|
|
 | | | |
- close
- close
- close
- close
Maine & Maritimes 10-K 2009 Documents found in this filing:
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, 2008 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.)
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: NYSE Alternext US 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 (§229.405 of this chapter) 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.
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, 2008: $71,738,604. The number of shares outstanding of each of the issuer’s classes of common stock as of March 17, 2009. Common Stock, $7.00 par value—1,679,599 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, 2008, which is the end of the fiscal year covered by this report, are incorporated by reference into Part III.
Table of ContentsFORM 10-K For the Fiscal Year Ended December 31, 2008 For Glossary of Terms, see Page v TABLE OF CONTENTS
ii
Table of Contents
iii
Table of ContentsGlossary of Terms
iv
Table of Contents
v
Table of ContentsPART I
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 NYSE Alternext US exchange under the symbol “MAM.” MAM is the parent holding company for the following wholly-owned subsidiaries:
Maine & Maritimes Corporation and Subsidiaries
MAM was the former owner of the following wholly-owned subsidiaries:
MAM was also a 50% owner of the following entities:
1
Table of Contents
General Descriptions of the Parent Company and its Subsidiaries: Continuing Operations:
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 American Stock Exchange. 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.
2
Table of ContentsAdditionally, 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 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.
Former Equity Investments
3
Table of Contents
Discontinued Operations
4
Table of ContentsEmployees At the end of 2008, Maine Public Service Company had 138 employees (136 full-time, 2 part-time), compared to 131 (125 full-time, 6 part-time) at December 31, 2007. Neither MAM nor any of its other subsidiaries had employees at the end of 2008 or 2007. The Company’s consolidated payroll costs were $8.1 million for 2008 and $10.5 million for 2007. Payroll costs for 2008 were all for continuing operations. For 2007, $7.8 million of the total payroll was for continuing operations, and $2.7 million for discontinued operations. The increase in payroll of continuing operations represents the impact of the additional employees and normal pay increases. The discontinued operations payroll costs were eliminated with the sales and dissolutions of MTI and TMG and its subsidiaries. Approximately 36.2% 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 material amendments to the agreement in 2007 or 2008. In the summer of 2009, the Company will begin negotiations for the new collective bargaining agreement to be effective beginning October 1, 2009. Although the Company expects to successfully negotiate new agreements prior to the expiration of the current agreements, we cannot predict the outcome of these negotiations at this time. 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 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-kilovolt (“kV”) transmission line approximately 180 miles long, which connects the New Brunswick Power system with the New England Power Pool. MEPCO became a member of ISO-New England (“ISO-NE”) on December 1, 2008. Financial Information about Segments See Note 4 to the attached financial statements. Competitive Conditions and Effects of Regulation See Item 1A. below. 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, on official business days during the hours of 10 a.m. to 3 p.m. The public may obtain information on the operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330.
5
Table of ContentsThe 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 Commission 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.
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 most recent change was on July 1, 2008. The final settlement of 2008 transmission rates is not yet complete, and may result in an adjustment during 2009. Distribution and stranded cost rates did not change during 2008. In 2009, MPS anticipates the annual adjustments to its transmission rates on July 1, 2009, and a rate filing for stranded cost rates to be effective January 1, 2010. 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 does not anticipate any adjustments to distribution rates will occur in 2009. 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 changes in tax rates or changes in environmental or workplace laws. Construction of New Transmission Facilities As previously reported, MPS, working with CMP, has been seeking to develop the Maine Power Connection transmission line project (“MPC” or the “Project”). As originally proposed, the Project would include a 200-mile 345 kilovolt transmission line and new and upgraded substations to connect northern Maine to the ISO-NE control area. MPS became involved with this project coincident with a system impact study at ISO-NE. Interconnection requests in connection with proposed new generation projects triggered the study. As previously reported, recent developments have caused MPS to reevaluate the scope of the project, and to also consider alternative means of constructing a transmission line to allow MPS to interconnect its system with the New England Grid and to support renewable energy projects in its service territory. As reported in its January 16, 2009 Item 8.01 filing with the SEC and prior press release, Aroostook Wind Energy, LLC, a developer of wind energy project expected to interconnect to the MPC transmission line, filed a letter with the MPUC reporting that it wished to stop further system impact studies associated with its interconnection request and indicating that changes in the wholesale power market have rendered it uneconomic for it to invest in transmission infrastructure. However, AWE’s letter also indicated that it intends to continue its efforts to develop a wind project in Maine.
6
Table of ContentsAlso as previously reported, development of the 345kV transmission project will require local, state and federal regulatory approvals and permits. The status of certain of those required approvals is as follows:
As reported in previous filings and based on the recent developments described above, the Company is revisiting the physical scope of the MPC Project and alternative means of developments. The Project and any of its alternatives are dependent on, among other factors, (i) the development of additional generation and the needs of generators in our service territory, and (ii) either of the following occurs – (a) MPS joins ISO-NE and ISO-NE socializes the line or (b) one or more generators agree to pay for the line. The inability to obtain regional socialization or agreements with generators, each on terms acceptable to MPS, is likely to have an impact on whether MPS and CMP construct the line, whether as originally proposed or in any alternative form. Other factors, such as cost and availability of materials, labor and subcontractors may increase the cost of the project or delay its completion. Financing Risk for New Transmission Facilities Assuming new transmission facilities are approved for construction, the Company will be seeking financing for the new transmission facilities referenced above. There can be no assurance that the Company will be able to raise the significant amount of capital to construct new transmission facilities given, among other factors, (a) the uncertainty of financial markets, which is currently greater than normal, and (b) the fact that the amount to be financed is greater than the total assets of the Company (i.e., without any reduction for liabilities), which, as of December 31, 2008, are $135 million. Further, as described above, the final design, length and cost of the line would vary significantly depending on which option, if any, is ultimately developed. Other financing risks, including the type and cost of financing, are also risks in the development of this line. Risk from Joint Development Agreement The Joint Development Agreement which MPS entered into with CMP on October 2, 2008 in connection with the MPC project, sets forth numerous conditions for continued MPS participation in the Project. Failure to
7
Table of Contentsmeet such conditions in a timely fashion can result in various consequences, including a reduction in, or elimination of the interest which MPS may acquire in the Project. Reference is made to such Agreement, which was an exhibit to the MAM 8-K filed on October 8, 2008, for details of such conditions and consequences. Contract Risks at MAM USG There are risks when MAM USG secures contracts. Such risks include inaccuracy of cost estimates on fixed rate projects, change order approval risks and professional liability for engineering services. Factors mitigating these risks include Management’s experience with estimating utility engineering and construction costs, as well as professional liability insurance coverage. Attraction and Retention of Qualified Employees MPS and MAM USG heavily depend 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. The 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 operates in a territory restricted to Aroostook County and northern Penobscot County, Maine. Our business follows the economy of the region we serve. During 2007 and 2008, MPS experienced an increase in the number of disconnection notices to customers and payment arrangements for overdue bills. We also saw slower collections and 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. However, with the final collection or write-off of the remaining TMGNE receivables during 2008, and the greater certainty of collection of MAM USG receivables, the reserve as a percentage of all accounts receivable is lower at December 31, 2008 than December 31, 2007. 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. Potential renewable energy and other generation projects in our service territory may mitigate these factors. Also, 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. MAM USG operates in competitive markets and does not have an exclusive franchise. Competition for contracts comes from local and regional electrical engineering firms, and utility construction contractors. 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 depends on dividends from subsidiaries. There are regulatory restrictions on the
8
Table of Contentsamount 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 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, 2008. MAM and MPS 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 holds 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. During 2008, the value of MPS’s pension plan assets decreased from approximately $17.3 million to $11.7 million. As a result, the estimated cash contributions have increased from $122,000 for 2008 to $941,000 for 2009. 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 PCB. 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 from past or future environmental practices. Additionally, while the Company does not believe electro-magnetic fields represent a current danger because it does not own bulk transmission, it cannot warrant that claims could not be filed. If the MPC Project is built, the Company will become a part owner of a bulk transmission line. 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 2008 and its budgeted capital investments in 2009 to address this risk.
9
Table of ContentsWeather 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. MPS bases this rate largely on energy consumption. An SOS or CES supplies the energy. 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 faces 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. Professional Liability MAM, through its former engineering services firm TMG and its subsidiaries, remains subject to risks associated with engineering design errors and/or omissions. 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. As noted above, MAM USG provides construction, engineering and design services in connection with electric generation infrastructure projects, and, therefore, is subject to similar risks.
