**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

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**FORM 10-Q**

 

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 or 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

**FOR THE QUARTERLY PERIODENDED SEPTEMBER 30, 2006**

 

**- OR -**

 

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934

 

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**Commission File No.  333-103749**

 

**MAINE& MARITIMES CORPORATION**

**AMaine Corporation**

**I.R.S. Employer Identification No.**30-0155348

**209STATE STREET, PRESQUE ISLE, MAINE 04769**

**(207) 760-2499**

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports),  and (2) has been subject to such filingrequirements for the past 90 days. Yes x.    No o.

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o.  Acceleratedfiler o. Non-accelerated filer x.

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

Indicate the number of shares outstanding of each ofthe issuer’s classes of common stock, as of the close of the period covered bythis report.

Common Stock, $7.00 parvalue — 1,638,027 shares

 

 

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**Glossaryof Terms**
| ACRS       |   | Accelerated Cost Recovery System                         |
|------------|--------|----------------------------------------------------------|
| ADR        |   | Asset Depreciation Range                                 |
| AMEX       |   | American Stock Exchange                                  |
| Ashford    |   | Ashford Investments, Ltd                                 |
| CES        |   | Competitive Energy Supplier                              |
| CMMS       |   | Computerized Maintenance Management System               |
| Cornwallis |   | Cornwallis Court Developments, Inc.                      |
| CPCN       |   | Certificate of Public Convenience and Necessity          |
| DSM        |   | Demand-Side Management                                   |
| EA         |   | Energy Atlantic, LLC                                     |
| Eastcan    |   | Eastcan Consulting Engineers                             |
| EBIT       |   | Earnings Before Interest and Taxes                       |
| FAME       |   | Finance Authority of Maine                               |
| FASB       |   | Financial Accounting Standards Board                     |
| FERC       |   | Federal Energy Regulatory Commission                     |
| FIN        |   | FASB Interpretation Number                               |
| Kwh        |   | Kilowatt hours                                           |
| LEEDTM |   | Leadership in Energy and Environmental Design            |
| LIBOR      |   | London InterBank Offered Rate                            |
| MAM        |   | Maine & Maritimes Corporation                        |
| M&R    |   | Morris & Richards Consulting Engineers               |
| Me&NB  |   | Maine & New Brunswick Electrical Power Company,  Ltd |
| Mecel      |   | Mecel Properties Ltd                                     |
| MEPCO      |   | Maine Electric Power Company, Inc.                       |
| MPS        |   | Maine Public Service Company                             |
| MPUC       |   | Maine Public Utilities Commission                        |
| MTI        |   | Maricor Technologies, Inc.                               |
| MW         |   | Megawatt                                                 |
| MWH        |   | Megawatt hour                                            |
| NMISA      |   | Northern Maine Independent System Administrator          |
| OATT       |   | Open Access Transmission Tariff                          |
| OCI        |   | Other Comprehensive Income                               |
| Pace       |   | Pace Engineering Limited                                 |
| PCB        |   | Poly Chlorinated Bi-phenol                               |
| PPA        |   | Power Purchase Agreement                                 |
| PUHCA      |   | Public Utilities Holding Company Act                     |
| RES        |   | RES Engineering, Inc.                                    |
| ROE        |   | Return on Equity                                         |
| SEC        |   | Securities and Exchange Commission                       |
| SFAS       |   | Statement of Financial Accounting Standards              |
| SOS        |   | Standard Offer Service                                   |
| TMG        |   | The Maricor Group                                        |
| TMGC       |   | The Maricor Group, Canada Ltd                            |
| TMGNE      |   | The Maricor Group New England                            |
| WPS-PDI    |   | WPS-Power Development, Inc.                              |
| WS         |   | Wheelabrator-Sherman                                     |

 

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**PART 1. FINANCIAL INFORMATION**

***Item 1. FinancialStatements***

This item contains Consolidated Financial Statementsfor Maine & Maritimes Corporation (“MAM” or the “Company”) and itsSubsidiaries, including (1) an unaudited statement of consolidated operationsfor the quarter and nine months ended September 30, 2006, and for thecorresponding periods of the preceding year; (2) an unaudited consolidatedbalance sheet as of September 30, 2006; (3) an audited consolidated balancesheet as of December 31, 2005, the end of MAM’s preceding fiscal year; (4) anunaudited statement of consolidated cash flows for the period January 1(beginning of the fiscal year) through September 30, 2006, and for thecorresponding period of the preceding year; and (5) an unaudited statement ofconsolidated shareholders’ equity for the period January 1 (beginning of thefiscal year) through September 30, 2006.

In the opinion of Management, the accompanyingunaudited consolidated financial statements present fairly the financialposition of the Company and its Subsidiaries at September 30, 2006, andDecember 31, 2005; the results of their operations for the three and ninemonths ended September 30, 2006 and 2005; and their cash flows for the ninemonths ended September 30, 2006, and 2005.

**MAM is the parent holding company forthe following wholly-owned subsidiaries:**

 
| 1. |   | Maine Public Service Company (“MPS”) and its  wholly-owned inactive Canadian subsidiary Maine & New Brunswick  Electrical Power Company, Ltd (“Me&NB”);                                                |
|----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2. |   | Energy Atlantic, LLC (“EA”), an inactive subsidiary;                                                                                                                                                                          |
| 3. |   | The Maricor Group (“TMG”) and its wholly-owned  United States subsidiary The Maricor Group New England (“TMGNE”) and TMG’s  wholly-owned Canadian subsidiary The Maricor Group, Canada Ltd (“TMGC”); |
| 4. |   | Maricor Technologies, Inc. (“MTI”), a wholly-owned  United States subsidiary.                                                                                                                                                 |

 

MAM is also a 50% owner of Maricor Properties Ltd, (“MaricorProperties”), a Canadian company formerly wholly-owned by MAM, and itswholly-owned Canadian subsidiaries Cornwallis Court Developments, Ltd (“Cornwallis”)and Mecel Properties Ltd (“Mecel”).  MAMretained 100% of the economic rights and obligations of Mecel in the sale ofthe share to Maricor Properties; Mecel remains consolidated in these financialstatements.

***Maine & Maritimes Corporation and Subsidiaries***

***General Descriptions of the ParentCompany and its Subsidiaries:***

•            Maine& Maritimes Corporation is a holding company incorporated in the state ofMaine, and is the ultimate parent company for all business segments.  MAM maintains investments in (a) a regulatedelectric transmission and distribution utility operating within the state ofMaine, United States, (b) facility engineering and solutions companiesproviding mechanical, electrical and plumbing/fire protection engineering,asset lifecycle management, energy efficiency, and asset development serviceswithin the

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                United States and Canada, (c) afacilities asset governance, performance management, lifecycle management andsustainability software development company in the United States, and (d)partial ownership (50%) of Canadian real estate development and investmentcompanies.  MAM is headquartered inPresque Isle, Maine.

·          Maine Public ServiceCompany is a regulated electric transmission and distribution utility servingall of Aroostook County and a portion of Penobscot County in northern Maine.Since March 1, 2000, the date retail electric competition in Maine commenced,customers in MPS’s service territory have been purchasing energy from suppliersother than MPS. This energy comes from CES or, if customers are unable or donot wish to choose a competitive supplier, the SOS provider. SOS providers aredetermined through a bid process conducted by the MPUC.  MPS provides the transportation through itstransmission and distribution wires infrastructure.  Its service area covers approximately 3,600square miles, with a population of 72,000. The utility is regulated by the FERC and the MPUC. MPS is headquarteredin Presque Isle, Maine.

Electricsales in the Company’s territory are seasonally influenced, and the Company’sresults of operations reflect this seasonal nature. The highest usage occursduring the five heating season months, from November through March, due toheating-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 northernMaine area, the majority of MPS’s construction program is completed during thespring, summer and fall months.

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

·          The Maricor Group is afacilities engineering and solutions company providing mechanical, electricaland plumbing/fire protection engineering consulting design services, energyefficiency solutions, energy asset development, facilities conditionassessments and capital planning solutions, lifecycle asset managementsolutions, and emissions reduction services focusing on sustainability andLEEDTM.  The Maricor Group operatesprimarily within the New England region of the United States and the easternCanadian provinces, particularly Atlantic Canada.  TMG was formed in November 2003, and isheadquartered in Presque Isle, Maine, with offices in Boston, Massachusetts;Moncton and Saint John, New Brunswick; and Halifax, Nova Scotia.

·          The Maricor Group NewEngland is the New England subsidiary of The Maricor Group offering its parentcompany’s defined services primarily within New England, particularly theCommonwealth of Massachusetts with an office in Boston, Massachusetts.  TMGNE, formerly RES Engineering, Inc., was acquiredby TMG on June 15, 2004.

·          The Maricor Group,Canada Ltd is the Canadian subsidiary of The Maricor Group offering its parentcompany’s defined services primarily within the eastern Canadian provinces,particularly Atlantic Canada. Headquartered in Moncton, New Brunswick, itmaintains offices in Saint John, New Brunswick, as well as Halifax, NovaScotia.   TMGC acquired its firstmechanical and electrical engineering services company, Eastcan on December 1,2003.  On June 1, 2004, TMGC acquiredM&R.  On May 12, 2006, TMGC acquiredPace, an electrical engineering firm. All of these companies are now operating divisions of TMGC.

·          Maricor Properties Ltd,50% owned by MAM, is a Canadian real estate development, redevelopment andinvestment company.  It seeks to developor invest in public and private facility projects involving the renewal ordevelopment of building infrastructure within revitalization districts. Itutilizes the services of The Maricor Group in its development and redevelopmentprojects. Maricor Properties Ltd was organized on May 28, 2004, in Nova Scotia,Canada.  On June 30, 2006, MaricorProperties issued stock to Ashford, resulting in 50% ownership for both MAM andAshford.  Prior to this stock issuance,Maricor Properties was a wholly-owned subsidiary of MAM.  Ashford Investments is an Atlantic Canadianreal estate development, investment and management firm and provides managementservices to Maricor Properties and its subsidiaries.

·          Mecel Properties Ltd isa Canadian subsidiary of Maricor Properties Ltd and currently owns the officebuilding housing the Halifax, Nova Scotia operating division of The MaricorGroup, Canada Ltd.  It was acquired byMaricor Properties on June 1, 2004, in conjunction with the acquisition ofM&R by TMGC.  The terms of the saleof stock of Maricor Properties to Ashford included certain provisions relatedto Mecel.  A 120-day period beginning atthe time of the closing of this transaction was set aside to either gain necessaryapprovals to sell a 50% interest in Mecel to Ashford for additionalcompensation or to transfer ownership of Mecel to Maine & MaritimesCorporation or another one of its entities. This 120-day period has been extended by mutual agreement by MAM andAshford, with settlement expected prior to December 31, 2006, with the transferof Mecel to The Maricor Group, Canada. Ashford Properties, a subsidiary of Ashford Investments Inc., providesproperty management services for all properties owned by Maricor Properties andits subsidiaries, including Mecel.

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

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·          Maricor Technologies,Inc., formed on February 14, 2005, develops information technology and softwareproducts for sustainable governance of facilities, infrastructure andbuildings.  On February 14, 2005, itpurchased, through a three-way transaction, the “Strategic Asset Management”software technology assets of Delinea Corporation of Dallas, Texas, which wereformerly owned by HCI Systems Assets Management, LLC. The Maricor Group,which owns a channel market license for certain Atlantic Canadian and New Englandmarkets and vertical sectors, utilizes the software in the delivery of itssustainable asset management services. MTI markets its products throughout North America and is headquarteredin Presque Isle, Maine, with an office in Portland, Maine.

·          Energy Atlantic, LLC isa licensed, but currently inactive, CES of retail electricity, and isclassified as a discontinued operation in the consolidated financialstatements.

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MAINE & MARITIMES CORPORATION AND SUBSIDIARIES

**Statements of Consolidated Operations**(Unaudited)

 
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                          | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands  of dollars except shares and per share amounts)**                  | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating  Revenues**                                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Regulated                                                                           |       | $                                | 8,033      |                            | $          | 7,445 |   | $ | 25,499 |   | $ | 24,833 |   |
| Unregulated                                                                         |       | 1,491                            |       | 1,299                           |       | 4,370 |   | 4,100 |   |
| **Total Revenues**                                                                  |       | 9,524                            |       | 8,744                           |       | 29,869 |   | 28,933 |   |
| **Operating  Expenses**                                                             | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Regulated Operation & Maintenance                                               |       | 4,056                            |       | 3,682                           |       | 11,297 |   | 10,786 |   |
| Unregulated Operation & Maintenance                                             |       | 3,225                            |       | 2,183                           |       | 7,400 |   | 6,035 |   |
| Goodwill Impairment Loss                                                            |       | 2,546                            |       | —                          |       | 2,546 |   | — |   |
| Depreciation                                                                        |       | 726                              |       | 703                             |       | 2,186 |   | 2,098 |   |
| Amortization of Stranded Costs                                                      |       | 2,991                            |       | 2,691                           |       | 8,369 |   | 8,052 |   |
| Amortization                                                                        |       | 104                              |       | 91                              |       | 204 |   | 321 |   |
| Taxes Other Than Income                                                             |       | 471                              |       | 428                             |       | 1,465 |   | 1,356 |   |
| (Benefit of) Provision for Income Taxes—Regulated                              |       | (148                             | )          | (69                             | )          | 645 |   | 711 |   |
| Benefit of Income Taxes—Unregulated                                            |       | (1,826                           | )          | (423                            | )          | (2,550 | ) | (956 | ) |
| **Total Operating Expenses**                                                        |       | 12,145                           |       | 9,286                           |       | 31,562 |   | 28,403 |   |
| **Operating  (Loss) Income**                                                        |       | (2,621                           | )          | (542                            | )          | (1,693 | ) | 530 |   |
| **Other  Income (Deductions)**                                                      | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity in (Loss) Income of Associated Companies                                     |       | 16                               |       | (9                              | )          | 142 |   | (36 | ) |
| Interest and Dividend Income                                                        |       | 5                                |       | —                          |       | 14 |   | 12 |   |
| Allowance for Equity Funds Used During Construction                                 |       | (3                               | )          | 7                               |       | — |   | 16 |   |
| Benefit of Income Taxes                                                             |       | 32                               |       | 1                               |       | 10 |   | — |   |
| Other—Net                                                                      |       | (92                              | )          | (55                             | )          | (157 | ) | (55 | ) |
| **Total**                                                                           |       | (42                              | )          | (56                             | )          | 9 |   | (63 | ) |
| **(Loss)  Income Before Interest Charges**                                          |       | (2,663                           | )          | (598                            | )          | (1,684 | ) | 467 |   |
| **Interest  Charges**                                                               |       |                             |       |                            |       |   |   |   |   |
| Long-Term Debt and Notes Payable                                                    |       | 832                              |       | 685                             |       | 2,405 |   | 1,962 |   |
| Less Stranded Costs Carrying Charge                                                 |       | (386                             | )          | (361                            | )          | (1,201 | ) | (1,052 | ) |
| Less Allowance for Borrowed Funds Used During  Construction                         |       | 1                                |       | (2                              | )          | — |   | (6 | ) |
| **Total**                                                                           |       | 447                              |       | 322                             |       | 1,204 |   | 904 |   |
| **Net  Loss from Continuing Operations**                                            |       | (3,110                           | )          | (920                            | )          | (2,888 | ) | (437 | ) |
| **Discontinued  Operations**                                                        | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Income (Loss) from Discontinued Operations**                                      |       | —                           |       | (3                              | )          | 2 |   | 5 |   |
| **Income Tax Benefit (Provision)**                                                  |       | —                           |       | 3                               |       | (1 | ) | — |   |
| **Income  from Discontinued Operations**                                            |       | —                           |       | —                          |       | 1 |   | 5 |   |
|                                                                                |       |                             |       |                            |       |   |   |   |   |
| **Net  Loss Allocable to Common Stockholders**                                      |       | $                                | (3,110     | )                               | $          | (920 | ) | $ | (2,887 | ) | $ | (432 | ) |
|                                                                                |       |                             |       |                            |       |   |   |   |   |
| **Average  Shares of Common Stock Outstanding**                                     |       | 1,638,027                        |       | 1,636,437                       |       | 1,637,627 |   | 1,636,170 |   |
|                                                                                |       |                             |       |                            |       |   |   |   |   |
| ** **                                                                          |       |                             |       |                            |       |   |   |   |   |
| **Basic  (Loss) Earnings Per Share of Common Stock From Continuing Operations**     |       | $                                | (1.90      | )                               | $          | (0.56 | ) | $ | (1.76 | ) | $ | (0.26 | ) |
| **Basic  Earnings (Loss) Per Share of Common Stock From Discontinued Operations**   |       | —                           |       | —                          |       | — |   | — |   |
| ** **                                                                          |       |                             |       |                            |       |   |   |   |   |
| **Basic  (Loss) Earnings Per Share of Common Stock From Net Income**                |       | $                                | (1.90      | )                               | $          | (0.56 | ) | $ | (1.76 | ) | $ | (0.26 | ) |
| ** **                                                                          | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted  (Loss) Earnings Per Share of Common Stock From Continuing Operations**   |       | $                                | (1.90      | )                               | $          | (0.56 | ) | $ | (1.76 | ) | $ | (0.26 | ) |
| ** **                                                                          | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Diluted  Earnings (Loss) Per Share of Common Stock From Discontinued Operations** |       | —                           |       | —                          |       | — |   | — |   |
| ** **                                                                          |       |                             |       |                            |       |   |   |   |   |
| **Diluted (Loss) Earnings Per  Share of Common Stock From Net Income**              |       | $                                | (1.90      | )                               | $          | (0.56 | ) | $ | (1.76 | ) | $ | (0.26 | ) |

