value *
Issued
($0.01/
Share)
  Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance, December 31, 2004

  1,635,654         11,450     1,484                 35,634       (411 )     48,157  
                                                             

New Stock Issued

  1,125   9,500       8     25           950           983  

Stock Contingency from Acquisitions

          (122 )             (122 )

Net Loss

                (220 )       (220 )

Other Comprehensive Income:

                 

Changes in Value of Foreign Exchange Translation Gain, Net of Tax Provision of $98

                  153       153  

Unrealized Gain on Investments Available for Sale, net of Tax Provision of $7

                  11       11  

Interest Rate Hedge, Net of Tax Provision of $33

                  51       51  
                       

Total Other Comprehensive Income

                    215  
                       

Total Comprehensive Loss

                    (5 )

Dividend ($0.75 per common share)

                (1,227 )       (1,227 )
                                                             

Balance, December 31, 2005

  1,636,779   9,500     $ 11,458   $ 1,387     $   $ 950     $ 34,187     $ (196 )   $ 47,786  
                                                             

New Stock Issued

  1,600       11     14               25  

Stock Contingency from Acquisitions

          (147 )             (147 )

Net Loss

                (5,921 )       (5,921 )

Other Comprehensive (Loss) Income:

                 

Changes in Value of Foreign Exchange Translation Loss, Net of Tax Benefit of $49

                  (73 )     (73 )

Unrealized Gain on Investments Available for Sale, Net of Tax Provision of $3

                  6       6  

Interest Rate Hedge, Net of Tax Benefit of $100

                  (149 )     (149 )
                       

Total Other Comprehensive Loss

                    (216 )
                       

Total Comprehensive Loss

                    (6,137 )
                                                             

Balance, December 31, 2006

  1,638,379   9,500     $ 11,469   $ 1,254     $   $ 950     $ 28,266     $ (412 )   $ 41,527  
                                                             

Common Shares Issued

  1,207       8     17               25  

Conversion of Preferred Shares

  38,078   (9,500 )     267     683         (950 )          

Stock Contingency from Acquisitions, Net of Tax Benefit of $165

                  (248 )     (248 )

Net Income

                1,632         1,632  

Other Comprehensive (Loss) Income:

                 

Changes in Value of Foreign Exchange Translation Gain, Net of Tax Provision of $258

                  387       387  

Unrealized Loss on Investments Available for Sale, Net of Tax Benefit of $7

                  (11 )     (11 )

Interest Rate Hedge, Net of Tax Benefit of $248

                  (371 )     (371 )
                       

Total Other Comprehensive Income

                    5  
                       

Total Comprehensive Income

                    1,637  
                                                             

Balance, December 31, 2007

  1,677,664       $ 11,744   $ 1,954     $   $     $ 29,898     $ (655 )   $ 42,941  
                                                             

See Notes to Consolidated Financial Statements.

 

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MAINE & MARITIMES CORPORATION AND SUBSIDIARIES

Statements of Long-Term Debt

(In thousands of dollars)

 

     December 31,
     2007    2006

Maine Public Service Company

     

Maine Public Utility Financing Bank, Public Utility Revenue Bonds:

     

Refunding Series 1996: Due 2021—Variable Interest Payable Monthly (3.53% as of December 31, 2007)

   $ 13,600    $ 13,600

Series 2000: Due 2025—Variable Interest Payable Monthly (3.53% as of December 31, 2007)

     9,000      9,000

Finance Authority of Maine:

     

1998 Taxable Electric Rate Stabilization Revenue Notes: Due 2008—Variable Interest Payable Monthly (5.1% as of December 31, 2007)

     1,120      3,175

Bank of America, N.A. (Formerly Fleet National Bank)

     

$6,000,000, 7 Year Term Loan Due November 1, 2011—Variable Interest Payable Monthly (6.725% as of December 31, 2007)

     4,120      4,750

Terex Financial Services

     

$89,000 Note and Security Agreement for purchase of Equipment

     59     

Maine & Maritimes Corporation

     

Bank of America, N.A., $4,000,000 Term Note (7.73% as of December 31, 2007)

     2,269     

Katahdin Trust Company $1,450,000, 3 Year Term Loan Due December 29, 2010—Variable Interest Rate, Payable Monthly (7.644% as of December 31, 2007)

     1,422     
             

Total Outstanding

     31,590      30,525

Less—Amount Due Within One Year

     4,163      2,685
             

Long-Term Debt of Continuing Operations

     27,427      27,840
             

The Maricor Group

     

Katahdin Trust Company $2,200,000, 5 Year Term Loan Due December 29, 2010—Variable Interest Rate, Payable Monthly, Interest Only Through November 29, 2007

          2,200
             

Total Outstanding

          2,200

Less—Amount Due Within One Year

          18
             

Long-Term Debt of Discontinued Operations

          2,182
             

Total Long-Term Debt

   $ 27,427    $ 30,022
             

Current maturities and redemption requirements for the succeeding five years and thereafter are as follows (in thousands of dollars):

 

     Total

2008

     4,163

2009

     1,992

2010

     1,790

2011

     1,045

2012

    

Thereafter

     22,600
      
   $ 31,590
      

See Notes to Consolidated Financial Statements.