As of December 31, 2008, 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 2009, MPS began its ninth year of this ten-year program. The cost of testing the transformers is expensed as incurred;
10
Table of Contentsreplacement 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 $3.2 million and, as of December 31, 2008, $2.6 million has been spent to remediate approximately 72% of the transformers in this effort. In March 2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN 47”), effective for fiscal years ending after December 15, 2005. FIN 47 clarifies the term “conditional asset retirement obligation,” used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” as referring to a “legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity.” Based on this interpretation, MPS recognized an asset retirement obligation associated of $611,000 with the PCB Transformer phase-out program, described more fully in Note 1 of these Consolidated Financial Statements.
MPUC Dismisses Petition for Certificate of Public Convenience and Necessity for Maine Power Connection Project On July 1, 2008, MPS and CMP jointly filed for a Certificate of Public Convenience and Necessity under MPUC Docket No. 2008-256 related to the MPC transmission line project. On February 5, 2009, the Commission issued an Order dismissing the petition without prejudice. MPS and CMP intend to continue to pursue development of a transmission line to enable development of wind generation projects and potentially to connect northern Maine to the New England power grid. FERC Conditionally Grants Incentive Rate Treatment on MPC Transmission Line Project In their filing on July 18, 2008, MPS and CMP jointly filed with FERC for incentive rate treatment on their MPC Project. For MPS, the incentive rate treatment requested was 150 basis points above our current 10.5% return on equity for transmission. Additionally, in the event the Project is cancelled, MPS and CMP are seeking authorization to recover costs related to the abandonment of the Project. MPS has currently deferred approximately $757,000 of costs associated with the Project, reported in the Consolidated Balance Sheet at “Miscellaneous Assets.” On November 17, 2008, FERC conditionally approved the requested incentive rate treatment and recovery of prudently incurred costs if the Project is abandoned as a result of factors beyond the control of MPS and CMP. The incentives are conditioned on the Project being included in ISO-NE’s Regional System Plan as an METU. Request for Confirmation of Interpretation of Cost Allocation Manual Under MPUC Docket 2009-60, MPS has requested confirmation of its interpretation of its Cost Allocation Manual. The Manual provides the process for identifying common costs of the holding company, costs that are not directly associated with the operations of its subsidiaries and for which a cost-causative indirect basis of allocation exists. These costs consist primarily of Board of Directors’ fees, SEC reporting costs, investor relations, and corporate audit and tax fees. The current formula for allocation excludes stranded costs and income taxes from the calculation of allocation rates, on the basis that these are not direct expenses that drive common costs. On that same basis, MPS has proposed to exclude MAM USG subcontractor and materials expenses from the common cost allocation. This change would not impact the net income of the corporation, but would impact segment reporting. For 2008, net income for MPS would have been approximately $281,000 lower, with a corresponding increase in the net income for MAM USG. This Docket remains open, and the Company cannot predict the ultimate outcome of this request.
11
Table of ContentsFederal Energy Regulatory Commission 2008 Open Access Transmission Tariff Formula Rate Filing On June 16, 2008, MPS filed its updated rates under the 2008 Open Access Transmission Tariff (“OATT”) formula pursuant to Docket ER00-1053 for both wholesale and retail customers. The revenue decreases were approximately $230,000 or 28% for wholesale customers, effective June 1, 2008, and $670,000 or 18% for retail customers, effective July 1, 2008. The decrease is primarily associated with wheeling revenue collected from generators exporting electricity off the MPS system during 2007. The proceeding and potential settlement negotiations are underway; the final change in rates could differ from the initial filing. MPS cannot determine the ultimate outcome at this time. Reduction of Stated Capital of Maine & New Brunswick Electrical Power Company, Ltd. In the Order Approving Stipulation under MPUC Docket No. 2002-676, “Maine Public Service Company Request for Approval of Reorganization of the Company into a Holding Company Structure,” MPS received permission from the MPUC to wind up and dissolve Me&NB at such future time as MPS deemed appropriate. In September 2008, MPS filed notice with the MPUC and partially liquidated its investment in Me&NB. This partial liquidation reduced MPS’s equity investment in Me&NB from $1 million to $150,000, with $850,000 cash returned from Me&NB to MPS, to be used to fund MPS working capital needs. MPUC Investigation of Maine Utilities Continued Participation in ISO-NE On April 8, 2008, the MPUC initiated an investigation in Docket No. 2008-156 of Maine utilities continued participation in ISO-NE and the New England Regional Transmission Organization. MPS is not currently a member of ISO-NE, but was made a party to the case by the Commission in light of the potential integration of the ISO-NE and northern Maine markets by means of the MPC Project. In February 2008, the Company has requested to become a member of ISO-NE subject to certain conditions, including the inclusion of the costs of the MPC Project in the ISO-NE regional transmission tariff. MPS has been an active participant in this Docket. On January 16, 2009, the MPUC determined that the status quo relationship with ISO-NE was inadequate. The Commission ordered CMP and Bangor Hydro to move forward and negotiate meaningful reform to benefit Maine consumers with the assistance of the Commission. The Commission will continue to participate actively within the ISO-NE stakeholder process to achieve necessary reforms. The three Commissioners of the MPUC are committed to implementing a workable alternative to the current regional system. The Company cannot predict the outcome of this Docket and reform initiative. Federal Energy Regulatory Commission 2007 Open Access Transmission Tariff Formula Rate Filing On May 21, 2007, MPS filed its updated rates under the 2007 OATT formula pursuant to Docket ER00-1053 for both wholesale and retail customers. The revenue increases were approximately $54,000 for wholesale customers, effective June 1, 2007, and $345,000 for retail customers, effective July 1, 2007. FERC approved the 2007 OATT settlement in their June 27, 2008 Order, with no material change to the rates in the original filing.
None.
12
Table of ContentsPART II
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 NYSE Alternext US under the symbol “MAM”. As of March 1, 2009, there were 564 holders of record of the Company’s common stock, with 1,679,599 shares outstanding. As of December 31, 2007, the number of outstanding shares was 1,677,664. Dividend data and market price related to the common stock are tabulated as follows for 2008 and 2007:
Dividends are subject to quarterly declaration by the Board of Directors, which establishes the amount of each quarterly Common Stock dividend and fixes the record and payment dates. A $0.05 per share fourth quarter dividend was announced in December 2008, payable January 15, 2009, signifying a return of the dividend payment which was suspended in 2005 after 78 consecutive quarters. Consistent with the dividend policy stated in MAM’s 2007 Form 10-K, the Company resumed its dividend to common shareholders. Future dividends will be considered for declaration to Common shareholders when adequate cash flows are available and when fiscally prudent after careful consideration of all cash priorities. Although any dividend payments are subject to declaration by our Board and could be discontinued at any time, we expect a quarterly dividend payment of at least the present amount to continue for the foreseeable future. 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.
13
Table of ContentsSecurities Authorized for Issuance Under Equity Compensation Plans.
The Company maintains two active equity compensation plans. A new stock compensation plan, the 2008 Stock Plan, was approved at the May 13, 2008, Annual Stockholders Meeting. This plan allows for the Performance and Compensation Committee of the MAM Board of Directors to grant up to 85,000 shares of MAM stock to employees. No more than 10,000 shares may be granted to any one employee during a five-year period, and the Performance and Compensation Committee may condition the grant or vesting of the stock awards on attainment of performance goals or the passage of time. No shares have been granted under this plan. 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, 9,410 shares have been issued, with 10,590 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 35,114 shares was held by directors as of December 31, 2008. The unfunded obligation for these deferred fees of $1.4 million is reported in the Consolidated Balance Sheets within the line “Miscellaneous Liabilities.” Also, effective March 14, 2008, the 2002 Stock Option Plan was terminated by the Board of Directors. This plan originally included 150,000 shares available for issuance. As of December 31, 2008, there are 3,932 options remaining outstanding. 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 10, “Stock Compensation Plan,” in Item 8 for more information on these stock options. Sale of Unregistered Securities None. Company Purchases of Equity Securities There were no stock repurchases by the Company during 2008 or 2007.
14
Table of Contents
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, financing risk for new transmission facilities, risk from joint development agreement, contract risks at MAM USG, attraction and retention of qualified employees, economy of the region and general economic conditions, competitive conditions, holding company structure, 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, and professional liability. Therefore, no assurances can be given that the outcomes stated in such forward-looking statements and estimates will be achieved. Annual Performance Summary Net Income and Earnings per Share
MAM’s consolidated net income increased $3.0 million from $1.6 million in 2007 to $4.6 million 2008. These improved results translated to more than 2.8 times the earnings per share, an increase of $1.77 per share. Although the increase in net income includes a one-time Gain on Foreign Exchange from Liquidation of $997,000, the increase also includes over $1.0 million in overall improved earnings performance from continuing operations. The improved financial performance was recognized by the market through the continued solid pricing of our stock. As illustrated in the chart below, the average daily closing price of our stock increased by 41% over
15
Table of Contents2007, and by 128% compared with 2006. According to Edison Electric Institute (“EEI”), MAM had a total shareholder return of 15.9% in 2008, the second highest among the 59 EEI Index companies, in a year when only five of the 59 companies had a positive return.