 

See Notes to ConsolidatedFinancial Statements

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIES**

**Statements of Consolidated Cash Flows**(Unaudited)

 
| *** ***                                                           | ** ** | **Nine Months Ended**

**September 30,** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(In thousands of dollars)**                           | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **Cash  Flow From Operating Activities**                               | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Net Loss                                                               |       | $                                                       | (2,887     | ) | $ | (432 | ) |
| Adjustments to Reconcile Net Loss to Net Cash  Provided by Operations: |       |                                                    |       |   |   |
| Goodwill Impairment Loss                                               |       | 2,546                                                   |       | — |   |
| Gain from Sale of Stock of Subsidiary                                  |       | (429                                                    | )          | — |   |
| Write-off of Unrecoverable Cancelled Plant                             |       | 271                                                     |       | — |   |
| Depreciation                                                           |       | 2,289                                                   |       | 2,098 |   |
| Amortization                                                           |       | 1,173                                                   |       | 1,112 |   |
| Deferred Income Taxes —Net                                        |       | (1,714                                                  | )          | 832 |   |
| Change in Deferred Regulatory and Debt Issuance  Costs                 |       | (3,688                                                  | )          | (2,682 | ) |
| Amortization of W/S Upfront Payment                                    |       | 1,088                                                   |       | 1,123 |   |
| Change in Benefit Obligations                                          |       | 261                                                     |       | 95 |   |
| Change in Current Assets and Liabilities:                              |       |                                                    |       |   |   |
| Accounts Receivable and Unbilled Revenue                               |       | 1,429                                                   |       | 1,395 |   |
| Other Current Assets                                                   |       | (179                                                    | )          | (569 | ) |
| Accounts Payable                                                       |       | 1,004                                                   |       | 370 |   |
| Other Current Liabilities                                              |       | 242                                                     |       | (307 | ) |
| Other—Net                                                         |       | 778                                                     |       | (97 | ) |
| **Net  Cash Flow Provided By Operating Activities**                    |       | 2,184                                                   |       | 2,938 |   |
| **Cash  Flow From Financing Activities**                               | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Dividend Payments                                                      |       | —                                                  |       | (1,227 | ) |
| Retirements of Long-Term Debt                                          |       | (1,432                                                  | )          | (1,240 | ) |
| Short-Term Borrowings, Net                                             |       | 1,838                                                   |       | 2,887 |   |
| **Net  Cash Flow Provided By Financing Activities**                    |       | 406                                                     |       | 420 |   |
| **Cash  Flow From Investing Activities**                               | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Proceeds from Sale of Stock of Subsidiary                              |       | 429                                                     |       | — |   |
| Stock Redemption from Associated Company                               |       | 600                                                     |       | 350 |   |
| Cash Paid for Stock Contingencies from Acquisition  Agreements         |       | (244                                                    | )          | — |   |
| Acquisitions, Net of Cash Acquired                                     |       | (123                                                    | )          | (55 | ) |
| Change in Restricted Investments                                       |       | (5                                                      | )          | (4 | ) |
| Investment in Fixed Assets                                             |       | (3,349                                                  | )          | (4,173 | ) |
| **Net  Cash Flow Used For Investing Activities**                       |       | (2,692                                                  | )          | (3,882 | ) |
| **Decrease  in Cash and Cash Equivalents**                             |       | (102                                                    | )          | (524 | ) |
| **Cash  and Cash Equivalents at Beginning of Period**                  |       | 587                                                     |       | 1,056 |   |
| **Cash  and Cash Equivalents at End of Period**                        |       | $                                                       | 485        |   | $ | 532 |   |
| **Supplemental  Disclosure of Cash Flow Information:**                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Cash  Paid During the Period for:**                                  | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Interest                                                               |       | $                                                       | 2,294      |   | $ | 1,930 |   |
| Income Taxes                                                           |       | $                                                       | 53         |   | $ | 4 |   |
| **Non-Cash  Investing Activities:**                                    | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Value of  Preferred Stock Issued for Acquisition                       |       | $                                                       | —     |   | $ | 950 |   |
| Value of Common  Stock Issued for Compensation                         |       | $                                                       | 19         |   | $ | 20 |   |

 

See Notes to ConsolidatedFinancial Statements

 

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIES**

**Consolidated Balance Sheets**(Unaudited)

 
| ** **                                                                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In thousands of dollars)**                                                       | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Plant:**                                                                                         | ** ** | ** **             | ** ** | ** **            | ** ** |
| Electric Plant  in Service                                                                         |       | $                      | 99,861     |                  | $          | 98,998 |   |
| Non-Utility  Plant                                                                                 |       | 2,931                  |       | 2,664                 |       |
| Less Accumulated  Depreciation                                                                     |       | (42,560                | )          | (40,683               | )          |
| Net Plant in  Service                                                                              |       | 60,232                 |       | 60,979                |       |
| Construction  Work-in-Progress                                                                     |       | 1,602                  |       | 1,883                 |       |
| Total                                                                                              |       | 61,834                 |       | 62,862                |       |
|                                                                                               |       |                   |       |                  |       |
| **Investment in Associated  Companies**                                                            |       | 1,597                  |       | 1,956                 |       |
| **Net Plant and Investments in  Associated Companies**                                             |       | 63,431                 |       | 64,818                |       |
|                                                                                               |       |                   |       |                  |       |
| **Current Assets:**                                                                                | ** ** | ** **             | ** ** | ** **            | ** ** |
| Cash and Cash  Equivalents                                                                         |       | 485                    |       | 587                   |       |
| Accounts  Receivable (less allowance for uncollectible accounts of $375 in 2006 and  $372 in 2005) |       | 7,331                  |       | 7,950                 |       |
| Accounts  Receivable from Associated Companies                                                     |       | 401                    |       | 604                   |       |
| Unbilled Utility  Revenue                                                                          |       | 643                    |       | 1,071                 |       |
| Inventory                                                                                          |       | 686                    |       | 600                   |       |
| Income Tax  Refund Receivable                                                                      |       | —                 |       | 765                   |       |
| Prepayments                                                                                        |       | 469                    |       | 431                   |       |
| Unbilled  Contract Revenue                                                                         |       | 1,272                  |       | 816                   |       |
| Total                                                                                              |       | 11,287                 |       | 12,824                |       |
| **Regulatory Assets :**                                                                            | ** ** | ** **             | ** ** | ** **            | ** ** |
| Uncollected Maine  Yankee Decommissioning Costs                                                    |       | 8,488                  |       | 10,795                |       |
| Recoverable  Seabrook Costs                                                                        |       | 10,836                 |       | 11,669                |       |
| Regulatory Assets—Deferred  Income Taxes                                                      |       | 5,620                  |       | 5,794                 |       |
| Regulatory  Assets—Post-Retirement Medical Benefits                                           |       | 98                     |       | 115                   |       |
| Deferred Fuel  and Purchased Energy Costs                                                          |       | 33,340                 |       | 29,906                |       |
| Regulatory Asset—Power  Purchase Agreement Restructuring                                      |       | 363                    |       | 1,451                 |       |
| Unamortized  Premium on Early Retirement of Debt                                                   |       | 1,152                  |       | 1,308                 |       |
| Recoverable  Cancelled Plant                                                                       |       | 572                    |       | —                |       |
| Other Deferred  Regulatory Costs                                                                   |       | 1,473                  |       | 1,334                 |       |
| Total                                                                                              |       | 61,942                 |       | 62,372                |       |
| **Other Assets :**                                                                                 | ** ** | ** **             | ** ** | ** **            | ** ** |
| Intangible  Assets (net of accumulated amortization of $375 in 2006 and $284 in 2005)              |       | 102                    |       | 103                   |       |
| Goodwill                                                                                           |       | 4,397                  |       | 6,374                 |       |
| Unamortized Debt  Issuance Costs                                                                   |       | 558                    |       | 410                   |       |
| Restricted  Investment (at cost, which approximates market)                                        |       | 2,457                  |       | 2,453                 |       |
| Miscellaneous                                                                                      |       | 1,182                  |       | 1,119                 |       |
| Total                                                                                              |       | 8,696                  |       | 10,459                |       |
| **Total Assets**                                                                                   |       | $                      | 145,356    |                  | $          | 150,473 |   |

 

See Notes to ConsolidatedFinancial Statements

8

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIES**

**Capitalization and Liabilities**(Unaudited)

 
| **(In thousands of dollars)**                      | ** ** | **September 30,**

**2006** | ** ** | **December 31,**

**2005** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **Capitalization:**                                               |       |                             |       |                            |       |
| Shareholders’ Equity (see accompanying statements)           |       | $                                | 44,759     |                            | $          | 47,786 |   |
| Long-Term Debt                                                    |       | 31,275                           |       | 32,725                          |       |
| Total                                                             |       | 76,034                           |       | 80,511                          |       |
| **Current  Liabilities:**                                         | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Long-Term Debt Due Within One Year                                |       | 2,540                            |       | 2,430                           |       |
| Notes Payable to Banks                                            |       | 12,040                           |       | 10,400                          |       |
| Accounts Payable                                                  |       | 4,643                            |       | 4,016                           |       |
| Accounts Payable—Associated Companies                        |       | 250                              |       | 250                             |       |
| Accrued Employee Benefits                                         |       | 1,821                            |       | 1,433                           |       |
| Customer Deposits                                                 |       | 93                               |       | 36                              |       |
| Interest Accrued                                                  |       | 236                              |       | 125                             |       |
| Deferred Contract Revenue                                         |       | 210                              |       | 132                             |       |
| Total                                                             |       | 21,833                           |       | 18,822                          |       |
| **Deferred  Credits and Other Liabilities:**                      | ** ** | ** **                       | ** ** | ** **                      | ** ** |
| Accrued Removal Obligations                                       |       | 5,487                            |       | 5,683                           |       |
| Carrying Value of Interest Rate Hedge                             |       | 1,497                            |       | 1,387                           |       |
| Uncollected Maine Yankee Decommissioning Costs                    |       | 8,488                            |       | 10,795                          |       |
| Other Regulatory Liabilities                                      |       | 416                              |       | 458                             |       |
| Deferred Income Taxes                                             |       | 25,208                           |       | 27,270                          |       |
| Accrued Post-retirement Benefits and Pension Costs                |       | 4,900                            |       | 4,655                           |       |
| Investment Tax Credits                                            |       | 87                               |       | 106                             |       |
| Miscellaneous                                                     |       | 1,406                            |       | 786                             |       |
| Total                                                             |       | 47,489                           |       | 51,140                          |       |
| **Commitments, Contingencies, and  Regulatory Matters (Note 10)** |       |                             |       |                            |       |
| **Total Capitalization and  Liabilities**                         |       | $                                | 145,356    |                            | $          | 150,473 |   |

 

See Notes to ConsolidatedFinancial Statements

9

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIES**

**Statementof Consolidated Shareholders’ Equity**   (Unaudited)
| ** **                                                                         | ** ** | **Shares**                       | ** ** | **Common**                 | ** ** | **Preferred**  | ** ** | ** **                 | ** ** | **Accumulated  Other** | ** ** | ** **   | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------|------------|----------------|------------|----------------------------|------------|------------------------|------------|--------------|------------|
| **(In thousands of dollars,**                                       | ** ** | **Issued and  Outstanding** | ** ** | **Par Value  Issued** | ** ** | **Paid-In**    | ** ** | **Par Value  Issued** | ** ** | **Paid-In**            | ** ** | **Retained** | ** ** | **Comprehensive  Income** | ** ** | ** ** | ** ** |
| **except share information)**                                            | ** ** | **Common**                       | ** ** | **Preferred**              | ** ** | **($7/Share)** | ** ** | **Capital**                | ** ** | **($0.01/Share)**      | ** ** | **Capital**  | ** ** | **Earnings** | ** ** | **(Loss)** | ** ** | **Total** | ** ** |
|                                                                               |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   |   |   |   |   |
| **Balance,  December 31, 2005**                                                    |       | 1,636,779                        |       | 9,500                      |       | $              | 11,458     |                       | $          | 1,387                  |       | $            | —     |   | $ | 950 |   | $ | 34,187 |   | $ | (196 | ) | $ | 47,786 |   |
|                                                                               |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   |   |   |   |   |
| Common Stock  Issued                                                               |       | 1,248                            |       |                       |       | 9              |       | 10                         |       |                   |       |         |       |   |   |   |   | 19 |   |
|                                                                               |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   |   |   |   |   |
| Stock Contingency  from Acquisitions                                               |       |                             |       |                       |       |           |       | (244                       | )          |                   |       |         |       |   |   |   |   | (244 | ) |
| Net Loss                                                                           |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       | (2,887 | ) |   |   | (2,887 | ) |
| Other  Comprehensive Income (Loss):                                                |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   |   |   |   |   |
| Changes in Value of Foreign Exchange Translation Gain  Net of Tax Provision of $99 |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   | 149 |   | 149 |   |
| Unrealized Gain on Investments Available for Sale,  Net of Tax Provision of $1     |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   | 2 |   | 2 |   |
| Interest Rate Hedge, Net of Tax Benefit of $44                                     |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   | (66) |   | (66 | ) |
| Total Other Comprehensive Income                                                   |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   |   |   | 85 |   |
| Total Comprehensive Loss                                                           |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   |   |   | (2,802 | ) |
|                                                                               |       |                             |       |                       |       |           |       |                       |       |                   |       |         |       |   |   |   |   |   |   |
| **Balance, September 30, 2006**                                                    |       | 1,638,027                        |       | 9,500                      |       | $              | 11,467     |                       | $          | 1,153                  |       | $            | —     |   | $ | 950 |   | $ | 31,300 |   | $ | (111 | ) | $ | 44,759 |   |

 

MAM had five million shares of $7 par value commonstock authorized, with 1,638,027 and 1,636,779 shares issued and outstanding asof September 30, 2006, and December 31, 2005, respectively. At September 30,2006, and December 31, 2005, MAM had 500,000 shares of $0.01 par valuepreferred stock authorized, with 9,500 shares issued and outstanding.