 

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NOTES TO CONSOLIDATED

FINANCIAL STATEMENTS

1.    ACCOUNTING POLICIES

Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of Maine & Maritimes Corporation (“MAM” or the “Company”) and the following wholly-owned subsidiaries and affiliates:

 

  1. Maine Public Service Company (“MPS”) and its wholly-owned inactive Canadian subsidiary Maine & New Brunswick Electrical Power Company, Ltd (“Me&NB”);

 

  2. MAM Utility Services Group (“MAM USG”), a wholly-owned United States subsidiary, incorporated on September 27, 2007;

 

  3. Energy Atlantic, LLC (“EA”), an inactive subsidiary; and

 

  4. The Maricor Group (“TMG”) and its wholly-owned United States subsidiary The Maricor Group New England, Inc. (“TMGNE”) and TMG’s wholly-owned Canadian subsidiary The Maricor Group, Canada Ltd (“TMGC”), all of which are classified as discontinued operations. As described later in this document, the operations of TMGNE ceased August 31, 2007. Substantially all of the assets of TMGC were sold in June 2007. In September 2007, TMGC purchased the shares of Mecel Properties Ltd from Maricor Properties Ltd, to satisfy MAM’s obligation under the June 2006 Maricor Properties Share Agreement.

Maricor Technologies, Inc. (“MTI”) was a former wholly-owned subsidiary of MAM. Substantially all of the assets of MTI were sold on April 13, 2007, and the legal entity of MTI was dissolved on June 28, 2007. The activity of MTI through dissolution of the company is reported in discontinued operations.

In addition to these wholly-owned subsidiaries, MAM is a 50% owner of Maricor Properties Ltd, (“Maricor Properties”), a Canadian company formerly wholly-owned by MAM, and its wholly-owned Canadian subsidiary Cornwallis Court Developments Ltd. (“Cornwallis”). MAM was also a 50% owner of Maricor Ashford, an inactive joint venture with Ashford Investments, Inc. (“Ashford”). On September 12, 2007, MAM sold its 50% ownership of Maricor Ashford to Ashford.

MAM, a utility holding company organized effective June 30, 2003, owns all of the common stock of the above primary subsidiaries. Primary subsidiaries, including MPS and TMG, own all the common stock of their secondary subsidiaries. MAM is listed on the American Stock Exchange (“AMEX”) under the symbol “MAM.”

All inter-company transactions between MAM and its subsidiaries have been eliminated in consolidation.

Labor Agreements

Approximately 37% of the MPS labor force are members of the Local 1837 Unit 11 of the International Brotherhood of Electrical Workers (“IBEW”) and are covered under a collective bargaining agreement. On September 22, 2005, the IBEW 1837 Unit 11 Union approved a four-year collective bargaining agreement for the term of October 1, 2005, through September 30, 2009. The key provisions of this contract include wage increases of 4.0% for the first year and 3.25% for each year thereafter, increases in contributions to health insurance premiums, deductibles, medical and prescription co-payments to be paid by the employees, and ineligibility for pension and post-retirement benefits for new union employees hired on or after January 1, 2006, and October 1, 2005, respectively. To compensate new employees covered under the collective bargaining agreement for their ineligibility for the pension plan, they receive a 4.0% match under the Company’s 401(k) plan. This agreement was amended October 25, 2006, to reflect the freeze on future salary and service accruals effective December 31, 2006, for current employees in the Company’s Pension Plan.

 

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Regulations

MPS is subject to the regulatory authority of the Maine Public Utilities Commission (“MPUC”) and the Federal Energy Regulatory Commission (“FERC”). As a result of the ratemaking process, the applications of accounting principles by the Company differ in certain respects from applications by non-regulated businesses.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Deferred Fuel and Purchased Energy Costs

Certain Wheelabrator-Sherman (“WS”) fuel costs and the sharing provisions for Maine Yankee replacement power costs were deferred for future recovery as defined in MPS’s rate plan until March 1, 2000. All other fuel and purchased power costs were expensed as incurred. These costs are currently being recovered in rates and the related deferred asset is being amortized accordingly. Beginning March 1, 2002, and until the WS contract terminated in December 2006, the excess of the cost over the sales price of WS fuel was deferred. The resulting deferred asset of $30.9 million as of December 31, 2007, is expected to be collected in future rates as approved by the MPUC.

Accounting Policies

The following accounting policies are separated into those policies that will continue to have an impact on operations following the dissolution of the companies classified as discontinued operations, and those policies that impact only discontinued operations and will not impact the reporting of future years.