In spite of this success, 2008 was not without its share of financial challenges. While our overall financial performance trended upward in almost all categories, there were negative trends that caused some concern in specific areas:
16
Table of ContentsOverview of Company Strategy We are pleased with our progress during 2007 and 2008. However, we realize it is of critical importance that we continue to operate efficiently and to pursue investments to further solidify the Company and the future interests of our shareholders. Our basic strategy has remained unchanged from last year:
Utility Operations Our strategy for our existing franchise as a regulated electric transmission and distribution utility has not changed. We have been serving customers in our territory for over a century. What was true during that span and remains true today is our objective to provide our customers with safe, reliable and competitively-priced electricity service while targeting a fair regulated return on investment for our shareholders. While we are challenged by our low customer density, slow economic growth, and rugged geography, we are proud to be able to provide rates that are competitive with other larger utilities. In order to continue providing these services for another one hundred years and beyond, we must continue to efficiently manage and properly invest in our utility asset infrastructure. During 2007, 2008 and over the next few years, MPS has made and will continue to make substantial investments in our core electrical system. Capital expenditures for 2008 were approximately $6.8 million. For 2009-2012, capital expenditures will be approximately $7 million, 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 three years from our regulatory asset stranded costs collections with our capital improvement needs. The investments in these assets will help provide regulated returns to our shareholders during their useful life, assuming favorable regulatory treatment. What has changed tactically in our utility operation strategy is our pursuit of transmission alternatives. Our interest in transmission construction alternatives originated from interconnection requests filed by potential generation developers within and adjacent to our service territory. As noted in Item 1A. above, MPS continues to pursue development of a transmission line, which, among other things, would support development of renewable generation. During the past year, we disclosed in SEC filings the Company’s efforts to obtain approval for the proposed MPC Project (described under Item 1A. above ). Pursuant to a joint development agreement with CMP, the Company sought MPUC approval and filed a request with ISO-NE for allowance of the cost of the MPC Project to be regionalized in ISO-NE transmission rates as a market efficiency transmission upgrade in order to permit the delivery of renewable power to the New England market. As is typical for a large and complicated series of regulatory proceedings, we have experienced our share of ups and downs during the last year. On the positive side were several items that supported our filing, including:
17
Table of Contents
Parties opposing the Project cited a number of concerns, including:
As we reported in Form 8-K filings during January 2009, our request for MPC Project regulatory approval in the State of Maine has been dismissed by the MPUC. However, as the MPUC’s Order dismissing the case included statements encouraging the project sponsors to continue to pursue transmission options that would facilitate the delivery of renewable energy from northern Maine, and address the lack of liquidity in the northern Maine market. To that end, the MPC team is pursuing a number of related alternatives including:
We continue to believe that a northern Maine interconnection such as the MPC Project would generate substantial benefits to our service territory, the State of Maine ratepayers and municipalities, and the New England region, and would also be consistent with national energy policy make logical and economic sense. While it would be impossible for us to predict an outcome at this point, we think it is in the best interests of our customers and shareholders to continue our quest to connect the MPS territory to the rest of Maine and New
18
Table of ContentsEngland. Future efforts may involve a project which is different, at least in part. As previously reported and as discussed above under Item 1A, recent developments have caused MPS to reevaluate the scope of the project and to also consider alternative means of constructing a transmission line to allow MPS to interconnect its system with the New England Grid and to support renewable energy projects in its service territory. Unregulated Services A key portion of our strategy is to provide complementary services to our regulated utility operations by utilizing our core competencies. MAM, as the holding company, formed an unregulated subsidiary in September 2007 to pursue these initiatives. This subsidiary, MAM Utility Services Group, is providing electrical contracting, engineering, planning, procurement, and project management services to developers, generators, and others in the private and public sectors. MAM USG enjoyed successes during its first full year in business by winning bids to perform the electrical contracting work for two large wind projects as well as several other smaller commercial and industrial projects. Increasing our revenue for this segment was achieved. Total revenue for this segment was $8.4 million for 2008. However, we did incur significant expense which resulted in a loss for that segment of approximately $487,000. Obviously, we are disappointed any time we incur a loss and we have taken steps in several areas to help rectify this situation. Most notably, we have created templates and processes to more carefully track costs, we have hired a new General Manager, we have installed an incentive-based pay program within this segment, and we have also asked the MPUC for relief from corporate holding company cost allocations which we believe unfairly burden this subsidiary. We continue to believe that a growth component of our strategy corresponds well with the stable annuity provided by the regulated utility, and offers potential upside to our shareholders. Discontinued Operations As noted in prior filings, all operations of TMG, TMGC, MTI, and Mecel, were discontinued near the end of 2006. During the first half of 2007, substantially all of the assets of these entities were sold and liabilities settled. In 2008, few transactions flowed through discontinued operations and we do not expect any material transactions during 2009. In October 2008, public notice was posted in Nova Scotia, Canada, for the dissolution of TMGC. Under Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” the currency translation adjustment accumulated in Other Comprehensive Income (“OCI”) within Shareholders’ Equity is realized upon complete or substantially complete liquidation of the foreign entity. The accumulated balance totaled $997,000 for TMGC. Simply stated, this amount resulted from purchasing assets in Canada when the U.S. dollar was worth significantly more than the Canadian dollar. As the Canadian dollar strengthened, when the final dissolution occurred in the fourth quarter of 2008, those Canadian investments were worth more and a gain was realized. With the dissolution completed in the fourth quarter, MAM’s foreign investment in TMGC was completely liquidated, and this accumulated OCI was recognized as a Gain on Foreign Exchange from Liquidation. Dividend Policy As described in our 2007 Annual report, we anticipated solid cash flow in 2008, an increase in consolidated earnings for 2008, and the related paydown of total debt. We have achieved these goals which put the Company in a position to reinstitute a common dividend. A $0.05 per share fourth quarter dividend was announced in December 2008, signifying a return of a dividend payment which was suspended in 2005 after 78 consecutive quarters. As was stated in the 2007 10-K, dividends are subject to quarterly declaration by the Board, which establishes the amount of each quarterly Common Stock dividend and fixes the record and payment dates. A
19
Table of Contentsdividend would be considered for declaration to Common shareholders when adequate cash flows are available and when fiscally prudent after careful consideration of all cash priorities. Although dividend payments are subject to discontinuance by our Board at any time, we expect a quarterly dividend payment of at least the present amount to continue for the foreseeable future. Cash Flows Cash Flows Provided by Operating Activities reflect the consolidated operations of MAM as the holding company, which is comprised of MPS, the regulated electric transmission and distribution utility, as well as MAM USG, which offers electrical contracting, engineering, planning, procurement, and project management services to developers, generators, and others in the private and public sectors. Cash flows from operations at MPS will remain higher than our net income would indicate, due to the collection of previously deferred regulatory costs being collected primarily through 2012. The reason these collections do not affect our net income is that there is a regulatory mandated increase in the amortization of our regulatory stranded cost asset on our balance sheet. These cash flows, which we call “stranded cost free cash flows,” will be collected through 2016, with the majority collected during the period from January 1, 2007 through December 31, 2012. An estimated table of these net cash flows after payment of deferred taxes is listed below through 2012 (in thousands of dollars).
After the majority of our stranded cost free cash flows are collected through 2012, we will be mandated to file rate proceedings with the MPUC to determine any necessary rate adjustments. Depending on items 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, there may be rate changes for our customers. Cash flows provided by MAM USG will depend on our ability to win construction bids, and manage our costs on projects. While we are developing a sales pipeline of projects, we cannot predict how successful our bids to win this work will be. We do not have a significant backlog of projects which we have already won. Other than cash for funding normal operations, the utility capital plan, and payment of dividends as mentioned above, the only other significant impact on cash flows anticipated for 2009 is contributions to our defined benefit pension plan. MAM has reduced our overall market risk as we have frozen participation as of January 1, 2006, and frozen any future salary and service cost accruals for participants as of December 31, 2006. Similar to many other plans, future contributions under our plan may be more or less depending on market conditions. As of December 31, 2008, approximately $122,000 had been contributed to the pension plan for plan year 2008. During 2009, we anticipate contributing an additional $341,000 for plan year 2008, as well as $600,000 for plan year 2009.