See Notes to ConsolidatedFinancial Statements

10

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**NOTES TOCONSOLIDATED**

**FINANCIALSTATEMENTS**

 **1.    ACCOUNTINGPOLICIES**

**Consolidation and Basisof Presentation**

The accompanyingconsolidated financial statements include the accounts of Maine & MaritimesCorporation (the “Company” or “MAM”) and the following wholly-ownedsubsidiaries and affiliates:

1.               Maine PublicService Company and its wholly-owned inactive Canadian subsidiary Maine &New Brunswick Electrical Power Company, Ltd;

2.               The Maricor Groupand its wholly-owned United States subsidiary The Maricor Group New England andwholly-owned Canadian subsidiary The Maricor Group, Canada Ltd;

3.               MaricorTechnologies, Inc., a wholly-owned United States subsidiary; and

4.               Energy Atlantic,LLC, an inactive subsidiary.

 

MAM, a holding companyorganized effective June 30, 2003, owns all of the common stock of the abovesubsidiaries. MAM is listed on the American Stock Exchange (“AMEX”) under thesymbol MAM.

MAM is also a 50% owner of Maricor Properties Ltd, aCanadian company formerly wholly-owned by MAM, and its wholly-owned Canadiansubsidiaries, Cornwallis Court Developments Ltd and Mecel Properties Ltd.  Maricor Properties is a 50% owner of MaricorAshford Ltd, a joint venture with Ashford Investments Ltd.

All intercompanytransactions between MAM and its direct and indirect subsidiaries have beeneliminated in consolidation.

**Accounting Policies**

A complete listing ofaccounting policies is available in MAM’s 2005 Form 10-K.

**Goodwill Impairment Analysis**

The Company’s business acquisitions may result ingoodwill and other intangible assets, which affect the amount of future periodamortization expense and possible impairment expense that the Company willincur. The Company has adopted Statement of Financial Accounting Standards (“SFAS”)No. 142, “*Goodwill and Other Intangible Assets,”*which requires that the Company, on an annual basis, calculate fair value ofthe reporting units that contain the goodwill and compare that to the carryingvalue of the reporting units to determine if impairment exists. The Company’sannual impairment assessment date is November 30. Impairment testing must takeplace more often if circumstances or events indicate a change in the impairmentstatus.

Within The Maricor Group, earnings through the thirdquarter continued to lag expectations for a number of transitional and marketreasons.  These reasons include thelonger lead times and transition costs in the development of the higher valueengineering business lines beyond the mechanical and electrical engineeringfirms acquired.  However, some of theloss is also attributable to those core mechanical and electrical engineeringservice lines, primarily at The Maricor Group New England.  The downturn in revenue within this divisionthat prompted the May 31, 2006, impairment test has persisted.  Therefore, Management performed an interimimpairment analysis of goodwill of The Maricor Group as of August 31, 2006.

The reporting units were defined as the mechanical andelectrical engineering operations acquired as RES, M&R and Eastcan.  Additional service lines added sinceacquisition were excluded from the analysis. In calculating the fair value of the reporting units, Management relieson a number of factors including operating results, business plans, economicprojections, anticipated future cash flows and transactions, and marketplacedata. There are inherent uncertainties related to these factors and Management’sjudgment in applying them to the analysis of goodwill.  In analyzing potential impairment, Managementhas evaluated marketplace data and trends as it relates to businesses operatingwithin the same competitive space and geographies.  Management believes its assumptionsassociated with its discounted cash flow analysis, as well as comparables, arereflective of the marketplace.

When estimated fair value of reporting unit is lessthan the carrying value, goodwill may be overstated on the balance sheet, andan impairment charge would be recorded against net earnings.  The August 31, 2006, impairment analysis indicatedan impairment of $2.55 million, related to the RES reporting unit, subject tothird quarter results.  Third quarterresults and a current review of anticipated cash flows, as well as otherfactors described above, support the Company recognizing the impairment in thethird quarter.  This impairment isrecorded in the Statement of Consolidated Operations as “Goodwill ImpairmentLoss.”

11

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**New Accounting Pronouncements**

In September 2006, the Financial Accounting StandardBoard (“FASB”) issued FASB Statement of Financial Accounting Standards No. 158(“SFAS 158”), *“Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans — An Amendment of FASB Statements No.87, 88, 106 and 132(R).” * This statement requires employers to recognizeon their Balance Sheet an asset for a pension or other postretirement plan’soverfunded status, and a liability for an underfunded plan.  The assets and obligations of the plans mustbe measured at the end of the fiscal year. Changes in the funded status of a defined benefit postretirement plan mustbe recognized in the year in which the changes occur, and will be reported inother comprehensive income (“OCI”).  Thisguidance will become effective to the Company on December 31, 2006.  Management notes that the Maine PublicService Company (“MPS”) Pension Plan and Postretirement Medical Plan are bothwithin the scope of this guidance, and is in the process of quantifying theimpact of SFAS 158 on the consolidated financial statements.

Also in September 2006, the FASB issued SFAS 157, *“Fair Value Measurements.”* This standard provides guidance for using fair value to measure assetsand liabilities.  It applies wheneverother standards require or permit the use of fair value measurements for assetsor liabilities, but does not expand the use of fair value measurements in newcircumstances.  Fair value is the pricethat would be received to sell an asset, or paid to transfer a liability, in anorderly transaction between market participants in the market in which thereporting entity transacts.  The standardestablished a fair value hierarchy to be used to determine the method ofdetermining this price.  The highestweight is given to quoted prices in active markets.  The lowest weight is given to unobservabledata.  Fair value measurements must beseparately disclosed by their level in this fair value hierarchy, withadditional disclosure required for the effect on earnings when fair valuemeasurements are based on unobservable data. This standard is effective for fiscal years beginning after November 15,2007, and interim periods within those fiscal years, with early adoptionencouraged when the reporting entity has not issued financial statements forthe fiscal year of adoption.  Managementis currently assessing the impact of this guidance on its financial statements.

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 afterDecember 15, 2006.  This guidanceinterprets SFAS 109, *“Accounting for IncomeTaxes,”*and clarifies the existing guidance regarding recognition ofuncertain tax positions.  Under FIN 48, atax benefit from an uncertain tax position can only be recognized if it is morelikely than not that the position is sustainable based on its technical meritsand relevant administrative practices. The amount of the tax benefit allowed to be recognized is limited to thegreatest amount of benefit that is cumulatively greater than 50% likely ofbeing realized.  The guidance also notesthat these tax benefits can become recognized or “derecognized” as newinformation becomes available.  TheCompany is currently assessing the impact FIN 48 will have on its financialstatements.

 

12

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**2.**     **INCOME TAXES**

A summary of Federal, Canadian and State income taxescharged (credited) to income is presented below. For accounting and ratemakingpurposes, income tax provisions (benefits) included in “Operating Expenses”reflect taxes applicable to revenues and expenses allowable for ratemakingpurposes on MPS regulated activities and unregulated activities for MAM, TMG,Mecel and MTI. The tax effect of non-operating activities and those notincluded in rate base is allocated as “Other Income (Deductions).”
| ** **                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(In thousands of dollars)**            | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Current (benefit of)  provision for income taxes        |       |                                                 |       |                                                |       |   |   |   |   |
| Federal                                                 |       | $                                                    | (895       | )                                                   | $          | (476 | ) | $ | (941 | ) | $ | (69 | ) |
| State                                                   |       | (250                                                 | )          | (153                                                | )          | (292 | ) | (65 | ) |
| Canadian                                                |       | 30                                                   |       | (292                                                | )          | 71 |   | (557 | ) |
| Total current benefit  of income taxes                  |       | (1,115                                               | )          | (921                                                | )          | (1,162 | ) | (691 | ) |
| Deferred (benefit of)  provision for income taxes       |       |                                                 |       |                                                |       |   |   |   |   |
| Federal                                                 |       | (741                                                 | )          | 392                                                 |       | (489 | ) | 423 |   |
| State                                                   |       | (141                                                 | )          | 39                                                  |       | (116 | ) | 42 |   |
| Canadian                                                |       | (3                                                   | )          | —                                              |       | (129 | ) | — |   |
| Total deferred (benefit  of) provision for income taxes |       | (885                                                 | )          | 431                                                 |       | (734 | ) | 465 |   |
| Investment credits, net                                 |       | (6                                                   | )          | (6                                                  | )          | (18 | ) | (19 | ) |
| Total (benefit  of) provision for income taxes          |       | $                                                    | (2,006     | )                                                   | $          | (496 | ) | $ | (1,914 | ) | $ | (245 | ) |
| Allocated to:                                           |       |                                                 |       |                                                |       |   |   |   |   |
| Operating income (loss)                                 |       |                                                 |       |                                                |       |   |   |   |   |
| - Regulated                                             |       | $                                                    | (148       | )                                                   | $          | (69 | ) | $ | 645 |   | $ | 711 |   |
| - Unregulated                                           |       | (1,826                                               | )          | (423                                                | )          | (2,550 | ) | (956 | ) |
| Subtotal                                                |       | (1,974                                               | )          | (492                                                | )          | (1,905 | ) | (245 | ) |
| Discontinued Operations                                 |       | —                                               |       | (3                                                  | )          | 1 |   | — |   |
| Total Operating                                         |       | (1,974                                               | )          | (495                                                | )          | (1,904 | ) | (245 | ) |
| Other income                                            |       | (32                                                  | )          | (1                                                  | )          | (10 | ) | — |   |
| Total                                                   |       | $                                                    | (2,006     | )                                                   | $          | (496 | ) | $ | (1,914 | ) | $ | (245 | ) |

 

For the nine months ended September 30, 2006, and2005, the effective income tax rate was 40% and 36%, respectively. Theprincipal reasons for the effective rate differing from the US Federal andState income tax rates are flow-through items on depreciable property at theregulated utility, specifically cost of removal on ADR property and loss onretirements of ACRS property, and amortization of investment tax credits.

The Company has notaccrued U.S. income taxes on the undistributed earnings of ME&NB, as thewithholding taxes due on the distribution of any remaining amount would beprincipally offset by foreign tax credits. No dividends were received fromME&NB in 2006 or 2005.

As required by SFAS No.109, Management of the Company has evaluated the positive and negative evidencebearing upon the realizability of the Company’s deferred tax assets, whichconsist principally of Canadian net operating losses, goodwill, pension andpost-retirement benefits and accumulated Other Comprehensive Income (“OCI”) —interest rate hedge.  For the quarterended September 30, 2006, and the year ended December 31, 2005, Managementevaluated the need for a deferred tax asset valuation allowance and determinedthat no adjustment was needed.

13

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The following summarizesaccumulated deferred income tax (assets) and liabilities established ontemporary differences under SFAS 109 as of September 30, 2006, and December 31,2005:
| **(In thousands of dollars)**  | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Seabrook                                      |       | $                            | 5,890      |                        | $          | 6,350 |   |
| Property                                      |       | 8,982                        |       | 8,899                       |       |
| Flexible pricing  revenue                     |       | 594                          |       | 584                         |       |
| Deferred fuel                                 |       | 13,301                       |       | 11,931                      |       |
| Wheelabrator-Sherman  up-front payment        |       | 145                          |       | 579                         |       |
| Pension and  post-retirement benefits         |       | (962                         | )          | (938                        | )          |
| Goodwill Impairment  Loss                     |       | (1,018                       | )          | —                      |       |
| Net Operating Loss  Carryforward              |       | (1,568                       | )          | —                      |       |
| Other                                         |       | (156                         | )          | (135                        | )          |
| Net Accumulated Deferred Income Tax Liability |       | $                            | 25,208     |                        | $          | 27,270 |   |

 

**3.    CHANGEIN REPORTING ENTITY**

As a result of the saleof one share of Maricor Properties to Ashford Investments on June 30, 2006, theconsolidated reporting entity of MAM changed, under the scope of SFAS No. 154, *“Accounting Changes and Error Corrections.”*  The Consolidated Statement of Operations andConsolidated Statement of Cash Flows for the periods ending September 30, 2005,have been retrospectively adjusted in these financial statements to reflectthis change in reporting entity, in accordance with SFAS 154.  The Consolidated Balance Sheet as of December31, 2005, has also been retrospectively adjusted for this change.

The impact on earningshad MAM owned 50% of Maricor Properties instead of 100% for the three monthsended September 30, 2005, was a decrease of the net loss from $926,000 to$920,000.  This would have reduced theloss per common share, basic and diluted, to $0.56 from $0.57.  The net loss for the nine months endedSeptember 30, 2005, would have also decreased, from a loss of $447,000 with100% of Maricor Properties to $432,000 with a 50% ownership.  This would have reduced the loss per commonshare, basic and diluted, from $0.27 to $0.26, respectively.

**4.    SEGMENTINFORMATION**

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

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

·                  Unregulatedengineering services: TMG and all of its subsidiaries and product and servicelines;

·                  Unregulatedsoftware technology: MTI;

·                  Unregulatedenergy marketing: EA, an inactive subsidiary;

·                  Other: Mecel,corporate costs directly associated with the unregulated subsidiaries, commoncosts not allocated to the regulated utility and equity earnings in subsidiaryand associated companies; and,

·                  Eliminations ofintercompany activity.

The segment information for 2005 has been reclassifiedto conform to the 2006 presentation.

The accounting policies of the segments are the sameas those described in Note 1, “Summary of Significant Accounting Policies.”  MAM provides certain administrative supportservices to MPS, TMG, Mecel, MTI and their subsidiaries.  The cost of services provided to MPS isbilled to MPS based on a combination of direct charges and allocations.  The cost of corporate service provided to theother unregulated entities remains at the holding company, and is not allocatedor charged to the various subsidiaries. MPS also provides services to MAM and other affiliates.  These services are billed to MAM at costthrough inter-company transactions.