Accounting Policies with a Continuing Impact

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 probable of recovery 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 MPS’s current rate plans. MPS earns a return on substantially all regulatory assets for which funds have been spent.

The Company believes that MPS’s 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, 2007, $55.6 million of regulatory assets remained on MPS’s books. These assets will be amortized over various periods in accordance with MPUC approved rate orders.

Revenue Recognition—MPS

MPS records an estimate 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.

 

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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 2007 and 2006, $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 deferred $744,000 through December 31, 2006. Recovery and amortization of this special discount began in 2007. The remaining regulatory asset of $494,000 at December 31, 2007, is included in the line “Deferred Regulatory Costs” on the Consolidated Balance Sheets.

Revenue Recognition—USG and TMG

Revenues and profits from MAM USG’s long-term contracts are recognized on a percentage completed 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 resulted in either under- or over-billings. Losses on contracts will be 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, MAM USG will include 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 represented 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. Unbilled contract revenue represented 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 resulted when the appropriate contract revenue amount had 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.

The revenue recognition for TMG, classified as discontinued operations, followed this same policy. The policy will continue to impact our financial statements through MAM USG, but not TMG.

Pension and Other Post-Retirement Benefit Plans

MPS has pension and other post-retirement benefit plans, principally health care benefits, covering substantially all of its employees and retirees. In accordance with Statement of Financial Accounting Standards No. 87 (“SFAS 87”), “Employer’s Accounting for Pensions,” Statement of Financial Accounting Standards No. 106 (“SFAS 106”), “Employer’s Accounting for Post-retirement Benefits Other Than Pensions,” and Statement of Financial Accounting Standards No. 158 (“SFAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” 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 Company’s non-cash pension income or expense or the Company’s post-retirement benefit costs. For additional information on the Company’s benefit plans, see Note 11 to the Consolidated Financial Statements, “Benefit Programs.”

 

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Income Taxes

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, 2007, and 2006, Management evaluated the deferred tax asset valuation and determined that no valuation allowance was needed.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” effective on a “catch-up” basis for fiscal years beginning after December 15, 2006. This guidance interprets SFAS 109, “Accounting for Income Taxes,” and clarifies the existing guidance regarding recognition of uncertain tax positions. Under FIN 48, a tax benefit from an uncertain tax position can only be recognized if it is more likely than not that the position is sustainable based on its technical merits and relevant administrative practices. The amount of the tax benefit allowed to be recognized is limited to the greatest amount of benefit that is cumulatively greater than 50% likely of being realized. The guidance also notes that these tax benefits can become recognized or “derecognized” as new information becomes available. For additional information on the Company’s income taxes, see Note 2 to these Consolidated Financial Statements, “Income Taxes.”

Interest on income taxes, if any, is presented within the provision for or benefit of income taxes. Penalties associated with income taxes, if any, are presented within Other Income (Deductions).

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.

Asset Retirement Obligations

In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143 (“SFAS 143”), “Accounting for Asset Retirement Obligations.” SFAS 143 requires an entity to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and to capitalize the cost by increasing the carrying amount of the related long-lived asset. The liability is adjusted to its present value periodically over time, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement, the entity either settles the obligation at its recorded amount or incurs a gain or a loss. For rate-regulated entities, any timing differences between rate recovery and book expense would be deferred as either a regulatory asset or a regulatory liability. The Company’s adoption of SFAS 143 as of January 1, 2003, did not have a material effect on its financial position or results of operations. SFAS 143 provides that if the requirements of SFAS 71 are met, a regulatory liability should be recognized for the difference between removal costs collected in rates and actual costs incurred. Based on the cost of removal inherent in MPS’s depreciation rates from the depreciation study in effect, as of December 31, 2007 and 2006, accrued removal obligations totaling approximately $5.7 million and $4.7 million, respectively, which had previously been embedded within accumulated depreciation, were reclassified as a regulatory liability.

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 “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, as of December 31, 2007 and 2006, MPS recognized a specific asset retirement obligation of $699,000 and $832,000, respectively, associated with the PCB Transformer phase-out program mandated by the State of Maine, by reducing accumulated depreciation and increasing the accrued removal obligation. This adjustment did not impact net income.

 

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Financial Instruments

MPS has certain financial instruments, interest rate caps and swaps, on three variable-rate long-term debt issues that qualify as derivatives. Interest rate caps involve the exchange of cash for a cap on the interest rate MPS can be charged. Interest rate swaps involve the exchange of cash and the exchange of a variable-rate payment for a fixed-rate payment. On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), as amended by SFAS 137, 138 and 149, which establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 requires that an entity recognize derivatives as either assets or liabilities on the balance sheet and measure those instruments at fair value. The accounting for changes in the fair value of the derivative depends on the intended use of the derivative and the resulting designation. See Note 7, “Interest Rate Derivatives” for additional disclosure regarding the treatment of these interest rate instruments.