20
Table of ContentsConsolidated Capital and Construction Program Cash expenditures for capital improvements, additions, replacements and equipment for the years ended December 31, 2008, 2007, 2006, and 2005, along with estimated expenditures for 2009 are as follows (in thousands of dollars):
The significant increase in MPS’s projected capital expenditures that began in 2007 and continued through 2008 and into 2009 is due to the necessary improvements identified by the distribution and transmission inspection programs, which have been and will continue to 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 The following discussion includes the operations of MPS and Me&NB:
Regulated Utility Operations provided $0.69 or 30.8% more per share in 2008 than 2007 on lower operating and interest expense. These expense reductions more than compensated for the decrease in revenue for the segment, down approximately $400,000, due to reductions in volume. Regulated Utility Operating Revenue Consolidated revenues and Megawatt Hours (“MWH”) for the years ended December 31, 2008 and 2007 are as follows (in thousands of dollars):
21
Table of ContentsResidential customer sales were 2,291 MWH or 1.3% below 2007, the primary driver of the $150,000 decrease in residential operating revenue. Small commercial volume decreased a similar amount, down 1,147 MWH or 1.2%. These reductions in volume appear to be due to conservation efforts. Medium and large commercial customer sales are down more, reflecting the cutbacks in operations of some of our larger customers. Medium commercial volume decreased 4,080 MWH or 3.8%, while large commercial volume is down 23,960 MWH or 14.1%. These decreases combined reduced revenue approximately $490,000. These reductions in volume are the continuation of the trend that began in 2007. MPS revenue dollars were partly protected from these decreases in volume. In the Company’s most recent stranded cost rate case, 2006-506, MPS agreed to reconcile the projected sales volume on which the stranded cost rates were based to the actual sales volume. With volume down significantly, MPS recognized revenue and established a regulatory asset to reflect the stranded cost revenue allowed in rates. The estimated adjustment for 2008 was $754,000. Other retail revenue consists of area and street lighting. This revenue is stable, with constant volume and a $2,000 decrease in sales dollars. Other regulatory operating revenue is up approximately $342,000. Transmission wheeling revenue was up approximately $431,000. Similar to the increase in 2007 over 2006, this additional revenue will be a reduction of the transmission revenue requirement in the next OATT. Miscellaneous service revenue is down approximately $135,000. MPS performed a market study of its rates for these services during 2008, and reduced its rates to be more competitive. Smaller changes in other electric and unbilled revenue account for the remaining change. Regulated Utility Expenses For the years ended December 31, 2008 and 2007, regulated operation and maintenance are as follows (in thousands of dollars):
Regulatory utility expenses are down approximately $1.2 million or 8.2% year over year. The largest categories of decreases included:
22
Table of Contents
For the years ended December 31, 2008 and 2007, stranded cost amortization expenses are as follows (in thousands of dollars):
Excluding cancelled transmission plant, stranded cost amortization for 2007 through 2009 was established in MPUC Docket No. 2006-506. Cancelled transmission plant amortization and recovery was agreed in the 2006 OATT settlement, and allowed for recovery of the cancelled transmission plant asset from rate year 2006 through rate year 2008. This asset is fully amortized as of December 31, 2008. For Seabrook, cancelled transmission plant, the cost incentive refund and special discounts, amortization expense is recovery of cash expenditures made in the past. The Maine Yankee amortization represents the cash payments to Maine Yankee as the decommissioning process continues to wrap up. The deferred fuel amortization is a “levelizing” mechanism, and the timing of amortization and recovery of previous cash outlays for deferred fuel was negotiated in the stranded cost rate case to keep the revenue requirement constant for the rate effective period. Unregulated Utility Services The unregulated utility services segment is composed of the results of MAM USG. MAM USG’s first full year of operation was 2008, with the Company created in September 2007.
MAM USG secured two large wind development projects during 2008, generating the majority of the segment’s $8.4 million operating revenue, yielding an approximately 2.6% gross margin. Management has taken steps to improve the bidding and cost control processes more effectively going forward. We have also hired a new General Manager, and installed an incentive-based pay program for MAM USG. Finally, we have asked the
23
Table of ContentsMPUC under Docket No. 2009-60 for relief from the corporate holding company cost allocations we believe unfairly burden this subsidiary. While we cannot guarantee improved performance going forward, we are optimistic about the impact the combination of these changes could have on the segment results. Other Continuing Operations Other continuing operations includes the activity of MAM, the holding company, such as the unregulated costs of the holding company that cannot be allocated as common costs, and intercompany eliminations.
The expenses in 2008 included an adjustment to the estimated tax provision from the filing of the 2007 income tax return, one-third of the Oracle hosting arrangement expenses, which cannot be charged to MPS, and the remaining costs associated with dissolving TMG. 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):
The majority of 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 remaining activity ended with the sale of the Mecel building in May 2008, and the dissolution of TMG and all of its subsidiaries during 2008. In October 2008, public notice was posted in Nova Scotia, Canada, for the dissolution of TMGC. Under Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” the currency translation adjustment accumulated in OCI within Shareholders’ Equity is realized upon complete or substantially complete liquidation of the foreign entity. The accumulated balance totaled $997,000 for TMGC. This amount resulted from purchasing assets in Canada when the U.S. dollar was worth significantly more than the Canadian dollar. As the Canadian dollar strengthened, when the final dissolution occurred in the fourth quarter of 2008, those Canadian investments were worth more and a gain was realized. With the dissolution completed in the fourth quarter, MAM’s foreign investment in TMGC was completely liquidated, and this accumulated OCI was recognized as a Gain on Foreign Exchange from Liquidation.
24
Table of ContentsUnregulated Software Technology—Discontinued Operations The following table presents the results of the Unregulated Software Technology segment, classified as Discontinued Operations (in thousands of dollars):
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. Taxes Other Than Income Taxes other than income consist of property and payroll taxes. These expenses remained constant from year to year, at approximately $1.7 million in each 2008 and 2007. Income Tax Expense (Benefit) Regulated income tax expenses were approximately $2.1 million for 2008, compared to $2.5 million for 2007. The higher earnings for the segment were partly offset by the reduced effective income tax rate, as a result of an adjustment to the prior year income tax estimates. The benefit from unregulated income taxes was $49,000 for 2008, compared to $560,000 for 2007. An adjustment to the estimated tax provision from the filing of the 2007 income tax return reduced the income tax benefit at MAM. During the stranded cost free cash flow period, the deferred income tax liabilities are reversing and realized as current income tax obligations. The remaining net operating loss carryforward from the operations and dissolutions of TMG and MTI was used to offset these cash obligations during 2008. Interest Charges Interest expense decreased $641,000, from $2.9 million in 2007 to $2.3 million in 2008. In addition to regular repayments of debt, MPS made its final payment on its FAME note, and MAM repaid in full its Bank of America term note during 2008. Further, interest rates on the variable rate debt issues were lower in 2008 than 2007. The reduction in interest expense from stranded cost carrying charges decreased from $1.7 million in 2007 to $1.6 million in 2008. As the regulatory assets are recovered during the stranded cost free cash flow period, the stranded cost carrying charges will continue to decrease. 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
25
Table of Contentsare 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. If the Company were to cease meeting the criteria for application of these accounting rules, the accounting standards for businesses in general would become applicable, and immediate recognition of any previously deferred costs, or a portion of deferred costs, would be required in the year in which the criteria are no longer met. At December 31, 2008, $51.6 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 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. Transmission rates are adjusted annually, and were most recently changed on July 1, 2008. The final settlement of 2008 transmission rates is not yet complete, and may result in an adjustment during 2009. Distribution and stranded cost rates did not change during 2008. In 2009, MPS anticipates the annual adjustments to its transmission rates on July 1, 2009, and a rate filing for stranded cost rates to be effective January 1, 2010. 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. No adjustments to distribution rates are currently anticipated to occur in 2009. 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. 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 2008 and 2007, $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, 2008, the remaining regulatory asset of $322,000 is included in the line “Deferred Regulatory Costs” on the Consolidated Balance Sheets. Revenue Recognition—MAM USG 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
26
Table of Contentsrecognized 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. Consistent with industry practice, certain of MAM USG’s customers withhold a portion of the payment of each invoice as retainage until the project is completed to specifications. Similarly, MAM USG withholds a portion of the payments to certain subcontractors. MAM USG had $378,000 of retainage receivable reported within “Accounts Receivable” and $148,000 of retainage payable reported with “Accounts Payable” on the Consolidated Balance Sheets. These amounts are expected to be received and paid within one year, and are therefore classified as current assets and liabilities. 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 12 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, 2008, and 2007, Management evaluated the deferred tax asset valuation and determined a valuation allowance was needed on the earnings on investments. Certain distributions from MPS’s investments have been treated for tax as dividend income, resulting in a deferred tax asset of $384,000. As this will become a capital loss for tax purposes, the Company cannot be assured capital gains will exist to allow for the use of this loss, and a full valuation allowance has been provided.