14

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| ** **                                | ** ** | **(In thousands of dollars)**             | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **Three Months Ended September 30, 2006** | ** ** |
| ** **                                | ** ** | **Regulated**                             | ** ** | **Unregulated** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Electric**                              | ** ** | **Engineering** | ** ** | **Software** | ** ** | **Energy** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Utility**                               | ** ** | **Services** | ** ** | **Technology** | ** ** | **Marketing** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue from  External Customers          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated                                 |       | $                                         | 8,033      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 8,033 |   |
| Unregulated                               |       | —                                    |       | 1,465 |   | 32 |   | — |   | 35 |   | (41 | ) | 1,491 |   |
| Total Operating Revenues                  |       | 8,033                                     |       | 1,465 |   | 32 |   | — |   | 35 |   | (41 | ) | 9,524 |   |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  Expenses                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operation & Maintenance     |       | 4,056                                     |       | — |   | — |   | — |   | — |   | — |   | 4,056 |   |
| Unregulated Operation & Maintenance   |       | —                                    |       | 1,915 |   | 326 |   | — |   | 1,043 |   | (59 | ) | 3,225 |   |
| Goodwill Impairment Loss                  |       | —                                    |       | 2,546 |   | — |   | — |   | — |   | — |   | 2,546 |   |
| Depreciation                              |       | 719                                       |       | 3 |   | — |   | — |   | 4 |   | — |   | 726 |   |
| Amortization of Stranded Cost             |       | 2,991                                     |       | — |   | — |   | — |   | — |   | — |   | 2,991 |   |
| Amortization                              |       | 63                                        |       | 28 |   | 13 |   | — |   | — |   | — |   | 104 |   |
| Taxes Other than Income                   |       | 441                                       |       | 14 |   | 11 |   | — |   | 5 |   | — |   | 471 |   |
| Income Taxes                              |       | (148                                      | )          | (1,248 | ) | (131 | ) | — |   | (447 | ) | — |   | (1,974 | ) |
| Total Operating Expenses                  |       | 8,122                                     |       | 3,258 |   | 219 |   | — |   | 605 |   | (59 | ) | 12,145 |   |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating (Loss)  Income                  |       | (89                                       | )          | (1,793 | ) | (187 | ) | — |   | (570 | ) | 18 |   | (2,621 | ) |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Income  (Deductions)                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in Income of Associated Companies  |       | 43                                        |       | — |   | — |   | — |   | (2,375 | ) | 2,348 |   | 16 |   |
| Interest and Dividend Income              |       | 16                                        |       | 10 |   | — |   | — |   | — |   | (21 | ) | 5 |   |
| Other Income (Deductions)                 |       | (56                                       | )          | (5 | ) | — |   | — |   | — |   | (2 | ) | (63 | ) |
| Total Other Income (Deductions)           |       | 3                                         |       | 5 |   | — |   | — |   | (2,375 | ) | 2,325 |   | (42 | ) |
| (Loss) Income  Before Interest Charges    |       | (86                                       | )          | (1,788 | ) | (187 | ) | — |   | (2,945 | ) | 2,343 |   | (2,663 | ) |
| Interest Charges                          |       | 287                                       |       | 74 |   | — |   | — |   | 107 |   | (21 | ) | 447 |   |
| (Loss) Income  from Continuing Operations |       | (373                                      | )          | (1,862 | ) | (187 | ) | — |   | (3,052 | ) | 2,364 |   | (3,110 | ) |
| Income from  Discontinued Operations      |       | —                                    |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Net (Loss) Income                         |       | $                                         | (373       | ) | $ | (1,862 | ) | $ | (187 | ) | $ | — |   | $ | (3,052 | ) | $ | 2,364 |   | $ | (3,110 | ) |

 

15

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| ** **                                | ** ** | **(In  thousands of dollars)**             | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **Three  Months Ended September 30, 2005** | ** ** |
| ** **                                | ** ** | **Regulated**                              | ** ** | **Unregulated** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Electric**                               | ** ** | **Engineering** | ** ** | **Software** | ** ** | **Energy** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Utility**                                | ** ** | **Services** | ** ** | **Technology** | ** ** | **Marketing** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue from  External Customers          |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated                                 |       | $                                          | 7,445      |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 7,445 |   |
| Unregulated                               |       | —                                     |       | 1,267 |   | 29 |   | — |   | 28 |   | (25 | ) | 1,299 |   |
| Total Operating Revenues                  |       | 7,445                                      |       | 1,267 |   | 29 |   | — |   | 28 |   | (25 | ) | 8,744 |   |
|                                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  Expenses                       |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operation & Maintenance     |       | 3,682                                      |       | — |   | — |   | — |   | — |   | — |   | 3,682 |   |
| Unregulated Operation & Maintenance   |       | —                                     |       | 1,706 |   | 148 |   | — |   | 382 |   | (53 | ) | 2,183 |   |
| Depreciation                              |       | 698                                        |       | 5 |   | — |   | — |   | — |   | — |   | 703 |   |
| Amortization of Stranded Cost             |       | 2,691                                      |       | — |   | — |   | — |   | — |   | — |   | 2,691 |   |
| Amortization                              |       | 73                                         |       | 17 |   | — |   | — |   | 1 |   | — |   | 91 |   |
| Taxes Other than Income                   |       | 417                                        |       | (5 | ) | 7 |   | — |   | 8 |   | 1 |   | 428 |   |
| Income Taxes                              |       | (69                                        | )          | (227 | ) | (51 | ) | — |   | (146 | ) | 1 |   | (492 | ) |
| Total Operating Expenses                  |       | 7,492                                      |       | 1,496 |   | 104 |   | — |   | 245 |   | (51 | ) | 9,286 |   |
|                                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating (Loss)  Income                  |       | (47                                        | )          | (229 | ) | (75 | ) | — |   | (217 | ) | 26 |   | (542 | ) |
|                                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Income  (Deductions)                |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in Income of Associated Companies  |       | 45                                         |       | — |   | — |   | — |   | (868 | ) | 814 |   | (9 | ) |
| Interest and Dividend Income              |       | 17                                         |       | 22 |   | — |   | — |   | — |   | (39 | ) | — |   |
| Other Income (Deductions)                 |       | (36                                        | )          | 2 |   | — |   | — |   | (9 | ) | (4 | ) | (47 | ) |
| Total Other Income (Deductions)           |       | 26                                         |       | 24 |   | — |   | — |   | (877 | ) | 771 |   | (56 | ) |
| (Loss) Income  Before Interest Charges    |       | (21                                        | )          | (205 | ) | (75 | ) | — |   | (1,094 | ) | 797 |   | (598 | ) |
|                                      |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Charges                          |       | 254                                        |       | 80 |   | 1 |   | — |   | 25 |   | (38 | ) | 322 |   |
| (Loss) Income  from Continuing Operations |       | (275                                       | )          | (285 | ) | (76 | ) | — |   | (1,119 | ) | 835 |   | (920 | ) |
| Income from  Discontinued Operations      |       | —                                     |       | — |   | — |   | — |   | — |   | — |   | — |   |
| Net (Loss) Income                         |       | $                                          | (275       | ) | $ | (285 | ) | $ | (76 | ) | $ | — |   | $ | (1,119 | ) | $ | 835 |   | $ | (920 | ) |

 

16

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| ** **                                | ** ** | **(In  thousands of dollars)**            | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **Nine  Months Ended September 30, 2006** | ** ** |
| ** **                                | ** ** | **Regulated**                             | ** ** | **Unregulated** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Electric**                              | ** ** | **Engineering** | ** ** | **Software** | ** ** | **Energy** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Utility**                               | ** ** | **Services** | ** ** | **Technology** | ** ** | **Marketing** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue from  External Customers          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated                                 |       | $                                         | 25,499     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 25,499 |   |
| Unregulated                               |       | —                                    |       | 4,238 |   | 152 |   | — |   | 103 |   | (123 | ) | 4,370 |   |
| Total Operating Revenues                  |       | 25,499                                    |       | 4,238 |   | 152 |   | — |   | 103 |   | (123 | ) | 29,869 |   |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  Expenses                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operation & Maintenance     |       | 11,297                                    |       | — |   | — |   | — |   | — |   | — |   | 11,297 |   |
| Unregulated Operation & Maintenance   |       | —                                    |       | 5,070 |   | 841 |   | — |   | 1,690 |   | (201 | ) | 7,400 |   |
| Goodwill Impairment Loss                  |       | —                                    |       | 2,546 |   | — |   | — |   | — |   | — |   | 2,546 |   |
| Depreciation                              |       | 2,164                                     |       | 11 |   | — |   | — |   | 11 |   | — |   | 2,186 |   |
| Amortization of Stranded Cost             |       | 8,369                                     |       | — |   | — |   | — |   | — |   | — |   | 8,369 |   |
| Amortization                              |       | 92                                        |       | 81 |   | 31 |   | — |   | — |   | — |   | 204 |   |
| Taxes Other than Income                   |       | 1,357                                     |       | 49 |   | 33 |   | — |   | 26 |   | — |   | 1,465 |   |
| Income Taxes                              |       | 645                                       |       | (1,487 | ) | (304 | ) | — |   | (758 | ) | (1 | ) | (1,905 | ) |
| Total Operating Expenses                  |       | 23,924                                    |       | 6,270 |   | 601 |   | — |   | 969 |   | (202 | ) | 31,562 |   |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Income  (Loss)                  |       | 1,575                                     |       | (2,032 | ) | (449 | ) | — |   | (866 | ) | 79 |   | (1,693 | ) |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Income  (Deductions)                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in Income of Associated Companies  |       | 140                                       |       | — |   | — |   | — |   | (1,579 | ) | 1,581 |   | 142 |   |
| Interest and Dividend Income              |       | 36                                        |       | 29 |   | — |   | — |   | — |   | (51 | ) | 14 |   |
| Other Income (Deductions)                 |       | (127                                      | )          | (19 | ) | — |   | — |   | (1 | ) | — |   | (147 | ) |
| Total Other Income (Deductions)           |       | 49                                        |       | 10 |   | — |   | — |   | (1,580 | ) | 1,530 |   | 9 |   |
| Income (Loss) Before  Interest Charges    |       | 1,624                                     |       | (2,022 | ) | (449 | ) | — |   | (2,446 | ) | 1,609 |   | (1,684 | ) |
| Interest Charges                          |       | 780                                       |       | 195 |   | — |   | — |   | 284 |   | (55 | ) | 1,204 |   |
| Income (Loss)  from Continuing Operations |       | 844                                       |       | (2,217 | ) | (449 | ) | — |   | (2,730 | ) | 1,664 |   | (2,888 | ) |
| Income from  Discontinued Operations      |       | —                                    |       | — |   | — |   | 1 |   | — |   | — |   | 1 |   |
| Net Income  (Loss)                        |       | $                                         | 844        |   | $ | (2,217 | ) | $ | (449 | ) | $ | 1 |   | $ | (2,730 | ) | $ | 1,664 |   | $ | (2,887 | ) |
| Total Assets                              |       | $                                         | 134,731    |   | $ | 8,402 |   | $ | 1,750 |   | $ | — |   | $ | 473 |   | $ | — |   | $ | 145,356 |   |

 

17

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| ** **                                | ** ** | **(In  thousands of dollars)**            | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **Nine  Months Ended September 30, 2005** | ** ** |
| ** **                                | ** ** | **Regulated**                             | ** ** | **Unregulated** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Electric**                              | ** ** | **Engineering** | ** ** | **Software** | ** ** | **Energy** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Utility**                               | ** ** | **Services** | ** ** | **Technology** | ** ** | **Marketing** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| Revenue from  External Customers          |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated                                 |       | $                                         | 24,833     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 24,833 |   |
| Unregulated                               |       | —                                    |       | 4,036 |   | 67 |   | — |   | 81 |   | (84 | ) | 4,100 |   |
| Total Operating Revenues                  |       | 24,833                                    |       | 4,036 |   | 67 |   | — |   | 81 |   | (84 | ) | 28,933 |   |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  Expenses                       |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operation & Maintenance     |       | 10,786                                    |       | — |   | — |   | — |   | — |   | — |   | 10,786 |   |
| Unregulated Operation & Maintenance   |       | —                                    |       | 4,477 |   | 329 |   | — |   | 1,387 |   | (158 | ) | 6,035 |   |
| Depreciation                              |       | 2,084                                     |       | 14 |   | — |   | — |   | — |   | — |   | 2,098 |   |
| Amortization of Stranded Cost             |       | 8,052                                     |       | — |   | — |   | — |   | — |   | — |   | 8,052 |   |
| Amortization                              |       | 220                                       |       | 101 |   | — |   | — |   | — |   | — |   | 321 |   |
| Taxes Other than Income                   |       | 1,277                                     |       | 34 |   | 15 |   | — |   | 30 |   | — |   | 1,356 |   |
| Income Taxes                              |       | 711                                       |       | (355 | ) | (111 | ) | — |   | (492 | ) | 2 |   | (245 | ) |
| Total Operating Expenses                  |       | 23,130                                    |       | 4,271 |   | 233 |   | — |   | 925 |   | (156 | ) | 28,403 |   |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Income  (Loss)                  |       | 1,703                                     |       | (235 | ) | (166 | ) | — |   | (844 | ) | 72 |   | 530 |   |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other Income  (Deductions)                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in Income of Associated Companies  |       | 133                                       |       | — |   | — |   | — |   | (678 | ) | 509 |   | (36 | ) |
| Interest and Dividend Income              |       | 40                                        |       | 33 |   | — |   | — |   | 111 |   | (172 | ) | 12 |   |
| Other Income (Deductions)                 |       | (22                                       | )          | — |   | — |   | — |   | (13 | ) | (4 | ) | (39 | ) |
| Total Other Income (Deductions)           |       | 151                                       |       | 33 |   | — |   | — |   | (580 | ) | 333 |   | (63 | ) |
| Income (Loss)  Before Interest Charges    |       | 1,854                                     |       | (202 | ) | (166 | ) | — |   | (1,424 | ) | 405 |   | 467 |   |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Charges                          |       | 739                                       |       | 268 |   | 2 |   | — |   | 60 |   | (165 | ) | 904 |   |
| Income (Loss)  from Continuing Operations |       | 1,115                                     |       | (470 | ) | (168 | ) | — |   | (1,484 | ) | 570 |   | (437 | ) |
| Income from  Discontinued Operations      |       | —                                    |       | — |   | — |   | 5 |   | — |   | — |   | 5 |   |
| Net Income  (Loss)                        |       | $                                         | 1,115      |   | $ | (470 | ) | $ | (168 | ) | $ | 5 |   | $ | (1,484 | ) | $ | 570 |   | $ | (432 | ) |
| Total Assets                              |       | $                                         | 131,519    |   | $ | 11,652 |   | $ | 1,712 |   | $ | 263 |   | $ | 5,351 |   | $ | — |   | $ | 150,497 |   |

 

18

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**5.**     **INVESTMENTS IN ASSOCIATED COMPANIES**

**Maricor Properties Ltd**

MAM owns 50% of thecommon stock of Maricor Properties with Ashford Investments Inc. (“Ashford”).   Maricor Properties was a wholly-ownedsubsidiary of MAM until June 30, 2006, when Maricor Properties issued one shareof its stock acquired by Ashford.   Forfurther disclosure of this transaction, see Note 9 of the June 30, 2006, Form10-Q.

In accordance with theShareholders Agreement, Mecel was set aside in a 120-day holding periodbeginning at date of closing on June 30, 2006, to either gain necessaryapprovals to sell one-half interest in Mecel to Ashford for additionalcompensation or to transfer ownership of Mecel to MAM or one of its affiliates.  This holding period has been extended bymutual agreement of MAM and Ashford, and is expected to be settled by thetransfer of Mecel to TMGC prior to December 31, 2006.

Management reviewed thecharacteristics of Maricor Properties subsequent to this transaction inaccordance with FIN 46(R), “*Consolidation of VariableInterest Entities, an Interpretation of ARB 51*,” and determined thatMAM remained the primary beneficiary of Mecel, but is not the primarybeneficiary of Maricor Properties, including the Vaughan Harvey building andCornwallis Court Developments, Ltd. While the assets and liabilities of Mecel remain consolidated in thesefinancial statements, MAM recorded its investment in the remainder of MaricorProperties using the equity method of accounting.