Foreign Exchange

MAM accounts for the operations of its Canadian subsidiaries in accordance with Statement of Financial Accounting Standards No. 52 (“SFAS 52”), “Foreign Currency Translation.” Income statement activity is translated at the average rate for the period. The balance sheet is translated at the exchange rate as of the end of the period. During 2007 and 2006, this impact increased (decreased) other comprehensive income by $387,000 and $(73,000), respectively, net of income tax. The majority of the impact of foreign exchange was associated with the operations of TMGC. However, MAM still has foreign exchange risk associated with Mecel Properties and Me&NB.

Accounts Receivable and Reserve

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make required payments. The Company estimates its anticipated losses from doubtful accounts based on its collections history, as well as by specifically reserving for known doubtful accounts. Estimating losses from doubtful accounts is inherently uncertain because the amount of such losses depends substantially on the financial condition of the Company’s customers, and the Company typically has limited visibility as to the specific financial state of its various individual customers. If the financial condition of the Company’s customers were to deteriorate beyond estimates, resulting in an impairment of their ability to make payments, the Company would be required to write off additional accounts receivable balances, which would adversely impact the Company’s net earnings, cash flows and balance sheet.

Utility Plant

Utility plant for MPS is stated at original cost of contracted services, direct labor and materials, as well as related indirect construction costs including general engineering, supervision, and similar overhead items and allowances for the cost of equity and borrowed funds used during construction (“AFUDC”). The cost of utility plant which is retired and the related cost of removal, less salvage, are charged to accumulated depreciation, consistent with utility industry practice. The cost of maintenance and repairs, including replacement of minor items of property, are charged to maintenance expense as incurred. MPS’s property, with minor exceptions, is subject to first and second mortgage liens.

Costs which are disallowed or are expected to be disallowed for recovery through rates are charged to expense at the time such disallowance is probable.

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is

 

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measured by the amount by which the carrying amount of the assets exceeds their fair value. Judgments made by the Company relate to the expected useful lives of long-lived assets and its ability to realize any undiscounted cash flows in excess of the carrying amounts of such assets and are affected by factors such as the ongoing maintenance and improvements of the assets, changes in the expected use of the assets, changes in economic conditions, changes in operating performance and anticipated future cash flows. Since judgment is involved in determining the fair value of long-lived assets, there is risk that the carrying value of the Company’s long-lived assets may require adjustment in future periods. If actual fair value is less than the Company’s estimates, long-lived assets may be overstated on the balance sheet and a charge would need to be taken against net earnings.

Depreciation and Amortization

Most of the utility plant depreciation is provided on a composite basis using the straight-line method, while computer equipment and vehicles are depreciated on a single-unit basis. Both types of rates are approved by the MPUC and the FERC, and were most recently updated with the 2006 distribution and transmission rate cases, with an overall reduction in depreciation rates. The composite depreciation rate, expressed as a percentage of average depreciable plant in service, was approximately 2.96%, 3.05% and 3.22% for 2007, 2006 and 2005, respectively.

Depreciation of fixed assets at TMG and Maricor Properties was straight-line based on the remaining useful life of the asset. Buildings are depreciated over 25 years; new computer hardware is depreciated over approximately three years; leasehold improvements are depreciated over the life of the lease; and office equipment is depreciated over three to five years. Each of these depreciation categories utilizes a half-year convention.

Bond issuance costs and premiums paid upon early retirements are amortized over the terms of the related debt. Recoverable Seabrook costs and other deferred regulatory expenses are amortized over the period allowed by regulatory authorities in the related rate orders. Recoverable Seabrook costs are being amortized principally over thirty years (See Note 13, “Commitments, Contingencies and Regulatory Matters—Seabrook Nuclear Power Project”).

Investments in Associated Companies

The Company records its investments in Associated Companies (See Note 5, “Investments in Associated Companies”) using the equity method.

Pledged Assets

The assets of MPS, including the common stock of Me&NB, are pledged as collateral for the first and second mortgage and collateral trust bonds of MPS. Substantially all of MAM’s assets, excluding those of MPS, are pledged as collateral for the Bank of America financing.

Inventory

Inventory is stated at average cost, and consists primarily of assets used in the construction and maintenance of utility property, including poles and wire.

Cash and Cash Equivalents

For purposes of the Statements of Consolidated Cash Flows, the Company considers all highly liquid securities with a maturity, when purchased, of three months or less to be cash equivalents.

The Company maintains deposits with reputable national banks in excess of the $100,000 FDIC insurance limit, but Management believes the risk that access to these deposits could be restricted is remote.