27
Table of ContentsIn 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. 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, 2008 and 2007. Operating Capital and Liquidity The Company’s cash and cash equivalents increased from $910,000 at December 31, 2007, to $1.8 million at December 31, 2008. Net cash flow provided by operating activities increased, up approximately $2.0 million from 2007 to 2008, primarily due to the $3.0 million increase in net income. 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 2008 was $11.6 million, while the net income for the year was $4.6 million, due to the improved financial performance and the discontinuance of unprofitable operations. Net cash flow used by financing activities totaled $6.9 million for debt retirements. In 2007, an additional $5.1 million of debt was repaid. Investing activities used $3.7 million in 2008. The investments in fixed assets of $6.8 million were offset by the release of the FAME capital reserve fund of $2.5 million. 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, and MAM received $1.8 million for sales of discontinued operations. Lastly, the remaining obligations for stock contingencies from previous acquisitions were settled in 2007 for a total of $414,000. 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. In February 2008, MPS reached terms on amendments to its debt agreements with Bank of America. These amendments were approved by the MPUC on May 1, 2008, and formalized effective May 2, 2008. The amendments include various reductions in interest rates on the lines of credit and decreased letter of credit fees on the MPS financing with Bank of America. As of December 31, 2008, $6.0 million was outstanding on this line of credit, with $4.0 million available.
28
Table of ContentsMAM USG also executed a $500,000 line of credit with Bank of America, effective in early May 2008. This line of credit is guaranteed by MAM, and is used to fund working capital needs. There was no balance outstanding on this line of credit at December 31, 2008, and $500,000 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 was 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 LIBOR plus 2.5% or Bank of America’s prime rate. The loan agreement contained certain financial covenants, measured quarterly, which required MAM to maintain a minimum tangible net worth, a minimum debt service coverage ratio and a maximum debt-to-total capital ratio. MAM repaid this debt in full and the RBC $1.7 million letter of credit was terminated during 2008; no balance remained outstanding at December 31, 2008. MAM, MAM USG and MPS have met all debt covenants for the year 2008 and expect to be in compliance with all debt covenants for the foreseeable future. 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 $6.5 million of first mortgage bonds and $23.3 million of second mortgage bonds without bondable property additions. Effective May 2, 2008, MAM and MPS reached agreement on amendments to their debt agreements with Bank of America. 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 from 2008 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 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. The loan was transferred to MAM with the dissolution of TMG, 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. 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 $15 million and reduced with generating asset sale proceeds, the 1996 Refunding Series had $13.6 million outstanding at December 31, 2008, and is due in 2021. On October 19, 2000, the 2000 Series of bonds was issued in the amount of $9.0 million, with
29
Table of Contentsthese 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. The term of the LOC’s was amended with the other renegotiated debt terms during 2008, and are due to expire on June 30, 2011. 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 2.87% and 2.44% for the 1996 Refunding Series and the 2000 Series, respectively. In September 2003, MPS executed an interest rate swap agreement with Fleet National 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:
30
Table of Contents
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, 2008, MPS is carrying on its consolidated balance sheet a regulatory asset and a corresponding liability in the amount of $3.2 million, which 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.
31
Table of Contents
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, 2008 and 2007, and the related consolidated statements of operations, common shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2008. Our audits also included the financial statement schedules for the years ended December 31, 2008 and 2007, listed in the Index at Item 15(a)(2). These financial statements and schedules 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, 2008 and 2007, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2008, 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, 2008 and 2007.
32
Table of ContentsMAINE & MARITIMES CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (In thousands of dollars, except share and per share information)
See Notes to Consolidated Financial Statements
33
Table of ContentsMAINE & MARITIMES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets—Assets (In thousands of dollars)
See Notes to Consolidated Financial Statements
34
Table of ContentsMAINE & MARITIMES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets—Capitalization and Liabilities (In thousands of dollars)
See Notes to Consolidated Financial Statements
35
Table of ContentsMAINE & MARITIMES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands of dollars)
See Notes to Consolidated Financial Statements
36
Table of ContentsMAINE & MARITIMES CORPORATION AND SUBSIDIARIES Consolidated Statements of Common Shareholders’ Equity (In thousands of dollars, except share information)
See Notes to Consolidated Financial Statements.
37
Table of ContentsMAINE & MARITIMES CORPORATION AND SUBSIDIARIES Statements of Long-Term Debt (In thousands of dollars)
Current maturities and redemption requirements for the succeeding five years and thereafter are as follows (in thousands of dollars):
See Notes to Consolidated Financial Statements.
38
Table of ContentsFINANCIAL STATEMENTS 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: Continuing Operations:
Discontinued Operations:
As described later in this document, TMG and all of its subsidiaries were dissolved in the fourth quarter of 2008. 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. The Mecel building was sold May 30, 2008. 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. In addition to these wholly-owned subsidiaries, MAM was 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”). On March 31, 2008, MAM sold its investment in Maricor Properties to Ashford. 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 NYSE Alternext US exchange under the symbol “MAM.” All inter-company transactions between MAM and its subsidiaries have been eliminated in consolidation. Labor Agreements Approximately 36.2% 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
39
Table of Contentsterm 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. Negotiations for the collective bargaining agreement, to take effect October 1, 2009, will begin in the second or third quarter of 2009. The Company expects to successfully negotiate a new agreement prior to the expiration of the current agreements. 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 $26.1 million as of December 31, 2008, is expected to be collected in future rates as approved by the MPUC. Accounting Policies 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. If the Company were to cease meeting the criteria for application of these accounting rules, the accounting standards
40
Table of Contentsfor businesses in general would become applicable, and immediate recognition of any previously deferred costs, or a portion of deferred costs, would be required in the year in which the criteria are no longer met. At December 31, 2008, $51.6 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 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. Transmission rates are adjusted annually, and were most recently changed on July 1, 2008. The final settlement of 2008 transmission rates is not yet complete, and may result in an adjustment during 2009. Distribution and stranded cost rates did not change during 2008. In 2009, MPS anticipates the annual adjustments to its transmission rates on July 1, 2009, and a rate filing for stranded cost rates to be effective January 1, 2010. 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. No adjustments to distribution rates are currently anticipated to occur in 2009. 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. 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 2008 and 2007, $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 $322,000 at December 31, 2008, is included in the line “Deferred Regulatory Costs” on the Consolidated Balance Sheets. Revenue Recognition—MAM USG 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
41
Table of Contentscertain 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. Consistent with industry practice, certain of MAM USG’s customers withhold a portion of the payment of each invoice as retainage until the project is completed to specifications. Similarly, MAM USG withholds a portion of the payments to certain subcontractors. MAM USG had $378,000 of retainage receivable reported within “Accounts Receivable” and $148,000 of retainage payable reported with “Accounts Payable” on the Consolidated Balance Sheets. These amounts are expected to be received and paid within one year, and are therefore classified as current assets and liabilities. 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 12 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, 2008, and 2007, Management evaluated the deferred tax asset valuation and determined a valuation allowance was needed on the earnings on investments. Certain distributions from MPS’s investments have been treated for tax as dividend income, resulting in a deferred tax asset of $384,000. As this will become a capital loss for tax purposes, the Company cannot be assured capital gains will exist to allow for the use of this loss, and a full valuation allowance has been provided. 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.”
42
Table of ContentsMPS 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, 2008 and 2007, accrued removal obligations totaling approximately $5.2 million and $5.0 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, 2008 and 2007, MPS recognized a specific asset retirement obligation of $611,000 and $699,000, 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. 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 8, “Fair Value Disclosures—Interest Rate Derivatives” for additional disclosure regarding the treatment of these interest rate instruments. Foreign Exchange MAM accounted 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 was translated at the average rate for the period. The balance sheet was translated at the exchange rate as of the end of the period.