In the third quarters of 2006and 2005, MAM recorded equity in losses of $9,000 and 6,000, respectively, fromthe activities of Maricor Properties, excluding Mecel.  For the nine months ended September 30, 2006,MAM recorded equity in earnings of $85,000, while recording equity in losses of$58,000 for the same period of 2005. None of the earnings of Maricor Properties were distributed asdividends.  MAM’s investment in MaricorProperties is reported within “Investments in Associated Companies,” andreceivables from and payable to MAM and its wholly-owned subsidiaries fromMaricor Properties and its subsidiaries are presented within the lines “AccountsReceivable from Associated Companies,” and “Accounts Payable to AssociatedCompanies.”

**Maine Yankee and MEPCO**

MPS owns 5% of the common stock of Maine Yankee AtomicPower Company (“Maine Yankee”), a jointly-owned nuclear electric power company,and 7.49% of the common stock of the Maine Electric Power Company (“MEPCO,”) ajointly-owned electric transmission company. MPS records its investment inMEPCO and Maine Yankee using the equity method.

Substantially all earnings of Maine Yankee and MEPCOare distributed to investor companies. Dividends declared, dividends received in cash, and stock redemptionsreceived in cash are presented in the following table:

|                        | ** ** | **Quarter Ending  September 30, ** | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Maine  Yankee**           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Dividends Declared          |       | 60,000                                            |       | 25,000 |   |
| Dividends Received in Cash  |       | —                                            |       | 25,000 |   |
| Stock Redemptions           |       | 399,000                                           |       | — |   |
|                        |       |                                              |       |   |   |
| **MEPCO**                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Dividends Declared          |       | 2,000                                             |       | 2,000 |   |
| Dividends  Received in Cash |       | 2,000                                             |       | 2,000 |   |

 

**6.    SHORT-TERMCREDIT ARRANGEMENTS**

The following Note describes changes to the Company’sshort-term credit arrangements during the third quarter of 2006, and should beread in conjunction with MAM’s 2005 Form 10-K and MAM’s March 31, and June 30,2006, Forms 10-Q.

As part of the refinancing of short-term borrowingsduring 2005, MAM and certain of its subsidiaries agreed to certain financialand other covenants, such as debt service coverage and earnings before interestand taxes (“EBIT”) ratios. In the event of a default, the various lenders couldrequire immediate repayment of the debt. A default could also trigger increasesin interest rates, difficulty obtaining other sources of financings andcross-default provisions within the debt agreements. A default on the MPS lineof credit with Bank of America is a cross-default on the MAM line of creditwith Bank of America. In addition, MAM has guaranteed a TMG 

19

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facility withKatahdin Trust Company, and a Maricor Properties term loan with Royal Bank ofCanada. As of September 30, 2006, MAM did not meet the interest coverage ratiorequired under the MAM Credit Agreement with Bank of America or the TMGfacility with Katahdin Trust Company.  Bank of America and Katahdin Trust Company have granted waivers fromcompliance with the interest coverage ratio requirements for the third quarter.Also, based on the year-to-date net loss and projected fourth quarter results,Management anticipates the Company will not meet its interest coverage ratiofor the fourth quarter of 2006, and is currently negotiating covenant termswith these banks.

Underthe terms of the credit agreement with Katahdin Trust Company, the $1 millionTMG line of credit must be repaid in full for at least one 30-day period duringeach year.  On July 19, 2006, KatahdinTrust Company waived this requirement for 2006.

**7.     LONG-TERM CREDIT ARRANGEMENTS**

The following Notedescribes changes to the Company’s long-term credit arrangements during thethird quarter of 2006, and should be read in conjunction with MAM’s 2005 Form10-K and MAM’s March 31, and June 30, 2006, Forms 10-Q.

OnJuly 5, 2006, Maricor Properties borrowed $2.45 million CDN from Merrill LynchMortgage Lending to refinance temporary debt at the Royal Bank of Canada.  The new debt is a 10-year mortgage loan, withmonthly payments of principal and interest based on a 25-year amortizationschedule throughout the term of the loan, and the remaining loan balancepayable at the end of the term.  Theinterest rate is variable, calculated as the greater of (a) 135 basis pointsover the yield on the Government of Canada mortgage benchmark bond most closelyapproximating the term of the loan or (b) a floor of 5.20%.  As of the date of borrowing, the interestrate was 6.011%.  This loan is secured bythe Vaughan Harvey Blvd. property in Moncton, New Brunswick, and is guaranteedby Ashford Investments Inc., which is a 50% equity owner of Maricor Properties.

OnAugust 4, 2006, Maricor Properties also borrowed $4.05 million CDN from MerrillLynch Mortgage Lending to refinance the J. Angus MacDonald Building.  The proceeds were used to repay the StandardLife mortgage.  The debt is a 10-yearmortgage loan, with monthly payments of principal and interest based on a25-year amortization schedule throughout the term of the loan, and theremaining loan balance payable at the end of the term.  The interest rate is variable, calculated asthe greater of (a) 135 basis points over the yield on the Government of Canadamortgage benchmark bond most closely approximating the term of the loan or (b)a floor of 5.20%.  As of the date ofborrowing, the interest rate was 5.695%. This loan is secured by the J. Angus MacDonald building, and isguaranteed by Ashford Investments Inc. and Maricor Properties.

**8.    STOCKCOMPENSATION PLAN**

Uponapproval by MPS’s shareholders in June 2002, MPS adopted the 2002 Stock OptionPlan (the “Plan”). The Plan was subsequently adopted by the Company after itsformation. The Plan provides designated employees of the Company and itsSubsidiaries with stock ownership opportunities and additional incentives tocontribute to the success of the Company, and to attract, reward and retainemployees of outstanding ability. The Plan is administered by the members ofthe Performance and Compensation Committee of the Board of Directors, who arenot employees of the Company or its subsidiaries. The Company may grant optionsto its employees for up to 150,000 shares of common stock, provided that themaximum aggregate number of shares which may be issued under the Plan pursuantto incentive stock options shall be 120,000 shares. The exercise price forshares to be issued under any incentive stock option shall not be less thanone-hundred percent (100%) of the fair market value of such shares at the mostrecent closing price to the date the option is granted. An option’s maximumterm is ten years. As of September 30, 2006, a former CEO has been the onlyemployee to receive stock options.

TheCompany accounts for the fair value of its grants under the Plan in accordancewith the provisions of Statement of Financial Accounting Standards No. 123(R), “*Share-Based Payment*.”

| Year of Issuance                | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Number of  Options Granted                |       | 5,250    |       | 5,250    |       |
| Vesting Period                            |       | 3 years  |       | 3 years  |       |
| Number of  Options Vested and Exercisable |       | 5,250    |       | 5,250    |       |
| Dividend Yield                            |       | 4.60     | %          | 4.70     | %          |
| Volatility                                |       | 20.0     | %          | 20.0     | %          |
| Risk-Free  Interest Rate                  |       | 3.00     | %          | 4.60     | %          |
| Expected Life                             |       | 7 years  |       | 7 years  |       |

 

Ofthese 10,500 options, 6,568 expire three months from the CEO’s termination, orNovember 17, 2006.  The remaining optionsexpire ten years from the grant date, with 1,966 expiring May 31, 2012, and1,966 expiring May 31, 2013.

Thestock options are valued using the Black-Scholes valuation model.  The total value of all options granted andoutstanding as of September 30, 2006, is approximately $44,000, and is recordedwithin Miscellaneous Liabilities on the Consolidated Balance Sheets.  Compensation expense was reduced by $26,000in the third quarter, due to forfeitures. Compensation expense for the year has been reduced by $17,000 for thissame reason.  None of this compensationexpense was capitalized.

20

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Asummary of the activity in the Stock Option Plan from December 31, 2005,through September 30, 2006, is presented below:

|                                                 | ** ** | **Shares** | ** ** | **Average Exercise Price** | ** ** |
|-------------------------------------------------|------------|------------|------------|--------------------------------------|------------|
| **Options**                                     | ** ** | **2006**   | ** ** | **2006**                             | ** ** |
| Outstanding at  December 31, 2005               |       | 21,000     |       | $                                    | 29.80      |   |
| Granted                                         |       | 5,250      |       | 15.45                                |       |
| Exercised                                       |       | —     |       | —                               |       |
| Expired                                         |       | —     |       | —                               |       |
| Forfeited                                       |       | (15,750    | )          | 24.27                                |       |
| Outstanding at  September 30, 2006              |       | 10,500     |       | $                                    | 30.28      |   |
| Options  exercisable at September 30, 2006      |       | 10,500     |       |                                 |       |
| Weighted-average fair  value of options granted |       | $          | 30.28      |                                 |       |   |
|                                                 |            |            |            |                                      |            |  |  |

 

Dilutive earnings per share impact of outstandingstock options:
| ** **                                                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| **(In thousands of dollars)**                                           | ** ** | **2006**                                             | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Loss                                                                               |       | $                                                    | (3,110     | )                                                         | $          | (920 | ) | $ | (2,887 | ) | $ | (432 | ) |
| Shares used in  computation:                                                           |       |                                                 |       |                                                      |       |   |   |   |   |
| Weighted-Average common shares outstanding in  Computation of basic earnings per share |       | 1,638,027                                            |       | 1,636,437                                                 |       | 1,637,627 |   | 1,636,170 |   |
| Dilutive effect of common stock options                                                |       | —                                               |       | —                                                    |       | — |   | — |   |
| Other dilutive shares                                                                  |       | —                                               |       | —                                                    |       | — |   | — |   |
| Shares used in computation of earnings per common  share assuming dilution             |       | 1,638,027                                            |       | 1,636,437                                                 |       | 1,637,627 |   | 1,636,170 |   |
| Net loss per  common share basic                                                       |       | $                                                    | (1.90      | )                                                         | $          | (0.56 | ) | $ | (1.76 | ) | $ | (0.26 | ) |
| Net loss per common  share diluted                                                     |       | $                                                    | (1.90      | )                                                         | $          | (0.56 | ) | $ | (1.76 | ) | $ | (0.26 | ) |

 

Potentiallydilutive common stock options and preferred shares outstanding during theseperiods were:
| ** **             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                             | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Common stock options   |       | 18,375                                               |       | 21,000                                                    |       | 15,750 |   | 18,375 |   |
| Other dilutive  shares |       | 11,910                                               |       | 11,910                                                    |       | 11,910 |   | 5,955 |   |
|                   |       | 30,285                                               |       | 32,910                                                    |       | 27,660 |   | 24,330 |   |

 

Theseshares are anti-dilutive, and were therefore excluded from the calculation ofdiluted earnings per share.

**9.**     **BENEFITPROGRAMS**

The Company providescertain pension, post-retirement and welfare benefit programs to its employees.Benefit programs are an integral part of the Company’s commitment to hiring andretaining top grade employees, providing market-based compensation that rewardsindividual and corporate performance. The Company continues to offermarket-based total compensation to its employees that include varying fundedbenefit programs, salary, bonuses, incentives, and commissions, depending uponan individual’s particular job classification. The Company offers welfarebenefit plans to all employees, consisting of healthcare, life insurance,long-term disability, and accidental disability insurance. The Company alsooffers retirement savings programs to most employees in the form of 401(k)plans in the United States or Retirement Savings Plans in Canada. These plansallow voluntary contributions by the employee and may include a contribution bythe Company.

**U. S. Defined Benefit Pension Plan**

The Company has anon-contributory defined benefit pension plan covering Maine Public Service andcertain MAM employees. Most employees of the Company’s unregulated operationsare not eligible for this benefit plan. Benefits under the plan are based onemployees’ years of service and compensation prior to retirement. The Company’spolicy has been to fund pension costs accrued. In accordance with that policy,the Company contributed approximately $335,000 to the pension plan for 2005 in2006. In addition, the Company is currently making quarterly payments for the2006 plan year, in accordance with IRS requirements. Each quarterly payment for2006 is approximately $214,000 and affects the plan funding level, but not theamount of expense to be recognized. The quarterly payments for 2006 madethrough September 30, 2006, were $428,000.

Expenses by quarter aresummarized in the table below.

Effective December 31, 2006, additional salaryincreases and service accruals under the MPS defined benefit pension plan willcease for both union and non-union employees. A discretionary employer 401(k) contribution, beginning January 1, 2007,will be used to compensate employees for some or all of the anticipated impactof this loss of benefits, dependent on the number of years of service theemployee has with the Company.  Thisaction is being taken to control pension benefit costs.  A curtailment expense of 

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approximately $300,000 will be incurred in the fourthquarter of 2006 in conjunction with the cessation of future benefit accruals,in accordance with SFAS 88, *“Employers’ Accounting forSettlements and Curtailments of Defined Benefit Pension Plans and forTermination Benefits.”*

**Health Care Benefits**

The Company provides certain health care benefits toeligible employees. Eligible employees share in the cost of their medicalbenefits, in addition to plan deductibles and coinsurance payments. The planalso covers retiree medical coverage for employees of Maine Public ServiceCompany, the regulated utility. Amendments in plan provisions have beenincorporated into the calculation of the related actuarial benefit obligation.The Company continues to evaluate the increasing financial liabilitiesassociated with health care benefits and is considering options that ensurecompetitive employee benefits and control costs.

For purposes of determining the accruedpost-retirement benefit cost as of September 30, 2006, and December 31, 2005,the health care cost trend rate used was an increase of 8.0% in 2006 and 2005and graded down to 4% in 2012, remaining at that level thereafter. These rateshave a significant effect on the amounts reported for the health care plan.

The following table sets forth the plans’ net periodicbenefit cost:
| ** **                                   | ** ** | **Pension Benefits**                                  | ** ** | **Other Benefits**                                   | ** ** |
|----------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                   | ** ** | **Three Months Ended  September 30, ** | ** ** | **Nine Months Ended  September 30, ** | ** ** | **Three Months Ended  September 30, ** | ** ** | **Nine Months Ended  September 30,     ** | ** ** |
| **(In thousands of dollars)** | ** ** | **2006**                                                   | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Service cost                                 |       | $                                                          | 140        |                                                      | $          | 122 |   | $ | 421 |   | $ | 366 |   | $ | 45 |   | $ | 45 |   | $ | 136 |   | $ | 136 |   |
| Interest cost                                |       | 290                                                        |       | 283                                                       |       | 870 |   | 850 |   | 126 |   | 126 |   | 378 |   | 378 |   |
| Expected return  on plan assets              |       | (271                                                       | )          | (269                                                      | )          | (814 | ) | (808 | ) | (54 | ) | (54 | ) | (161 | ) | (161 | ) |
| Amortization of  transition obligation       |       | —                                                     |       | —                                                    |       | — |   | — |   | 36 |   | 36 |   | 107 |   | 107 |   |
| Amortization of  prior service cost          |       | 23                                                         |       | 23                                                        |       | 68 |   | 68 |   | (15 | ) | (15 | ) | (45 | ) | (45 | ) |
| Recognized net  actuarial (gain)             |       | 43                                                         |       | 26                                                        |       | 130 |   | 78 |   | 42 |   | 42 |   | 127 |   | 127 |   |
| Net periodic benefit  cost                   |       | $                                                          | 225        |                                                      | $          | 185 |   | $ | 675 |   | $ | 554 |   | $ | 180 |   | $ | 180 |   | $ | 542 |   | $ | 542 |   |

 

**10.**   **COMMITMENTS,CONTINGENCIES AND REGULATORY MATTERS**

**Maine Public Utilities Commission2006 Distribution Rate Case**

On January 11, 2006, MPSfiled a notice with the MPUC under Docket No. 2006-24 that it intended to seeka 4% increase in overall electric rates.  Subsequently, on March 13, 2006,the Company filed for an increase in distribution revenue of $3.24 million, a9.9% increase in average electric delivery rates. The Company participated indiscovery on its request and subsequently updated its filing on June 15, 2006.The supplemental filing revised the Company’s request to increase distributionrevenue by $2.68 million, an 8.64% increase in average electric delivery rates.