 

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Restricted Investments

At December 31, 2007, the Company had $2.5 million of restricted investments. MPS was required to establish a Capital Reserve Fund held by the Trustee of MPS’s 1998 Taxable Electric Stabilization Revenue Notes, which accounted for $2.4 million of the restricted investments. On February 6, 2008, following the final payment on the 1998 Notes, the proceeds of the capital reserve fund were released to MPS. Approximately $72,000 of insurance proceeds on an MPS substation incident is also held by the Trustee of MPS’s first and second mortgage bonds. At December 31, 2006, the Company’s $2.5 million restricted investments balance represented the $2.4 million Capital Reserve Fund and $69,000 of insurance proceeds.

Stock Option Plan

At December 31, 2007, the Company had a stock-based employee compensation plan, which is described more fully in Note 9, “Stock Compensation Plan.” The Company accounts for this plan in accordance with the provisions of Statement of Financial Accounting Standards No. 123(R) (“SFAS 123(R)”), “Accounting for Stock Based Compensation.”

Stock Plan for Outside Directors

An additional 20,000 shares were originally available for issuance to the Company’s Board of Directors pursuant to the Stock Plan for Outside Directors. Under this plan, 14,849 shares have been issued, with 5,151 shares remaining available for issuance.

Preferred Shares

In February 2005, MAM issued 9,500 shares of convertible 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. In February 2007, 3,000 shares of preferred stock were converted into 12,078 shares of common stock. The remaining 6,500 preferred shares were converted into 26,000 shares of common stock in April 2007. If MAM’s stock price is below $25 on March 31, 2008, HCI will be entitled to additional shares of stock.

Earnings per Share

Basic earnings per share (“EPS”) is determined by dividing net income by the weighted-average number of shares of common stock outstanding during the period. The weighted-average common shares outstanding for diluted EPS include the incremental effect of stock options and preferred shares issued. See Note 9, “Stock Compensation Plan” for calculation of basic and diluted earnings per share.

Discontinued Operations

Goodwill and Acquired Intangibles

The Company’s acquisitions of RES, M&R, Eastcan and Pace resulted in goodwill and other intangible assets, which affected the amount of amortization expense and impairment expense the Company incurred. The Company 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 containing 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 relied 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 Management’s judgment in applying them to the analysis of goodwill impairment. If actual fair value is less than the Company’s estimates, goodwill and other intangible assets may be overstated on the balance sheet and a charge would need to be taken against net earnings.

 

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For impairment testing purposes, the reporting unit was defined as the acquired operations. For these acquisitions, the operations acquired became the mechanical and electrical engineering components of TMGC and TMGNE. All goodwill associated with these acquisitions was written off during 2006.

Revenue Recognition—MTI

Maricor Technologies, Inc. was engaged as a seller and licensor of software. Generally, revenue was 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 was allocated to the various elements based on evidence of fair value. When a multiple element arrangement included rights to post-contract customer support, the portion of the license fee allocated to support was recognized ratably over the term of the arrangement.

Amortizable Intangible Assets

The Company had identifiable intangible assets from the acquisition of unregulated mechanical and electrical engineering companies. These intangible assets were identified as the expected profit from the backlog of projects in progress as of the acquisition date and from the value derived from the client lists from these service firms. These assets were amortized over their estimated useful lives, which are approximately one year for the backlog and three years for the client lists. The remaining intangible assets of $67,000 were written off and included in the estimated loss on sale in 2006.

Reclassifications

The reclassification of the unregulated engineering services segment, the unregulated software technology segments, and Mecel from continuing operations to discontinued operations have been made to the 2005 financial statement amounts in order to conform to the 2007 and 2006 presentation. Further, the unregulated real estate segment reported in the 2005 financial statements has been reclassified to the equity method, instead of consolidated, also to conform to the 2007 and 2006 presentation.

New Accounting Pronouncements

Business Combinations

On December 4, 2007, the FASB issued FASB Statement (“SFAS”) No. 141(R), “Business Combinations.” This statement significantly changed the accounting for business combinations, requiring an acquiring entity to recognize all assets acquired and liabilities assumed in a transaction at the acquisition-date fair value, with limited exceptions. Accounting for acquisition costs, non-controlling interests, acquired contingent liabilities, in-process research and development, restructuring costs and deferred tax asset valuation allowances and income tax uncertainties will all change under the new guidance. SFAS 141(R) also implemented new disclosure requirements. This Statement is effective for the first annual reporting period beginning on or after December 15, 2008, with early adoption prohibited. With our change in strategy, we have no current plans for significant acquisitions, and therefore do not anticipate a material impact from the adoption of this standard. However, we cannot guarantee acquisitions will not occur in the future that could be materially impacted by this new standard.

Noncontrolling Interests in Consolidated Financial Statements

Also on December 4, 2007, the FASB issued SFAS 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51.” SFAS 160 requires the recognition of a noncontrolling interest (also known as a minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. Further, this standard clarifies that changes in a

 

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parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. A gain or loss will be recognized in net income when a subsidiary is deconsolidated, using the fair value of the noncontrolling equity investment on the deconsolidation date. Finally, SFAS 160 expanded the disclosure requirements regarding the interests of the parent and its noncontrolling interest. This statement is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited.