43
Table of ContentsIn October 2008, public notice was posted in Nova Scotia, Canada, for the dissolution of TMGC. Under Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” the currency translation adjustment accumulated in Other Comprehensive Income (“OCI”) within Shareholders’ Equity is realized upon complete or substantially complete liquidation of the foreign entity. The accumulated balance totaled $997,000 for TMGC. With the dissolution completed in the fourth quarter, MAM’s foreign investment in TMGC was completely liquidated, and this accumulated OCI was recognized as a Gain on Foreign Exchange from Liquidation. 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 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
44
Table of ContentsMPUC 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 3.07% and 2.96% for 2008 and 2007, respectively. 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 $250,000 FDIC insurance limit, but Management believes the risk that access to these deposits could be restricted is remote. Restricted Investments At December 31, 2008, the Company had $9,000 of restricted investments, compared to $2.5 million at December 31, 2007. 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 was also held by the Trustee of MPS’s first and second mortgage bonds. These funds were released in October 2008. Stock Option Plan At December 31, 2008, the Company had a stock-based employee compensation plan, which is described more fully in Note 10, “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, 9,410 shares have been issued, with 10,590 shares remaining available for issuance.
45
Table of ContentsPreferred 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 (“HCI”). 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. Market price protection was given by MTI when it sold its assets to HCI. If the average closing stock price of MAM’s stock had been less than $25 for the ten trading days prior to March 31, 2008, HCI would have been entitled to additional shares of common stock. MAM’s stock remained above this level, and no additional shares were granted. 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. See Note 10, “Stock Compensation Plan” for calculation of basic and diluted earnings per share. New Accounting Pronouncements Employers’ Disclosures about Postretirement Benefit Plan Assets On December 30, 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets. This Statement of Position amends Statement of Financial Accounting Standards (“SFAS”) 132(R), Employers’ Disclosures about Pension and Other Postretirement Benefits to provide additional guidance on the required disclosures about defined benefit pension plans and other postretirement benefit plans. Specifically, the guidance requires additional disclosure about the fair value measurements similar to those required by SFAS 157, Fair Value Measurements. This FSP is effective for fiscal years ending after December 15, 2009; however, early application is permitted. The additional disclosures are not expected to have a material impact on the Company’s financial statements. Determining the Fair Value of a Financial Asset when the Market for that Asset is Not Active In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset when the Market for that Asset is Not Active. The FSP clarifies the application of SFAS 157, Fair Value Measurements, in a market that is not active, and provides examples for determination of fair value in those situations. The FSP was effective October 10, 2008, and for prior periods for which financial statements had not yet been issued. As described in more detail in Note 8, the Company’s interest rate derivatives are within the scope of SFAS 157. However, these derivatives are in an active market, and the Company did not experience a material impact from the adoption of FSP 157-3. GAAP Hierarchy In May 2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting Principles.” This Statement identified a consistent hierarchy for selecting accounting principles to be used in preparing financial statements in conformity with U.S. generally accepted accounting principles. The Company adopted SFAS 162, and there was no impact on its financial statements. Derivative Instruments and Hedging Activities On March 19, 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement 133. This statement enhances the required disclosures
46
Table of Contentsabout derivatives and hedging activities, including how an entity uses derivative instruments, how the entity accounts for these instruments, and how the derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows. Specific enhancements from this new standard include disclosure of:
This standard also requires a cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. MAM’s use of derivatives is limited to cash flow interest rate derivatives to fix the interest rates on MPS’s two remaining variable rate long-term debt issues. The additional disclosure requirements are not expected to have a material impact on MAM’s financial statements. Business Combinations On December 4, 2007, the FASB issued SFAS No. 141(R), “Business Combinations.” This statement significantly changes 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. The impact of this standard on the Company’s financial statements will be dependent on the dollar amount of future acquisitions. 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 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. We anticipate no material impact to the financial statements from the adoption of this standard. 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 was effective for the beginning of MAM’s 2008 fiscal year. The Company did not experience a material impact on its financial statements from the adoption of this standard.
47
Table of Contents2. 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, MAM USG, 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.
The effective income tax rates differ from the U.S. statutory rate as follows:
The recognition of the gain on foreign exchange from liquidation reduced the 2008 effective rate approximately 5.1%. TMGC, the subsidiary from which the gain was recognized, was not consolidated in MAM’s U.S. return, and MAM’s investment in that subsidiary was fully deducted for tax purposes with the filing of the 2007 income tax return, therefore resulting in no income tax impact from the recognition of the gain.
48
Table of ContentsThe book to accrual adjustments of (1.6)% and 1.4% in 2008 and 2007, respectively, represent tax true-up items associated with revised tax estimates. These items included treatment of capitalized pension and postretirement medical expenses, the net operating loss carryforward, an empowerment zone credit wage add-back, and a true-up of the tax amortization of goodwill. The valuation allowance on earnings from investments of 0.1% and 3.0% in 2008 and 2007, respectively, relate to MPS’s interest in two joint venture companies, Maine Yankee and MEPCO. MPS’s net income includes the equity in 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. The elements of deferred income tax expense (credit) are as follows (in thousands of dollars):
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 2008 or 2007. 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, December 31, 2007 or December 31, 2008, 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. Interest on income taxes, if any, is presented within the provision for or benefit from income taxes. Penalties associated with income taxes, if any, are presented within Other Income (Deductions). As of December 31, 2008 and 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, 2004, or earlier.
49
Table of ContentsAs 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. For the years ended December 31, 2008, and 2007, Management determined a valuation allowance was needed on the earnings on investments. Certain distributions from MPS’s investments have been treated for tax as dividend income, resulting in a deferred tax asset of $384,000. As this will become a capital loss for tax purposes, the Company cannot be assured capital gains will exist to allow for the use of this loss, and a full valuation allowance has been provided. Management assessed the remaining deferred tax assets at December 31, 2008 and 2007, which consisted principally of the estimated losses on the divestiture of unregulated operations, pension and post-retirement benefits and accumulated OCI associated with the interest rate hedge, and determined no valuation allowance is required. The following summarizes accumulated deferred income tax (assets) and liabilities established on temporary differences under SFAS 109 as of December 31, 2008 and 2007 (in thousands of dollars):
MAM divested substantially 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):
50
Table of ContentsIn October 2008, public notice was posted in Nova Scotia, Canada, for the dissolution of TMGC. Under Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” the currency translation adjustment accumulated in OCI within Shareholders’ Equity is realized upon complete or substantially complete liquidation of the foreign entity. The accumulated balance totaled $997,000 for TMGC. With the dissolution completed in the fourth quarter, MAM’s foreign investment in TMGC was completely liquidated, and this accumulated OCI was recognized as a Gain on Foreign Exchange from Liquidation. TMG was dissolved during 2008, and therefore had no assets or liabilities at December 31, 2008. The TMG balance sheet as of December 31, 2007 is as follows (in thousands of dollars):
Maricor Technologies MTI’s operating revenue and net loss for 2007 is as follows (in thousands of dollars):
MTI was dissolved during 2007, and therefore had no assets or liabilities at December 31, 2008 or 2007.
51
Table of Contents4. SEGMENT INFORMATION The Company is organized based on products and services. Management monitors the operations of the Company in the following operating segments:
The segment information for 2007 has been reclassified to conform to the 2008 presentation, by reporting MAM USG as a separate segment. The accounting policies of the segments are the same as those described in Note 1, “Accounting Policies.” MAM provides certain administrative support services to MPS and MAM USG, and provided similar services to TMG and its subsidiaries, and MTI. 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.
52
Table of Contents
53
Table of Contents
5. INVESTMENTS IN ASSOCIATED COMPANIES Maricor Properties Ltd On June 30, 2006, Maricor Properties sold one share of stock representing a 50% ownership interest to Ashford Investments, Inc. This sale specifically excluded the economic ownership of Mecel, with MAM retaining 100% of the economic ownership of Mecel. Management reviewed the characteristics of Maricor Properties subsequent to this transaction in accordance with Financial Accounting Standards Board Interpretation No. (“FIN”) 46(R), “Consolidation of Variable Interest Entities, an Interpretation of ARB 51,” and determined that MAM remained the primary beneficiary of Mecel, but was not the primary beneficiary of Maricor Properties as of the date of this transaction. Therefore, the assets and liabilities of Mecel remained consolidated in these
54
Table of Contentsfinancial statements, while the assets and liabilities of the other components of Maricor Properties were no longer consolidated. MAM’s investment in Maricor Properties was reported within “Investments in Associated Companies,” and receivables from Maricor Properties and its subsidiaries payable to MAM and its wholly-owned subsidiaries were presented within the line “Accounts Receivable from Associated Companies” until MAM sold its remaining share of Maricor Properties on March 31, 2008. On September 12, 2007, the shares of Mecel were sold from Maricor Properties to TMGC, and Mecel is consolidated in these financial statements within the unregulated engineering services segment in discontinued operations. MAM had no investment in Maricor Properties remaining at December 31, 2008. As of December 31, 2007, condensed financial information for the components of Maricor Properties not consolidated in these financial statements is as follows (in thousands of dollars):
MAM recorded equity in the loss of Maricor Properties of $8,000 and $22,000 during 2008 and 2007. Maricor Ashford Ltd As of March 21, 2007, MAM became an equal partner in Maricor Ashford Ltd, an inactive real estate development and redevelopment joint venture with Ashford, an unaffiliated real estate management company. Prior to this date, Maricor Properties was an equal partner in this joint venture with Ashford. On September 12, 2007, MAM sold its shares of Maricor Ashford to Ashford for a $50,000 note receivable. At December 31, 2007, this note is recorded in “Accounts Receivable from Associated Companies.” It was paid in full in January 2008. MAM also incurred a loss on this sale of $8,000, recorded in “Other – Net” on the 2007 Consolidated Statement of Operations. Maine Yankee and MEPCO MPS owns 5% of the common stock of Maine Yankee Atomic Power Company (“Maine Yankee”), a jointly-owned nuclear electric power company, and 7.49% of the common stock of MEPCO, a jointly-owned electric transmission company. Although MPS’s ownership percentage of these entities is relatively low, it does have influence over the operating and financial decisions of these companies through board representation. Therefore, MPS records its investment in MEPCO and Maine Yankee using the equity method. This is consistent with industry practice for similar joint-owned units. Substantially all Maine Yankee and MEPCO earnings are distributed to investor companies.