During June 2006, theCompany entered into settlement discussions with the parties to Docket No.2006-24. The discussions led to a Stipulation that was filed with theCommission on June 23, 2006. The Stipulation proposed an increase to theCompany’s distribution revenue of $1.75 million effective on July 15, 2006. Additionally, the Company agreed to deferits increase in the Demand-Side Management (“DSM”) mil rate and its decrease inthe transmission component of its delivery rate until July 15, 2006, asdescribed below.  The net effect of thethree retail rate changes was an increase to annual retail delivery revenue ofapproximately $1.33 million or an average increase to the Company’s electricdelivery rate of 3.84%. The Stipulation was approved by the Commission on July5, 2006, and new distribution rates implementing the net retail revenue changebecame effective as of July 15, 2006.

The stipulation requiredadjustment of the amortization of the Oracle system from a seven-yearamortization period to a ten-year amortization period, retroactive to thecapitalization of the system in 2004. The impact of this adjustment of approximately $128,000 was recognizedin the second quarter of 2006.  MPS alsoagreed to certain service quality index standards as part of this stipulation.

**MPUC Approves the Pass-Through of RetailTransmission Rates to MPS Retail Jurisdictional Customers, and the Increase toDSM Mil Rate, MPUC Docket No. 2003-516**

Per agreement with theMaine Public Utilities Commission, the new transmission rates for retailcustomers were put into retail rates on July 15, 2006, to coincide with MPS’sdistribution rate increase.  These rateswere approved by the MPUC on July 5, 2006.

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Per this filing, the DSM mil rate was increased by20%, or approximately $111,000, and the retail transmission rate was decreasedby 13.43%, or approximately $534,000.

**Maine Public Utilities Commission2006 Stranded Cost Rate Case**

TheCompany filed its 2006 Stranded Cost case on August 31, 2006, in MPUC DocketNo. 2006-506. The filing is an update of the Stipulation in the prior StrandedCost case, MPUC Docket No. 2003-666. MPS is proposing that stranded cost ratesremain the same as those agreed to in the prior filing. The initial caseconference was held on September 26, 2006. Discovery on the case is currentlyunderway. MPS does not anticipate any significant issues in this case.

**Federal Energy Regulatory Commission2006 Open Access Transmission Tariff Formula Rate Filing**

On May 31, 2006, pursuantto Section 205 of the Federal Power Act, 16 U.S.C. Section 824d, andTitle 18 CFR Sections 35.11 and 35.13 of the regulations of the FERC,MPS submitted for filing its proposed revisions to its FERC Open Access TransmissionTariff in Docket No. ER 05 (the “2006 OATT”) to modify its transmission rateformula.  MPS filed its updated ratesunder the 2006 OATT formula on June 15, 2006, pursuant to Docket ER00-1053,with an effective date of June 1, 2006, for both wholesale and retailcustomers, subject to a customer refund that may occur as a result of theproceeding and potential settlement negotiations.  The retail transmission revenue requirementwas decreased by approximately $534,000 on July 15, 2006, under the 2006OATT.  This represented a decrease of13.43% to the transmission component of retail delivery rates. The primaryreasons for the decrease were a shift in costs between transmission anddistribution and the settlement of the 2005 Open Access Transmission Tariffthrough rates, as described more fully below.

Asettlement between the parties to the 2006 OATT was reached on September 14,2006. The Company’s FERC attorneys have circulated the draft stipulation to allof the interested parties. The significant elements of the settlement includedan ROE of 10.5% on transmission assets, recovery of 90% of the expendituresassociated with Line 3875 in transmission rate base to be amortized over threeyears, the inclusion of new depreciation rates beginning January 1, 2007, andOracle allocation consistent with the distribution rate case.

The Company expects theFERC will approve the settlement later this year.

**Federal Energy Regulatory Commission2005 Open Access Transmission Tariff Formula Rate Filing**

On May 31, 2005, pursuantto Section 205 of the Federal Power Act, 16 U.S.C. Section 824d, andTitle 18 CFR Sections 35.11 and 35.13 of the regulations of the FERC,MPS submitted for filing its proposed revisions to its FERC Open AccessTransmission Tariff in Docket No. ER 05 (the “2005 OATT”) to modify itstransmission rate formula.  MPS filed itsupdated rates under the 2005 OATT formula on June 15, 2005, pursuant to DocketER00-1053 with an effective date of June 1, 2005, for both wholesale and retailcustomers, subject to a customer refund that may occur as a result of theproceeding and potential settlement negotiations.  The retail transmission revenue requirementwas increased by approximately $289,000 on June 1, 2005, under the 2005OATT.  This represented an increase of 8%to the transmission component of retail delivery rates or an overall impact ontotal retail delivery rates of 0.7%.  Theprimary reasons for the increase were the increase to costs due to mandatedSarbanes-Oxley requirements, and the purchase of a new Oracle-based accountingsystem.

As part of the settlementdata request process, the Company identified several adjustments to its FERCForm 1 filing for 2004, which flow through the Company’s transmission rateformula.  The approximate net impact ofthese corrections, once implemented, will be to reduce the overall increase tothe projected retail transmission revenue and result in a revised projected netincrease to the retail transmission revenue requirement of approximately$171,000 instead of the previously projected increase of approximately$288,000.  The final Settlement Agreement for the 2005 OATT was filed with theFERC on April 14, 2006, and final approval was received from the FERC on June21, 2006.  This adjustment flowedthrough the MPS OATT effective June 1, 2006, and is being passed through retailrates beginning on July 15, 2006.

**Requests for Issuance of Certificatesof Public Convenience and Necessity in Connection With the Construction of aProposed Transmission Line and Various Transmission Service Reservations.**

On October 4, 2004, MPSfiled a Petition with the MPUC requesting the issuance of a Certificate ofPublic Convenience and Necessity (“CPCN”) pursuant to 35-A M.R.S.A. Section3132 to construct a 138 kV transmission line originating at an existingsubstation in Limestone, Maine and extending to the Canadian Border nearHamlin, Maine.

The project was proposedin order to ensure the reliability and integrity of the MPS transmission gridunder scenarios of reduced on-system generator availability and peak loadgrowth.  MPS submitted that the availablefirm transfer capability of the transmission system when added to the remainingon-system hydro generation was not sufficient to meet peak load conditions,should existing on-system wood-fired generation become unavailable.  The proposed line would have addressed thisby significantly increasing the load-

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serving capability of the northern Maine region andwould have served to reinforce the vital transmission ties between northern Maineand the New Brunswick transmission grid. Additional benefits of the proposed line include the potential forincreasing the number of competitive retail electric suppliers and increasingthe attractiveness of the region for development of additional generation, suchas wind farms, by providing increased transmission export capacity.

The MPUC Commissionersdeliberated the Docket on August 29, 2005, and denied the petition, determiningthat there was no immediate reliability risk in northern Maine.  The Commission concluded that the risk oflosing on-system wood-fired generation was not sufficient to warrant the newtransmission line.  The Commission’sOrder denying the certificate, which was issued on October 21, 2005, describedactions to be taken by MPS and the Northern Maine Independent SystemAdministrator (“NMISA”) to reduce certain reliability risks identified byMPS.  The Company filed forreconsideration of the Order on November 8, 2005, based on the possibility thatAroostook Wind Energy Company, LLC (“AWE”) might elect to utilize the CPCNrequested by MPS in this Docket in order to have MPS construct transmissionfacilities necessary to connect their proposed generation project to the MPSelectrical system.  On March 30, 2006,the Company filed a status report with the Commission with regard to theproposed transmission facilities.  MPSexpects the MPUC to respond to the status report in the near future.  Additionally, on November 23, 2005, theCommission granted an MPS request for suspension of certain of the specificrequirements of the October 21, 2005, Order pending Commission consideration ofcertain proposed market rule changes which NMISA presented to the Commission onMarch 1, 2006.  Through September 30,2006, approximately $844,000 was spent on this transmission project.

As noted above, as aresult of the proposed settlement of its 2006 Open Access Transmission TariffFormula Rate Filing.  MPS expects to recover approximately 90% of the expendituresassociated with Line 3875 in transmission rate base to be amortized over threeyears.

**Wheelabrator-Sherman**

MPSwas ordered into a Power Purchase Agreement (“PPA”) with Wheelabrator-Sherman (“WS”)in 1986, which required the purchase of the entire output (up to 126,582 MWHper year) of a 17.6 MW biomass plant through December 31, 2006. The PPA wassubsequently amended in 1997, with WS agreeing to price reductions of $10.0million through the end of the original term in exchange for an up-frontpayment of $8.7 million in May 1998. The MPUC’s December 1997 approval of theamended PPA included a determination that the up-front payment would be treatedas stranded cost and, therefore, recovered in MPS’s rates. Total stranded costsincluded as regulatory assets under the caption “Deferred Fuel and PurchasedEnergy Costs” in the accompanying balance sheet related to this contract are$33.3 million at September 30, 2006, and $29.9 million at December 31, 2005,respectively.

MPSand WS also agreed to renew the PPA for an additional six years at agreed-uponprices and an increase of output to 136,982 MW beginning in 2001. Energy supplypurchases under this contract through February 29, 2000, were $2.6 million.Purchases from WS after March 1, 2000, are reflected as stranded costs.

MPSestimates its remaining commitment to purchase power under this contract to be$2.7 million from October 1, 2006, through December 31, 2006. Since March 1,2004, WPS-PDI has purchased 100% of WS’s output.

**Poly ChlorinatedBi-Phenol Transformers**

In response to a Maineenvironmental regulation to phase out Poly Chlorinated Bi-phenol (“PCB”)transformers, MPS has implemented a program to eliminate transformers on itssystem that do not meet the new State environmental guidelines. The program isin the process of visiting almost 13,000 distribution transformers over aten-year period. MPS is currently in its fifth year of this ten-year program.Approximately 35% of the transformers visited require “in service” PCB oilsampling.  In addition, transformers that pass the inspection criteriawill be refitted with new lightning arrestors and animal guards, wherenecessary. The current total estimated cost of the project is $2.6 million; asof September 30, 2006, $1.8 million of this total has been spent on thiseffort.  The remaining cost of the project has been accrued on the BalanceSheet as “Accrued Removal Obligations.”

**Off-Balance Sheet Arrangements**

**Variable Interest Entities**

Maricor Properties andthe Maricor Ashford Ltd joint venture are variable interest entities, asdefined by FIN 46(R).  However,Management has determined that these entities should not be consolidated withthese financial statements, as MAM is not the primary beneficiary of thesecompanies.

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**Leases**

The Company has severaloperating leases for office and field equipment, vehicles and office space,accounted for in accordance with SFAS 13, “*Accounting for Leases*”.  The following summarizes payments for leasesfor a period in excess of one year:

|                                              | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **September 30,**          | ** ** |
| **(In thousands of dollars)** | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Office Equipment                             |       | $                               | 15         |   | $ | 40 |   |
| Building                                     |       | 140                             |       | 151 |   |
| Vehicles                                     |       | 17                              |       | 12 |   |
| Rights of Way                                |       | 1                               |       | 1 |   |
| Field Equipment                              |       | 21                              |       | 20 |   |
| Total                                        |       | $                               | 194        |   | $ | 224 |   |

 

The future minimum leasepayments for the items listed above for the next five years are as follows:

**FutureMinimum Lease Payments by Year For All Items**

|            | ** ** | **Minimum Lease**         | ** ** |
|------------|------------|--------------------------------|------------|
| **Years**  | ** ** | **Payments**                   | ** ** |
| ** ** | ** ** | **(In thousands of** | ** ** |
| ** ** | ** ** | **dollars)**                   | ** ** |
| 2006       |       | $                              | 269        |   |
| 2007       |       | $                              | 199        |   |
| 2008       |       | $                              | 225        |   |
| 2009       |       | $                              | 185        |   |
| 2010       |       | $                              | 71         |   |

 

As a result of restructuring at TMGNE, furtherdescribed in Management’s Discussion and Analysis, the remaining $174,000 oflease payments for the TMGNE office space in Hudson were accrued.  Cash payments for this lease will be madebetween October 2006 and May 2009.

MPS also entered into a capital lease for computerequipment during the third quarter of 2006.  The total obligation under this capital lease was $62,000, $57,000of which remained at September 30, 2006. Future minimum lease payments under the term of this lease are asfollows:

|            | ** ** | **Minimum Lease**         | ** ** |
|------------|------------|--------------------------------|------------|
| **Years**  | ** ** | **Payments**                   | ** ** |
| ** ** | ** ** | **(In thousands of** | ** ** |
| ** ** | ** ** | **dollars)**                   | ** ** |
| 2006       |       | $                              | 9          |   |
| 2007       |       | $                              | 20         |   |
| 2008       |       | $                              | 22         |   |
| 2009       |       | $                              | 6          |   |

 

**Financial Information System HostingAgreement**

In December 2003, theCompany entered into a ten-year agreement with Delinea Corporation to host andprovide technical and functional support for the integrated Oracle FinancialInformation System. Hosting fees are $575,000 per year for years 2006-2013,plus an indexed inflation factor.

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**PART 1. FINANCIAL INFORMATION**

***Item 2. Management’sDiscussion and Analysis of Financial Condition and Results of Operations***

**Forward-Looking Statements**

This filing containscertain “forward-looking statements” as defined in the Private SecuritiesLitigation Reform Act of 1995, related to the expected future performance ofour plans and objectives, such as forecasts and projections of expected futureperformance or statements of Management’s plans and objectives.  These forward-looking statements may becontained in filings with the SEC and in press releases and oralstatements.  We use words such as “anticipate,”“estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other wordsand terms of similar meaning in connection with any discussion of futureoperating or financial performance. These statements are based on the current expectations, estimates orprojections of Management and are not guarantees of future performance.  Some or all of these forward-lookingstatements may not turn out to be what the Company expected.  Actual results will differ, and some of thedifferences may be material.  Factorsthat could cause actual results to differ materially from our projectionsinclude, among other matters, liquidity and capital formation risk; lack ofprofitable operations from unregulated businesses; acquisition and integrationrisks; legislation and regulation; foreign operations; general economicconditions, including economy of the region, interest rate risk, value of realestate and inflation risk; the degree of exclusivity of franchises;competition, environmental risks; aging infrastructure and reliability risks;collections risk; attraction and retention of qualified employees; equity pricerisk; professional liability risks; technological obsolescence; weather;vandalism, terrorism and other illegal acts; information technology risks; andalternative generation options. Therefore, no assurances can be given that the outcomes stated in suchforward-looking statements and estimates will be achieved.