The Fair Value Option for Financial Assets and Financial Liabilities

The FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115,” in February 2007. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This statement is effective for the beginning of MAM’s 2008 fiscal year. The Company is in the process of assessing the impact of SFAS 159 on its financial statements, but does not anticipate a material impact from the adoption of this standard.

Fair Value Measurements

Also in September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” This standard provides guidance for using fair value to measure assets and liabilities. It applies whenever other standards require or permit the use of fair value measurements for assets or liabilities, but does not expand the use of fair value measurements in new circumstances. Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants in the market in which the reporting entity transacts. The standard established a fair value hierarchy to be used to determine the method of determining this price. The highest weight is given to quoted prices in active markets. The lowest weight is given to unobservable data. Fair value measurements must be separately disclosed by their level in this fair value hierarchy, with additional disclosure required for the effect on earnings when fair value measurements are based on unobservable data. This standard is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption encouraged when the reporting entity has not issued financial statements for the fiscal year of adoption. This statement is not anticipated to have a material impact on the Company’s financial statements.

 

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2.    INCOME TAXES

A summary of Federal, Canadian and State income taxes charged (credited) to income is presented below. For accounting and ratemaking purposes, income tax provisions (benefits) included in “Operating Expenses” reflect taxes applicable to revenues and expenses allowable for ratemaking purposes on MPS regulated activities and unregulated activities for MAM, TMG, Mecel and MTI. The tax effect of items not included in rate base or normal operating activities is allocated as “Other Income (Deductions).”

The foreign income taxes include only the Canadian income taxes for TMGC, Me&NB and Mecel.

 

     2007     2006     2005  
     (In thousands of dollars)  

Current income taxes

      

Federal

   $     $     $ (730 )

State

                 (87 )

Foreign

           6       (140 )
                        

Total current income taxes

           6       (957 )
                        

Deferred income taxes

      

Federal

   $ 1,210     $ (3,226 )   $ 759  

State

     213       (569 )     134  
                        

Total deferred income taxes

     1,423       (3,795 )     893  
                        

Investment credits, net

     (23 )     (25 )     (25 )
                        

Total income taxes

   $ 1,400     $ (3,814 )   $ (89 )
                        

Allocated to:

      

Operating income

      

— Regulated

   $ 2,531     $ 1,575     $ 1,506  

— Unregulated

     (560 )     (1,068 )     (878 )
                        

Subtotal

     1971       507       628  

Discontinued Operations

     (634 )     (4,322 )     (719 )
                        

Total Operating

     1,337       (3,815 )     (91 )

Other income

     63       1       2  
                        

Total

   $ 1,400     $ (3,814 )   $ (89 )
                        

The effective income tax rates differ from the U.S. statutory rate as follows:

 

     2007     2006     2005  

Statutory Rate

   34.0 %   34.0 %   34.0 %

Holding Company Formation

   (0.2 )   0.1     1.9  

State Income Taxes

   6.9     6.0     4.6  

Book to Accrual Adjustments

   1.4     (2.6 )   3.8  

Disallowed Meals

   0.3     (0.2 )   (5.5 )

Valuation Allowance on Earnings from Investments

   3.0     0.6     5.6  

Depreciation Flow-through on ADR Property

   0.0     0.0     (19.3 )

ITC Amortization

   (0.7 )   0.3     8.0  

Other

   1.5     1.0     (4.3 )
                  

Effective Rate

   46.2 %   39.2 %   28.8 %
                  

The book to accrual adjustments of 1.4%, (2.6)% and 3.8% in 2007, 2006 and 2005, respectively, represent tax true-up items associated with revised tax estimates. These items are an empowerment zone credit wage add-back, true-up of the tax amortization of goodwill, and a true-up of taxable dividends received from a joint venture company.

 

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The valuation allowance on earnings from investments items of 3.0%, 0.6% and 5.6% in 2007, 2006 and 2005, respectively, relate to MPS’s interest in two joint venture companies, Maine Yankee and MEPCO. MPS’s net income includes the equity earnings from these two companies, which are accounted for under the equity method. Their equity earnings are excluded from MPS taxable income, and the dividends received are included in taxable income. Deferred taxes are not provided on the equity earnings or the dividends since these companies dividend substantially all of their earnings on a quarterly basis.

According to regulated utility income tax accounting rules, MPS does not provide deferred income tax on certain timing differences related to accelerated depreciation on Asset Depreciation Range property, which was originally placed in service during the years 1971 through 1980. The depreciation flow-through on ADR property item of (19.3%) in 2005 relates to tax depreciation on this property. In 2006 and 2007, the impact on the effective rate was minimal, as most of this property is now fully depreciated.