55
Table of ContentsCondensed financial information for Maine Yankee and MEPCO is as follows (in thousands of dollars):
In accordance with a plan approved by the Securities and Exchange Commission, Maine Yankee has started the redemption of its common stock periodically through 2008. These stock redemptions are treated as reductions of MPS’s investment in Maine Yankee when declared. The following table shows the common stock redemptions to date:
MPS also pays its 5% share of Maine Yankee’s decommissioning costs. The liability for the present value of the total decommissioning costs is reported on the Consolidated Balance Sheets as Uncollected Maine Yankee Decommissioning Costs, with an offsetting regulatory asset. The amounts of decommissioning costs invoiced to MPS and payable to Maine Yankee at the end of the periods are presented within “Accounts Payable – Associated Companies,” also on the Consolidated Balance Sheets. 6. SHORT-TERM CREDIT ARRANGEMENTS The following table summarizes the balances outstanding under the Company’s short-term credit arrangements at December 31, 2008 and 2007:
56
Table of ContentsOn 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. The terms of this agreement were amended effective May 2, 2008. Interest rates on the facility are 30-, 60-, or 90-day LIBOR plus 0.95% through June 30, 2010 (30-, 60-, or 90-day LIBOR plus 1.125% thereafter) 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, 2008, there was $6.0 million outstanding on this line of credit, with $4.0 million available, and MPS is in compliance with all of its debt covenants. The average short-term debt balance outstanding at MPS for 2008 was $6.0 million, compared to an average balance of $6.8 million during 2007. The average interest rate was 4.52% in 2008, down from 6.90% in 2007. 7. LONG-TERM DEBT On October 19, 2000, the Maine Public Utilities Financing Bank (“MPUFB”) issued $9 million of its tax-exempt bonds due October 1, 2025 (“2000 Series”) on behalf of MPS. The proceeds were placed in trust to be drawn down for the reimbursement of issuance costs and for the construction of qualifying distribution property. On October 17, 2003, MPS received the final distribution from the trust. Pursuant to the long-term note issued under a loan agreement between MPS and the MPUFB, MPS has agreed to make payments to the MPUFB for the principal and interest on the bonds. Concurrently, pursuant to a letter of credit and reimbursement agreement, MPS caused a Direct Pay Letter of Credit for an initial term of nineteen months, subsequently extended until June, 2006, to be issued by The Bank of New York for the benefit of the holders of such bonds. On February 28, 2006, Bank of America issued its Direct Pay Letter of Credit which would have expired March 2009, to replace Bank of New York’s Letter of Credit. During 2008, MPS negotiated new terms with Bank of America. This LOC now expires on June 30, 2011. To secure MPS’s obligations under the letter of credit and reimbursement agreement, MPS issued first and second mortgage bonds in the amounts of $5.0 million and $4.5 million, respectively. MPS has the option of selecting weekly, monthly, annual or term interest rate periods for the 2000 Series, and, at issuance, selected the weekly interest period, with an initial interest rate of 4.35%. On November 20, 2000, MPS purchased an interest rate cap of 6% at a cost of $36,000 which expired in November 2003, and applied to the 2000 and 1996 Series, as described below. For 2008, the cumulative effective interest rate of the 2000 Series, including the effective fixed swap rate of 4.53%, issuance costs and credit enhancement fees since issuance were 6.07%. A similarly structured series of Bonds was issued on behalf of MPS by the MPUFB in 1996 (“1996 Series”), with $13.6 million outstanding due in 2021. A Direct Pay Letter of Credit was issued by The Bank of New York, which had been extended to June 2006, and is secured by $14.4 million of second mortgage bonds. On February 28, 2006, Bank of America issued its Direct Pay Letter of Credit which would have expired March 2009, to replace Bank of New York’s Letter of Credit. This LOC was also amended during 2008, and now expires on June 30, 2011. At the end of 2008, the cumulative effective interest rate of the 1996 series, including the effective fixed swap rate of 4.42%, issuance costs and credit enhancement fees were 5.70%. On May 29, 1998, FAME issued $11.5 million of its Taxable Electric Rate Stabilization Revenue Notes, Series 1998A (“1998 Notes”) on behalf of MPS. The 1998 Notes were repaid February 5, 2008. The 1998 Notes were issued pursuant to, and are secured under, a Trust Indenture by and between FAME and Peoples Heritage Bank (now TD BankNorth), Portland, Maine, as Trustee (“the Trustee”), for the purpose of: (i) financing the up-front payment to Wheelabrator-Sherman of approximately $8.7 million, as required under an amended purchase power agreement; (ii) for the Capital Reserve Fund, as required by FAME under their Electric Rate Stabilization Program; and (iii) for issuance costs. The 1998 Notes were limited obligations of FAME, payable solely out of the trust estate available under the Indenture, principally the Loan Note and Loan Agreement with MPS and the Capital Reserve Fund held by the Trustee, which was approximately $2.4 million at the end of 2005 and 2004. MPS has issued $4.0 million of its first mortgage bonds and $7.5 million of its second mortgage bonds
57
Table of Contentsas collateral for its performance under the Loan Note issue pursuant to the Loan Agreement. The 1998 Notes incurred interest at a Floating Interest Rate and are adjusted weekly. On June 1, 1998, MPS purchased an interest rate cap of 7% at a cost of $172,000, to expire June 2008, to limit its interest rate exposure to quarterly U.S. LIBOR rates. At the end of 2008, the cumulative effective interest rate, including the fixed swap rate of 2.79%, issuance costs and credit enhancement fees for the Notes were 5.11%. The MPUFB tax-exempt issues are subject to the same restrictive covenants as those discussed for MPS’s revolving credit arrangement in Note 6, “Short-Term Credit Arrangements.” The first and second mortgage bonds described above that secure MPS’s long-term debt are supported by the bondable additions of substantially all of MPS’s utility plant. On November 22, 2004, MPS entered into a $6.0 million, unsecured, 7-year term loan with Fleet National Bank, now Bank of America. The proceeds of the loan were used to repay and refinance a portion of the amounts outstanding under MPS’s revolving credit arrangement associated with the Company’s prior capital expenditures. The loan agreement contains certain covenants requiring the maintenance of a minimum Tangible Net Worth, maximum Ratio of Indebtedness for Borrowed Money to Total Capital and a minimum Ratio of Net Income to Fixed Charges. Interest is payable monthly at a variable interest rate of one-month LIBOR plus 1.5%. The loan is to be repaid in remaining scheduled monthly principal payments as follows:
As of December 31, 2008, $3.2 million of this loan remained outstanding. On July 9, 2007, TMG entered into a $1.5 million note with Katahdin Trust Company. This note, together with $750,000 of the proceeds from the sale of the assets of TMGC’s Moncton division, was used to pay down the $2.2 million TMG note with Katahdin Trust Company. 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. The loan was transferred to MAM with the dissolution of TMG, 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. 8. FAIR VALUE DISCLOSURES—INTEREST RATE DERIVATIVES On January 1, 2008, the Company adopted SFAS 157, “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures requirements about fair value measurements. This standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard does not require any new fair value measurements. SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. SFAS 157 establishes a three-level fair value hierarchy as the basis for considering market participant assumptions in fair value measurements. The input levels are defined as follows:
58
Table of Contents