**Executive Summary**

The Company has incurredan operating loss after taxes of $2.89 million for the quarter.  This loss is principally attributable tonon-recurring expenses totaling $2.3 million*, which are listed in the tablebelow by category.

| Non-recurring Charges in Third Quarter Results (in thousands)*: | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------|------------|
| TMGNE Goodwill  Impairment and Restructuring Charge                                                |       | $          | 1,632      |   |
| Severance Costs                                                                                    |       | 328        |       |
| Write-off of  acquisition costs                                                                    |       | 211        |       |
| Write-off and  Amortization of Cancelled Transmission Plant                                        |       | 126        |       |
| Total Non-recurring  Charges in Third Quarter 2006                                                 |       | $          | 2,297      |   |

----

*                    Notethat all amounts are listed after taxes.

An impairment charge of$1.53 million after taxes is as a result of continued non-performance by theTMGNE division of The Maricor Group. As more fully described in the footnotesto our financial statements under accounting policies, the overall performanceand economic outlook for the TMGNE has prompted Management to recognize thisimpairment loss.  Several factorstriggered an interim test for impairment, including continued decline inrevenue, personnel turnover, and a lagging sales pipeline.  Based upon third quarter results ofoperations and the Company’s internal impairment analysis, Management hasdetermined that there are no impairment charges for TMGC, which continues togrow revenues and has an improving sales forecast.  As a part of its annual impairment test, theCompany will continue to evaluate TMGC goodwill, but at this time does notanticipate an additional impairment loss adjustment in 2006.  The remainder of the TMGNE goodwillimpairment loss and restructuring charge was a result of the closure our Hudsonlocation, and accrual of $104,000 for the remaining lease costs.

Effective August 17,2006, J. Nicholas Bayne resigned from his position as CEO of the Company.  Beginning September 25, 2006, the Companyimplemented a staff reduction, which represented approximately 4% of the totalworkforce.  The severance charges of$328,000 after taxes reflect those events. Management deemed the reduction in force and related corporaterestructuring as necessary to control costs and reduce corporate overheads tobetter reflect the scope and needs of our current company size.  These charges have all been accrued inexpenses during the third quarter of 2006 and will be largely paid out in cashduring the fourth quarter, with the remainder being paid in 2007.  The annualized savings, as a result of thereduction in force, is estimated to be just over $1.0 million annuallybeginning in 2007.  Management and theBoard believe the staff reduction was an important and prudent step inmitigating recent operating losses of its unregulated businesses and therebypreserving current shareholder value.

Coincident withthe resignation of our former CEO in August, the Board decided to pause theCompany’s growth strategy while it evaluates the strategic direction of theCompany.  This evaluation includes anongoing review of the Company’s unregulated

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business operations todetermine means of improving their profitability and assessing their futurepotential to improve shareholder value. The Company expects to complete this analysis by the end of theyear.  The Company’s Vice Chairman NathanGrass continues to oversee day-to-day operations and is spearheading theevaluation process together with the Company’s management team.  As part of this process, the Company willselect a new CEO in the near future who will best help the Company achieve itsstrategic objectives.  As part of itsdecision to pause its growth strategy, the Company decided it was prudent todiscontinue due diligence and acquisition negotiations in August of 2006 withrespect to a target engineering firm. This resulted in a write-off ofpreviously capitalized acquisition costs in the amount of approximately $211,000after taxes.

As part of our annualtransmission rate proceedings, MPS negotiated a rate settlement of the costspreviously accumulated in connection with the October 4, 2004, petition filedwith the MPUC to construct a 138 kV transmission line.  We will collect $762,000 in futuretransmission rates from our customers out of a total of approximately $843,000spent.  The $762,000 of recoverablecancelled plant is amortized over 3 years, with the one-time related write-offof $49,000 and the catch up amortization of $115,000 accrued in our thirdquarter results.  This represents acollection of greater than 90% of the costs incurred to explore the feasibilityof this line.  For more detailedinformation, please refer to Part II, Item 1, “Legal Proceedings.”

The remaining losses ofapproximately $590,000 were a combination of losses by MTI, our softwaresubsidiary, of $187,000, operating losses at our TMG engineering subsidiariesof $183,000, and other corporate holding company overhead costs of $262,000.  These losses were offset by additionalrevenue at MPS from billable jobs and from our rate increases which went intoeffect on July 15, 2006, totaling $353,000, after provision for income taxes.

Revenues at TMG were upnearly 16% from the same quarter last year, which is a result of a 34% increasein revenues at TMGC, offset by declining revenues of 27% from TMGNE.  Similarly, year-to-date revenues at TMG areup 5% in total compared with the prior year-to-date which is comprised of a 23%increase at TMGC offset by decreased revenues at TMGNE of 22%.  While we continue to grow revenues at TMG,and strongly believe in the strong macro-economic trends for our product andservice offerings, we also are faced with the challenges of obtaining adequatescale of operations to offset increasing compliance and public company overheadcosts.

In addition to the recentreduction in force, we are instituting a freeze of benefit service for ourdefined benefit pension plan at MPS.  Inthe transition, participants in this plan will receive supplemental payments totheir 401k accounts to help offset their change in benefit levels.  Depending on market performance and otheractuarial assumptions inherent in defined benefit plans, the Companyanticipates annual savings of approximately $200,000, while also limiting therisk of market fluctuations in the future.

**Company Strategy Considerations**

In our 2005 Form 10-K and2006 Form 10-Q filings to date, we explained our growth strategy inconsiderable length.  With respect tounregulated operations, Management and the Board of Directors are consideringour strategic options in the context of how to best retain the value wecurrently have, and create additional shareholder value.  As stated in our previous filings, ourability to improve the financial performance of the unregulated operations isgreatly dependent on several key factors including, but not limited to:

·                  Access to growth capital at areasonable cost,

·                  Recruitment and retention of keymanagement, operational, and sales talent to spur growth,

·                  Our ability to attract keyacquisition targets,

·                  Minimizing overhead and public companycompliance costs, and

·                  Improving the execution of plans andmeeting forecasted targets.

 

In light of thesesignificant challenges, Management and the Board have decided to pause ouraggressive growth strategy while considering changes to our product and servicemix and our overall corporate structure and objectives.  During this pause, Management and the Boardare expeditiously reviewing all strategic options.  The strategic option ultimately chosen willdetermine when and if the acquisition strategy is resumed.

***Critical Accounting Policies***

The Company’s criticalaccounting policies are disclosed in MAM’s 2005 Form 10-K.

**Goodwill Impairment Analysis**

The Company’s business acquisitions may result ingoodwill and other intangible assets, which affect the amount of future periodamortization expense and possible impairment expense that the Company willincur. The Company has adopted Statement of Financial Accounting Standards (“SFAS”)No. 142, “*Goodwill and Other IntangibleAssets,”* which requires that the Company, on an

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annual basis, calculate fair value of the reportingunits that contain the goodwill and compare that to the carrying value of thereporting units to determine if impairment exists. The Company’s annualimpairment assessment date is November 30. Impairment testing must take placemore often if circumstances or events indicate a change in the impairmentstatus.

Within The Maricor Group, earnings through the thirdquarter continued to lag expectations for a number of transitional and market reasons.  These reasons include the longer lead timesand transition costs in the development of the higher value engineeringbusiness lines beyond the mechanical and electrical engineering firms acquired.  However, some of the loss is alsoattributable to those core mechanical and electrical engineering service lines,primarily at The Maricor Group New England. The downturn in revenue within this division that prompted the May 31,2006, impairment test has persisted. Therefore, Management performed an interim impairment analysis ofgoodwill of The Maricor Group as of August 31, 2006.

The reporting units were defined as the mechanical andelectrical engineering operations acquired as RES, M&R and Eastcan.  Additional service lines added sinceacquisition were excluded from the analysis. In calculating the fair value of the reporting units, Management relieson a number of factors including operating results, business plans, economicprojections, anticipated future cash flows and transactions, and marketplacedata. There are inherent uncertainties related to these factors and Management’sjudgment in applying them to the analysis of goodwill.  In analyzing potential impairment, Managementhas evaluated marketplace data and trends related to businesses operatingwithin the same competitive space and geographies.  Management believes its assumptionsassociated with its discounted cash flow analysis, as well as comparables, arereflective of the marketplace.

When estimated fair value of reporting unit is lessthan the carrying value, goodwill may be overstated on the balance sheet, andan impairment charge would be recorded against net earnings.  The August 31, 2006, impairment analysisindicated an impairment of $2.55 million, related to the RES reporting unit, subjectto third quarter results.  Third quarterresults and a current review of anticipated cash flows, as well as otherfactors described above, support the Company recognizing the impairment in thethird quarter.  This impairment isrecorded in the Statement of Consolidated Operations as “Goodwill ImpairmentLoss.”

***Overall Results ofOperations—Consolidated***

*Net (Loss) Income and (Loss)Earnings per Share*

|                                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(dollars in thousands except per share amounts)** | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| (Loss) Income  from Continuing Operations                                         |       |                             |       |                            |       |   |   |   |   |
| Regulated Electric Utility                                                        |       | $                                | (373       | )                               | $          | (275 | ) | $ | 844 |   | $ | 1,115 |   |
| Unregulated Engineering Services                                                  |       | (1,862                           | )          | (285                            | )          | (2,217 | ) | (470 | ) |
| Unregulated Software Technology                                                   |       | (187                             | )          | (76                             | )          | (449 | ) | (168 | ) |
| Other*                                                                            |       | (3,052                           | )          | (1,119                          | )          | (2,730 | ) | (1,484 | ) |
| Eliminations                                                                      |       | 2,364                            |       | 835                             |       | 1,664 |   | 570 |   |
| Income from Dis  continued Operations                                             |       | —                           |       | —                          |       | 1 |   | 5 |   |
|                                                                              |       |                             |       |                            |       |   |   |   |   |
| Net Loss                                                                          |       | $                                | (3,110     | )                               | $          | (920 | ) | $ | (2,887 | ) | $ | (432 | ) |
|                                                                              |       |                             |       |                            |       |   |   |   |   |
| Basic Loss Per  Share                                                             |       | $                                | (1.90      | )                               | $          | (0.56 | ) | $ | (1.76 | ) | $ | (0.26 | ) |

----

*   *The “Other” line includes Mecel, corporate costs directly associatedwith the unregulated subsidiaries, common costs not allocated to the regulatedutility and equity in earnings of subsidiaries and associated companies*.

Explanation of the operating results by segment ispresented below.

***Interest Expense***

Interest expense for the three months ended September30, 2006, totaled $447,000, up from $322,000 for the same period of 2005.  For the nine months ended September 30, 2006and 2005, interest expense was $1.2 million and $904,000, respectively.   Overall, long-term debt has decreased from$35.16 million at December 31, 2005, to $33.82 million at September 30, 2006,while short-term notes payable have increased $1.64 million from $10.4 millionat December 31, 2005, to $12.04 million at September 30, 2006.  The long-term debt is primarily composed offixed-rate, lower interest debt, while the notes payable is financed atvariable rates that have trended upward during 2006.

28

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***Income TaxProvision (Benefit)***

The regulated income tax benefit was $148,000 for thethree months ended September 30, 2006, compared to an income tax benefit of$69,000 in the same quarter of 2005, due to an increase in the net loss for theperiod.  The regulated tax provision forthe nine months ended September 30, 2006, was $645,000, compared to $711,000for the nine months ended September 30, 2005, due to the decrease in netincome.  The “Regulated Operations”section below details the changes in revenue and expense that resulted in lowerpre-tax income for the period.

Unregulated operations resulted in an income taxbenefit from operating activities of $1.83 million and $423,000, respectively,for the three months ended September 30, 2006 and 2005.  For the nine months ended September 30, 2006and 2005, the income tax benefit from unregulated operations was $2.55 millionand $956,000, respectively.  The largestincrease in income tax benefit was from the deferred income tax impact of thegoodwill impairment loss.  Higher net lossesfrom unregulated operations during 2006 also resulted in greater income taxbenefits than were recognized for the same period of 2005.  These changes in net loss are detailed below.

***Taxes Other ThanIncome***

Taxes other than income include payroll and propertytaxes.  These taxes have increasedapproximately $43,000 from $428,000 in the third quarter of 2005, to $471,000in the third quarter of 2006.  Taxesother than income also increased from $1.36 million in 2005 to $1.47 million in2006 for the nine months ended September 30. Payroll taxes have remained flat during these periods, while propertytax expense, primarily at MPS, has increased from $257,000 in the third quarterof 2005 to $301,000 in the third quarter of 2006.  Similarly, property tax expense for the ninemonths ended September 30, 2006, was $945,000, an increase of approximately$96,000 from the $849,000 of property tax expense in 2005.

***RegulatedOperations***

The following discussion includes the operations ofMPS and Me&NB, the Company’s regulated subsidiary and inactive unregulatedCanadian subsidiary:

|                                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                        | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(dollars in thousands except per share amounts)** | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net (Loss) Income  — Regulated Electric Utility                              |       | $                                | (373       | )                               | $          | (275 | ) | $ | 844 |   | $ | 1,115 |   |
| (Loss) Earnings Per  Share from Regulated Electric Utilities                      |       | $                                | (0.23      | )                               | $          | (0.17 | ) | $ | 0.52 |   | $ | 0.68 |   |

 

***Regulated OperatingRevenue***

Consolidated Revenues and Megawatt Hours (“MWH”) forthe three and nine months ended September 30, 2006 and 2005, are as follows:
| ** **                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                   | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| **(In thousands of dollars)** | ** ** | **Dollars**                      | ** ** | **MWH**                          | ** ** | **Dollars** | ** ** | **MWH** | ** ** | **Dollars** | ** ** | **MWH** | ** ** | **Dollars** | ** ** | **MWH** | ** ** |
| Residential                                  |       | $                                | 3,544      |                             | 42,857     |   | $ | 3,365 |   | 42,473 |   | $ | 10,794 |   | 134,700 |   | $ | 10,690 |   | 135,594 |   |
| Large Commercial                             |       | 1,103                            |       | 41,387                           |       | 1,147 |   | 42,109 |   | 3,746 |   | 128,107 |   | 3,847 |   | 129,226 |   |
| Medium  Commercial                           |       | 1,125                            |       | 27,675                           |       | 1,121 |   | 27,845 |   | 3,965 |   | 78,890 |   | 3,960 |   | 80,516 |   |
| Small Commercial                             |       | 1,336                            |       | 20,841                           |       | 1,304 |   | 21,055 |   | 4,951 |   | 67,780 |   | 4,975 |   | 69,305 |   |
| Other Retail                                 |       | 223                              |       | 841                              |       | 207 |   | 850 |   | 635 |   | 2,533 |   | 622 |   | 2,544 |   |
| Total Regulated  Retail Revenue              |       | 7,331                            |       | 133,601                          |       | 7,144 |   | 134,332 |   | 24,091 |   | 412,010 |   | 24,094 |   | 417,185 |   |
| Other Revenue                                |       | 702                              |       |                             |       | 301 |   |   |   | 1,407 |   |   |   | 739 |   |   |   |
| Total Regulated Revenue                      |       | $                                | 8,033      |                             |       |   | $ | 7,445 |   |   |   | $ | 25,498 |   |   |   | $ | 24,833 |   |   |   |

 

Total revenue in the third quarter of 2006 increasedapproximately $588,000 or 7.9% from the third quarter of 2005.  Of this increase, $401,000 was in otherrevenue, which increased primarily due to the work performed on the EvergreenWindfarm projects in Mars Hill, Maine.