The elements of deferred income tax expense (credit) are as follows (in thousands of dollars):

 

     2007     2006     2005  

Temporary Differences at Statutory Rates:

      

Seabrook

   $ (613 )   $ (613 )   $ (613 )

Liberalized Depreciation

     49       88       262  

Deferred Fuel

     (1,528 )     1,908       1,740  

Deferred Regulatory Expenses

     (28 )     90       (146 )

Flexible Pricing Revenue

     (193 )     12       51  

Accrued Pension & Post-Retirement Benefits

     81       355       7  

Wheelabrator-Sherman Power Purchase Restructuring

           (579 )     (579 )

Reacquired Debt

     (83 )     1       (77 )

Software Amortization

     40       178       114  

Cancelled Plant

     (101 )     203        

Net Operating Loss Carryforwards of Continuing Operations

     4,964       (1,055 )      

Discontinued Operations

     (847 )     (4,322 )     123  

Other

     (318 )     (61 )     11  
                        

Total Temporary Differences—Statutory Rates

   $ 1,423     $ (3,795 )   $ 893  
                        

The Company has not accrued U.S. income taxes on the undistributed earnings of Me&NB, as the withholding taxes due on the distribution of any remaining amount would be principally offset by foreign tax credits. No dividends were received from Me&NB in 2007, 2006, or 2005.

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109.” This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 requires a tax position to be more likely than not in order for the position to be recognized in the financial statements.

Effective January 1, 2007, the Company adopted the provisions of FIN 48. There were no adjustments required to the reported tax benefits at January 1, or December 31, 2007, from the adoption of this standard. Further, the Company does not expect that the amounts of unrecognized tax benefits will change significantly in the next twelve months. As of January 1, and December 31, 2007, the Company has accrued no interest or penalties related to uncertain tax positions.

In the first quarter of 2008, the Company was under audit by the State of Maine for its 2005 and 2006 State income tax and sales tax returns. This review was completed during the first quarter of 2008, with no material adjustments. These returns could remain subject to audit, if the US Federal income tax returns for those years are selected for audit. There are no reserves associated with these returns. The statutes of limitations for audits by Federal, Maine, Massachusetts and Canadian tax authorities have expired for all tax years ending December 31, 2003, or earlier.

 

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As required by SFAS No. 109 and FIN 48, Management of the Company has evaluated the positive and negative evidence bearing upon the likelihood of the Company realizing its deferred tax assets, which consist principally of the estimated losses on the divestiture of unregulated operations, pension and post-retirement benefits and accumulated Other Comprehensive Income (“OCI”) associated with the interest rate hedge. For the years ended December 31, 2007, 2006 and 2005, Management evaluated the deferred tax asset valuation allowance and determined no adjustment was needed.

The following summarizes accumulated deferred income tax (assets) and liabilities established on temporary differences under SFAS 109 as of December 31, 2007 and 2006 (in thousands of dollars):

 

     2007     2006  

Seabrook

   $ 5,124     $ 5,737  

Property

     9,527       9,526  

Flexible Pricing Revenue

     403       596  

Deferred Fuel

     12,311       13,839  

Pension and Post-Retirement Benefits

     (2,173 )     (1,992 )

Net Operating Loss Carryforwards

     (2,095 )     (1,055 )

Other Comprehensive Income

     (853 )     (602 )

Other

     (380 )     311  
                

Net Accumulated Deferred Income Tax Liability from Continuing Operations

     21,864       26,360  
                

Goodwill Impairment Loss

   $     $ (1,018 )

Estimated Loss on Sale of Discontinued Operations

           (2,485 )

Net Operating Loss Carryforwards

           (1,204 )

Amortization of Goodwill

           375  

Other Comprehensive Income

     538       287  

Other

     (11 )     (26 )
                

Net Accumulated Deferred Income Tax Liability (Asset) from Discontinued Operations

     527       (4,071 )
                

Net Accumulated Deferred Income Tax Liability

   $ 22,391     $ 22,289  
                

3.    DISCONTINUED OPERATIONS

As noted in MAM’s 2006 Form 10-K, the Company has refocused its corporate strategy on utility-centric business. In conjunction with this change, MAM divested all of its unregulated software technology and engineering operations during 2007. As a result, TMG and MTI were reclassified as discontinued operations in these financial statements, in accordance with FAS 144.