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. Fair value is a market-based measure, and is considered from the perspective of a market participant, not the Company. When market assumptions are not available, the Company uses assumptions to reflect those market participants would use in setting the fair value at the measurement date. In periods of market dislocation, observable market data may be limited or unavailable for certain assets and liabilities, reducing the level of the inputs (from a Level 1 to a Level 2, for example). The Company has not experienced such a conditions, and there have been no changes to valuation methods in the current period. Currently, the Company uses interest rate swaps to manage its interest rate risk. At December 31, 2008, MPS had two long-term debt issues outstanding with variable interest rates. Pursuant to its rate order in MPUC Docket 2003-85, MPS agreed to fix its interest rates and the MPUC allowed recovery of the fixed interest costs in rates. On September 9, 2003, MPS executed swap agreements for the three variable-rate issues then outstanding, locking in the rates over the remaining terms of the issues. For the FAME 1998 Taxable Elective Rate Stabilization Revenue Notes due 2008, the effective fixed interest rate was set at 2.79%. For the two series of tax-exempt bonds issued by the MPUFB, the effective fixed interest rates for the 1996 Series due 2021 and the 2000 Series due 2025 are 4.42% and 4.53%, respectively. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs. This valuation relies on Level 2 inputs. At December 31, 2008, the fair value of these qualified cash flow hedges was $4.8 million liability, reflected as “Carrying Value of Interest Rate Hedge” in the accompanying Consolidated Balance Sheets. For the year ended December 31, 2008, the difference between the fixed rates and the underlying variable rates on the issues of approximately $519,000 was charged to interest expense, along with the interest expense incurred on the corresponding debt issues. Management believes the fixing of interest rates over the terms of the Company’s debt will prove to protect both shareholders and consumers from upward interest rate risk. The loss in fair value on the interest rate swaps from December 31, 2007 to December 31, 2008, of $2.5 million less the deferred tax of $1.0 million has been recorded as Other Comprehensive Income (Loss), affecting common shareholder’s equity. The loss in fair value during 2008, incurred primarily in the fourth quarter, is due to changes in the long-term interest rate forecasts. Gains or losses in the fair market value of the interest rate swaps do not impact the Company’s net income or revenues, unless MPS’s shareholder’s common equity falls below the minimum allowable 48% of common equity rates, the floor established by the MPUC Order in Docket No. 2002-676 authorizing the formation of the holding company, MAM. On June 1, 1998, MPS purchased an interest rate cap of 7% at a cost of $172,000, to expire June 8, 2008, on $11.5 million of FAME’s Taxable Electric Rate Stabilization Notes, Series 1998A, issued on behalf of MPS. In
59
Table of Contentsaccordance with the rate treatment prescribed by the MPUC, the original cost of the interest rate cap has been amortized along with other issuance costs with $11,000 remaining at the end of 2007 as a regulatory asset. The cap expired and was fully amortized during 2008. 9. FAIR VALUE DISCLOSURES—FINANCIAL INSTRUMENTS The Company’s financial instruments consist primarily of cash in banks, receivables and debt. The carrying amounts for cash, receivables, and short-term debt approximate their fair value due to the short-term nature of these items. At December 31, 2008, the Company’s long-term debt had a carrying value and a fair value of approximately $26.8 million. 10. STOCK COMPENSATION PLAN Upon approval by MPS’s shareholders in June 2002, MPS adopted the 2002 Stock Option Plan (the “Plan”). The Plan was subsequently adopted by MAM after its formation. The Plan, excluding the options outstanding, was terminated by the MAM Board of Directors on March 14, 2008. As of December 31, 2008, the former CEO has been the only employee to receive stock options. With his resignation in August 2006, the options granted in 2004 through 2006 were forfeited, with only the 2002 and 2003 issues remaining vested and outstanding. In November 2006, three months from the resignation of the CEO, 6,568 options were forfeited, leaving 3,932 options outstanding as of December 31, 2008, for the remainder of the original ten-year term of these options. The Company accounts for the fair value of its grants under the Plan in accordance with the expense provisions of Statement of Financial Accounting Standards No. 123(R), “Accounting for Stock-Based Compensation.” The fair value of each option grant is estimated on the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the grants:
A summary of the status of the Company’s stock option plan as of December 31, 2008, and changes during the year then ended is presented below:
60
Table of ContentsThe following table summarizes information about fixed stock options outstanding at December 31, 2008:
Dilutive earnings per share impact of outstanding stock options:
11. DEFERRED DIRECTORS’ COMPENSATION The compensation program for the MAM Board of Directors includes an option for the director to defer some or all of his or her fees, rather than taking those fees in cash each quarter. The first deferral option grants the director a number of phantom shares of stock, with the number granted equivalent to the fees earned for the quarter, divided by the closing share price on the last day of that quarter. The cumulative deferred phantom shares are marked to the closing share price on the last day of each quarter, and the adjustment is recorded as expense. If applicable, any dividends paid are also converted to an equivalent number of phantom shares, and are added to the cumulative deferred total. During 2008, the equivalent of 3,796 shares were deferred. At December 31, 2008, the equivalent of 35,114 shares have been deferred. The share price on that date was $38.49, resulting in a $1.4 million liability recorded on the Consolidated Balance Sheet under “Miscellaneous Liabilities.” This unfunded liability is payable upon termination of services of the director. The plan allows for a lump sum distribution or a monthly payment over ten years. All directors currently participating in this deferral plan have elected the ten-year payment option. The second deferral option allows directors to postpone payment of their fees in cash, and earn interest on the deferred amounts at a rate adjusted quarterly to the five-year Treasury Note rate. The unfunded obligation under this deferral program is $24,000, and is also recorded under “Miscellaneous Liabilities” on the Consolidated Balance Sheets.” 12. BENEFIT PROGRAMS The Company provides certain pension, post-retirement and welfare benefit programs to its employees. Benefit programs are an integral part of the Company’s commitment to hiring and retaining employees, providing market-based compensation that rewards individual and corporate performance. The Company offers welfare benefit plans to all employees, consisting of health care, life insurance, long-term disability, and accidental disability insurance. The Company also offers retirement savings programs to most employees in the form of 401(k) plans in the United States. These plans allow voluntary contributions by the employee and may contain a contribution by the Company.
61
Table of ContentsOn August 17, 2006, the Pension Protection Act (“PPA”) was signed into law. Included in this legislation are new minimum funding rules that went into effect for plan years beginning in 2008. The funding target is 100% of a plan’s liability, with any shortfall amortized over seven years. There are lower funding targets, between 92% and 100%, available to well-funded plans during the transition period. The PPA was amended by the “Worker, Retiree, and Employer Recovery Act of 2008,” signed into law on December 23, 2008. This legislation included provisions that allow pension plans to smooth the changes in pension asset value over 24 months. Further, under the original PPA legislation, plans that did not meet their transition funding targets would have been required to become 100% funded. The new legislation requires funding only to the transition funding target, rather than 100%. Finally, employers with benefit plans less than 60% funded are allowed to look back to their plan’s funding status from the prior year, avoiding the restrictions the PPA would normally place on such underfunded plans. The Company’s pension plan is approximately 64% funded at December 31, 2008. U. S. Defined Benefit Pension Plan The Company has a non-contributory defined benefit pension plan covering Maine Public Service and certain former MAM employees. No employees of other unregulated businesses are eligible for this benefit plan. Benefits under the plan are based on employees’ years of service and compensation prior to retirement. Any new employees hired on or after January 1, 2006, are not eligible for the pension plan. On December 31, 2006, future salary and service accruals for current participants in the plan ceased. The Company agreed to additional employer contributions to the Retirement Savings Plan to compensate employees, in part or in full, depending on their number of years of service, for this lost benefit. This additional contribution ranges from 5% to 25%, and is immediately fully vested. This contribution was $741,000 for 2008 and $727,000 for 2007. The Company’s policy has been to fund pension costs accrued. The payments are made during the plan year and up to the filing of the federal income tax return for that year. In accordance with that policy, the Company made the following tax-deductible contributions to the plan (in thousands of dollars):
The following table shows the components of net periodic pension cost (“NPPC”) (in thousands of dollars):
Amortization related to the actuarial net loss of $145,000 is expected to be recognized in 2009. No amortization of prior service cost or transition assets or obligations is expected to be recognized during 2009, as a result of the December 31, 2006, pension freeze.
62
Table of ContentsThe key actuarial assumptions used in determining the pension plan values were:
The following table presents information on the Pension Plan’s projected benefit obligation (“PBO”), fair value of plan assets and the Plan’s funded status (in thousands of dollars):
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