The net loss for TMG is composed of the following (in thousands of dollars):

 

     2007     2006     2005  

Loss on Sale

   $ (154 )   $ (4,717 )   $  

Goodwill Impairment Loss

           (2,546 )      

Loss From Operations:

      

Operating Revenue

     2,395       5,735       5,291  

Expenses

     (3,457 )     (7,232 )     (6,633 )
                        

Loss from Operations

     (1,062 )     (1,497 )     (1,342 )
                        

Benefit of Income Taxes

     470       3,467       495  
                        

Net Loss—Unregulated Engineering Services

   $ (746 )   $ (5,293 )   $ (847 )
                        

 

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The TMG balance sheet as of December 31, 2007, 2006 and 2005 is as follows (in thousands of dollars):

 

     2007     2006     2005

Assets:

      

Cash & Cash Equivalents

   $ 48     $ 210     $ 315

Accounts Receivable, Net

     15       1,798       1,551

Unbilled Contract Revenue

           1,155       816

Other Current Assets

     114       76       76
                      

Current Assets

     177       3,239       2,758
                      

Fixed Assets, Net of Depreciation

     578       733       1,028

Intangible Assets and Goodwill

           162       7,032

Income Taxes Receivable

           864       1,243

Deferred Tax Assets

           2,494      

Other Assets

                 13

Long-Term and Other Assets

     578       4,253       9,316
                      

Total Assets

   $ 755     $ 7,492     $ 12,074
                      

Shareholder’s Equity and Liabilities:

      

Shareholder’s (Deficit) Equity

   $ (4,966 )   $ (4,116 )   $ 1,601
                      

Notes Payable to Banks

           1,000       1,000

Accounts Payable and Accrued Employee Benefits

     6       1,602       748

Intercompany Accounts Payable

     1,402       1,727       2,367

Unearned Revenue

           139       92

Other Current Liabilities

     531       50       429
                      

Current Liabilities

     1,939       4,518       4,636
                      

Intercompany Notes Payable

     3,782       4,890       3,637

Long-Term Debt

           2,200       2,200
                      

Long-Term and Other Liabilities

     3,782       7,090       5,837
                      

Total Shareholder’s Equity and Liabilities

   $ 755     $ 7,492     $ 12,074
                      

Maricor Technologies

MTI’s operating revenue and net loss for 2007 and 2006 is as follows (in thousands of dollars):

 

     2007     2006  

Loss on Sale

   $     $ (1,033 )

Loss From Operations:

    

Operating Revenue

     132       183  

Expenses

     (543 )     (1,303 )
                

Loss From Operations

     (411 )     (1,120 )
                

Benefit of Income Taxes

     164       856  
                

Net Loss—Unregulated Software Technology

   $ (247 )   $ (1,297 )
                

 

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MTI had no assets at December 31, 2007. MTI’s assets, liabilities and shareholder’s equity at December 31, 2006 were (in thousands of dollars):

 

     2006  

Assets:

  

Accounts Receivable, Net

   $ 29  

Current Assets

     29  

Fixed Assets, Net of Depreciation

     203  

Income Taxes Receivable

     329  

Deferred Tax Assets

     586  
        

Long-Term and Other Assets

     1,118  
        

Total Assets

   $ 1,147  
        

Shareholder’s Equity and Liabilities:

  

Shareholder’s (Deficit) Equity

   $ (330 )

Accounts Payable and Accrued Employee Benefits

     133  

Intercompany Accounts Payable

     1,120  

Unearned Revenue

     24  
        

Current Liabilities

     1,277  
        

Other Liabilities

     200  
        

Other Liabilities

     200  
        

Total Shareholder’s Equity and Liabilities

   $ 1,147  
        

4.    SEGMENT INFORMATION

The Company is organized based on products and services. Management monitors the operations of the Company in the following operating segments:

 

   

Regulated electric utility: MPS and its inactive wholly-owned Canadian subsidiary, Me&NB;

 

   

Unregulated engineering services: The Maricor Group and its subsidiaries and product and service lines, classified as discontinued operations;

 

   

Unregulated software technology: Maricor Technologies, Inc., classified as discontinued operations;

 

   

Unregulated energy marketing: EA, an inactive subsidiary, classified as discontinued operations; and

 

   

Other: Corporate costs directly associated with the unregulated subsidiaries, common costs not allocated to the regulated utility, operations of MAM USG and inter-company eliminations.

The segment information for 2006 and 2005 has been reclassified to conform to the 2007 presentation.

The accounting policies of the segments are the same as those described in Note 1, “Summary of Significant Accounting Policies.” MAM provides certain administrative support services to MPS and MAM USG, and provided similar services to TMG, and MTI and their subsidiaries. The costs of services provided to MPS and MAM USG are billed to MPS and MAM USG based on a combination of direct charges and allocations. The cost of corporate services provided to the other unregulated entities remains at the holding company, and is not allocated or charged to the various subsidiaries.

MPS also provides services to MAM and other affiliates, including administrative services, such as information technology, human resources and accounting, and operational services. The administrative services are billed to MAM at cost through inter-company transactions. Operations services for which MPS has an established rate for charging third-parties are charged at those established rates.

 

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          Twelve Months Ended December 31, 2007
Unregulated
       
    Regulated
Electric
Utility
    Engineering
Services
    Software
Technology
    Energy
Marketing
  Other     Total  
    (In thousands of dollars)  

Revenue from External Customers

           

Operating Revenue

  $