29

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Residential customer revenue increased $179,000, dueprimarily to the increase in rates effective July 15, 2006.  Refer to Part II, Item 1, “Legal Proceedings”for more information on the rate increase. Residential customer volume is also up slightly from prior year,increasing approximately 0.9% for the quarter. Year-to-date, residential customer revenue increased $104,000 from$10.69 million for the nine months ended September 30, 2005, to $10.79 millionfor the same period of 2006.  Volume forthe nine months ended September 30, 2006, decreased 894 MWH or 0.7% from the prioryear, primarily due to lower volume in the second quarter of 2006.

Large commercial customer revenue has decreasedslightly for the quarter and year-to-date ended September 30, 2006, down$44,000 and $101,000, respectively, from the corresponding periods of2005.  The majority of this decrease isthe loss of one large commercial customer, reducing revenue by $24,000 for thequarter and $75,000 year-to-date.

Revenue from medium commercial customers did notchange significantly from the three and nine-month periods ended September 30,2005, to the same periods of 2006. Medium commercial volume decreased approximately 170 MWH or 0.6% for thequarter ended September 30, 2006, compared to 2005, while revenue dollarsincreased slightly, up $4,000 for the same period, due to the increase in rateseffective July 15, 2006.  Revenue for thenine months ended September 30, 2006, increased $5,000 from the same period ofthe prior year, also resulting from the increase in rates in the third quarter.  The year-to-date volume for medium commercialcustomers is also down, a reduction of approximately 1,626 MWH or 2.0% from thenine months ended September 30, 2005, to the nine months ended September 30,2006.

Small commercial revenue increased $32,000 from thethird quarter 2005 to 2006, but experienced a 1% or 214 MWH decrease in volume,offset by the July 15, 2006, rate increase. Year-to-date, small commercial customers have contributed $24,000 lessrevenue than the same period of 2005. Volume year-to-date 2006 is down 1,525 MWH or 2.2%.

Other retail revenue remains consistent with prioryear, with no material changes in volume or revenue dollars for those services.

For more information on regulatory orders approvingthe most recent rate increases, see Part II, Item 1, “Legal Proceedings.”

***Regulated UtilityExpenses***

For the three and nine months ended September 30, 2006and 2005, regulated operation and maintenance expenses and stranded costs areas follows:

|                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands of dollars)**                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Regulated  Operation and Maintenance                        |       |                             |       |                            |       |   |   |   |   |
| Transmission and Distribution                               |       | $                                | 1,058      |                            | $          | 957 |   | $ | 3,008 |   | $ | 2,598 |   |
| Customer Service                                            |       | 386                              |       | 430                             |       | 983 |   | 929 |   |
| Administrative and General                                  |       | 2,612                            |       | 2,295                           |       | 7,306 |   | 7,259 |   |
| Total Regulated Operation and Maintenance                   |       | $                                | 4,056      |                            | $          | 3,682 |   | $ | 11,297 |   | $ | 10,786 |   |
|                                                        |       |                             |       |                            |       |   |   |   |   |
| Stranded Costs                                              |       |                             |       |                            |       |   |   |   |   |
| Wheelabrator-Sherman                                        |       | $                                | 1,930      |                            | $          | 1,656 |   | $ | 5,798 |   | $ | 5,020 |   |
| Maine Yankee                                                |       | 788                              |       | 804                             |       | 2,195 |   | 2,411 |   |
| Seabrook                                                    |       | 384                              |       | 384                             |       | 1,153 |   | 1,153 |   |
| Amortization of Wheelabrator-Sherman Restructuring  Payment |       | 363                              |       | 363                             |       | 1,088 |   | 1,088 |   |
| Deferred Fuel                                               |       | (735                             | )          | (586                            | )          | (2,266 | ) | (1,830 | ) |
| Cancelled Plant                                             |       | 191                              |       | —                          |       | 191 |   | — |   |
| Special Discounts                                           |       | 70                               |       | 70                              |       | 210 |   | 210 |   |
| Total Stranded  Costs                                       |       | $                                | 2,991      |                            | $          | 2,691 |   | $ | 8,369 |   | $ | 8,052 |   |

 

Transmission anddistribution expenses increased $101,000 from the third quarter of 2005 to thethird quarter of 2006.  Transmissionoverhead line maintenance expense increased $120,000 for the period, dueprimarily to increased costs for tree trimming. Year-to-date, the total increase of $410,000 is due to $169,000 ofadditional expense under the PCB mitigation project compared to 2005, and$153,000 of increased transmission and distribution overhead line maintenanceexpenses, including the third quarter 2006 tree trimming expenses.

Customer serviceexpenses in the third quarter of 2006 are down $44,000 from the same period in2005.  Of this change, $41,000 is due toreduced expense for uncollectible accounts year-over-year.  Year-to-date, customer service expense isslightly higher than

30

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2005, up $54,000.  Approximately $38,000 of this increase is dueto additional labor for customer records, while the remaining increase is dueto additional postage costs.

Administrative andgeneral expenses increased $317,000 from the third quarter of 2005 to the thirdquarter of 2006.  Separation agreementsas a result of the reduction in force in September and other severance accrualstotaled $344,000.  This increase waspartly offset by a decrease in the support fees charged to MPS associated withthe Oracle system, due to the allocation of Oracle costs agreed to withinDocket 2006-024.  The remainder of thesefees are allocated to the unregulated businesses, and charged within the “Other”segment in Note 3 of the Consolidated Financial Statements.

Year-to-date,administrative and general expenses are flat, increasing approximately $47,000from 2005 to 2006.  The largest increasesyear-to-date include the separation and severance agreements in the thirdquarter of $344,000, increased transportation expenses of $164,000 andincreased employee benefits expense, primarily workers compensation insuranceof $116,000.  These increases were offsetby a decrease in consulting expenses of $614,000, primarily due to a decreasein external Sarbanes-Oxley compliance costs.

Stranded cost expense for the three months endedSeptember 30, 2006, increased $300,000 from 2005, while stranded cost expensefor the nine months ended September 30, 2006, increased $317,000 compared to thesame period of 2005.  The largestincrease in stranded cost expense is $191,000 of amortization of cancelledtransmission plant.  Refer to Part II,Item 1, “Legal Proceedings,” for more information on this cancelled plant.

***UnregulatedEngineering Services***

|                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                  | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands of dollars)**                | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Loss —  Unregulated Engineering Services           |       | $                                | (1,862     | )                               | $          | (285 | ) | $ | (2,217 | ) | $ | (470 | ) |
| Basic Loss Per Share  from Unregulated Engineering Services |       | $                                | (1.14      | )                               | $          | (0.17 | ) | $ | (1.35 | ) | $ | (0.29 | ) |

 

***UnregulatedEngineering Services—Operating Revenue***

Unregulated engineering services revenues for thethree and nine months ended September 30, 2006, and 2005 are as follows:
| ** **                                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands of dollars)**     | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| The Maricor  Group New England                   |       | $                                | 356        |                            | $          | 444 |   | $ | 1,251 |   | $ | 1,613 |   |
| The Maricor  Group, Canada Ltd                   |       | 1,109                            |       | 823                             |       | 2,987 |   | 2,423 |   |
| Total  Unregulated Engineering Operating Revenue |       | $                                | 1,465      |                            | $          | 1,267 |   | $ | 4,238 |   | $ | 4,036 |   |

 

Unregulated engineering sales in Canada continued toexceed prior year.  For the quarter,revenue increased approximately $286,000 or 34%.  Revenue for the nine months ended September30 is also up $564,000 or 23%.  TMGC hasincreased revenue both through growth within Atlantic Canada and also increasedsales in other areas of Canada.  TMGC hasalso benefited from the stronger Canadian dollar against the US dollar duringthis time.  Finally, revenue growth inthe third quarter is also partly attributable to the acquisition of PaceEngineering Limited (“Pace”) in May 2006.

Revenue from The Maricor Group New England is downapproximately $122,000 or 27% for the quarter, compared to prior year.  Year-to-date, revenue is down $362,000 or22%.  Revenue continues to not only lagbehind prior year, but also lags Management’s expectations, due to lack oftraction in higher value service offerings and limited business developmentstaff resources.  Due to the decreasingrevenue, Management performed an interim goodwill impairment test for TMG as ofAugust 31, 2006.  The decrease in revenueand historical operating losses of this segment resulted in a goodwillimpairment loss in the third quarter of 2006 of $2.55 million.

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***UnregulatedEngineering Services Operating Expenses***

Unregulated engineering services operating andmaintenance expenses for the three and nine months ended September 30, 2006,and 2005:

|                                              | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| *** ***                                 | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands of dollars)** | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cost of Sales                                |       | $                                | 1,464      |                            | $          | 1,264 |   | $ | 4,105 |   | $ | 3,758 |   |
| Other Operating  Expenses                    |       | 451                              |       | 442                             |       | 965 |   | 719 |   |
| Goodwill  Impairment Loss                    |       | 2,546                            |       | —                          |       | 2,546 |   | — |   |
| Depreciation                                 |       | 3                                |       | 5                               |       | 11 |   | 14 |   |
| Amortization                                 |       | 28                               |       | 17                              |       | 81 |   | 101 |   |
| Taxes Other than  Income                     |       | 14                               |       | (5                              | )          | 49 |   | 34 |   |
| Income Taxes                                 |       | (1,248                           | )          | (227                            | )          | (1,487 | ) | (355 | ) |
| Total  Unregulated Operating Expenses        |       | $                                | 3,258      |                            | $          | 1,496 |   | $ | 6,270 |   | $ | 4,271 |   |

 

Cost of sales increased approximately $200,000 or15.8% in the third quarter of 2006, compared to 2005, in line with the 15.6%increase in sales revenue.  Cost of salesexceeded revenue at TMGNE, with $488,000 of direct expenses in the thirdquarter of 2006, compared to $356,000 of revenue.  Year-to-date, cost of sales at TMGNE is $1.32million, compared to $1.25 million in revenue. As sales continued to decrease during the third quarter, TMGNE becameunable to cover the overhead costs of their operations with the amount of revenuegenerated.  Steps have been taken inrestructuring the office to mitigate these losses going forward, including theclosure of the Hudson, Massachusetts office and participation in the corporatereduction in force.

Other operating expenses in the third quarter of 2006are comparable to 2005.  Excluding theimpact of the accrual of the remainder of the Hudson lease of approximately$174,000, other expenses are down $165,000 from 2005.  Consulting expenses are the majority of thisdecrease, down approximately $113,000 due to termination of some consultingarrangements and renegotiation of others. Year-to-date, other operating expenses are up approximately$174,000.  Approximately $78,000 of thisincrease is associated with separation accruals from the reduction inforce.  Of the remaining increase,approximately $30,000 was associated with recruitment fees in the third quarterof 2006.  These increases were offsetduring the quarter by reduced bad debt expense.

TMG also incurred a goodwill impairment loss of $2.55million, due to the performance of the RES reporting unit.  Refer to Note1 of the Consolidated FinancialStatements for more information.

***UnregulatedSoftware Technology***

|                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| **(In thousands of dollars)**         | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net Loss —  Unregulated Software Technology     |       | $                                | (187       | )                               | $          | (76 | ) | $ | (449 | ) | $ | (168 | ) |
| Loss Per Share from  Unregulated Software Technology |       | $                                | (0.11      | )                               | $          | (0.05 | ) | $ | (0.27 | ) | $ | (0.10 | ) |

 

Duringthe third quarter of 2006, MTI incurred a net loss of $187,000, or $111,000higher than the $76,000 net loss incurred in the same period of 2005.  The results for the nine months endedSeptember 30, 2006, compared to 2005 are similar, with a $281,000 greater lossincurred in 2006.  Throughout 2005,software development costs were capitalized, reducing expense.  By March 31, 2006, the majority of softwaredevelopment had been completed.  Sincethat time, MTI has focused primarily on development of its sales options,including direct sales and support, licensing, distribution agreements, andpotential sale of the iPlanTM and Building BlocksTM assets.  These costs are expensed as incurred.

***Off-Balance SheetArrangements***

**Variable Interest Entities**

Maricor Properties andthe Maricor Ashford Ltd joint venture are variable interest entities, asdefined by FIN 46(R).  However,Management has determined that these entities should not be consolidated withthese financial statements, as MAM is not the primary beneficiary of thesecompanies.

32

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**Leases**

The Company has severaloperating leases for office and field equipment, vehicles and office space,accounted for in accordance with SFAS 13, “*Accounting for Leases*”.  The following summarizes payments for leasesfor a period in excess of one year:

|                                              | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|
| ** **                                   | ** ** | **September 30,**          | ** ** |
| **(In thousands of dollars)** | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Office Equipment                             |       | $                               | 15         |   | $ | 40 |   |
| Building                                     |       | 140                             |       | 151 |   |
| Vehicles                                     |       | 17                              |       | 12 |   |
| Rights of Way                                |       | 1                               |       | 1 |   |
| Field Equipment                              |       | 21                              |       | 20 |   |
| Total                                        |       | $                               | 194        |   | $ | 224 |   |

 

The future minimum lease payments for the items listedabove for the next five years are as follows:

**FutureMinimum Lease Payments by Year For All Items**

|            | ** ** | **Minimum Lease**         | ** ** |
|------------|------------|--------------------------------|------------|
| **Years**  | ** ** | **Payments**                   | ** ** |
| ** ** | ** ** | **(In thousands of** | ** ** |
| ** ** | ** ** | **dollars)**                   | ** ** |
| 2006       |       | $                              | 269        |   |
| 2007       |       | $                              | 199        |   |
| 2008       |       | $                              | 225        |   |
| 2009       |       | $                              | 185        |   |
| 2010       |       | $                              | 71         |   |

 

As a result of restructuring at TMGNE, furtherdescribed in Management’s Discussion and Analysis, the remaining $174,000 oflease payments for the TMGNE office space in Hudson were accrued.  Cash payments for this lease will be madebetween October 2006 and May 2009.

MPS also entered into a capital lease for computerequipment during the third quarter of 2006.  The total obligation under this capital lease was $62,000, $57,000of which remained at September 30, 2006. Future minimum lease payments under the term of this lease are asfollows:

|            | ** ** | **Minimum Lease**                       | ** ** |
|------------|------------|----------------------------------------------|------------|
| **Years**  | ** ** | **Payments**                                 | ** ** |
| ** ** | ** ** | **(In thousands of dollars)** | ** ** |
| 2006       |       | $                                            | 9          |   |
| 2007       |       | $                                            | 20         |   |
| 2008       |       | $                                            | 22         |   |
| 2009       |       | $                                            | 6          |   |

 

**Financial Information System HostingAgreement**

In December 2003, the Company entered into a ten-yearagreement with Delinea Corporation to host and provide technical and functionalsupport for the integrated Oracle Financial Information System. Hosting feesare $575,000 per year for years 2006-2013, plus an indexed inflation factor.

***Liquidity and Capital Resources***

As part of the refinancing of short-term borrowingsduring 2005, MAM and certain of its subsidiaries agreed to certain financialand other covenants, such as debt service coverage and earnings before interestand taxes (“EBIT”) ratios. In the event of a default, the

33

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various lenderscould require immediate repayment of the debt. A default could also triggerincreases in interest rates, difficulty obtaining other sources of financingsand cross-default provisions within the debt agreements. A default on the MPSline of credit with Bank of America is a cross-default on the MAM line ofcredit with Bank of America. In addition, MAM has guaranteed a TMG facilitywith Katahdin Trust Company, and a Maricor Properties term loan with Royal Bankof Canada. As of September 30, 2006, MAM did not meet the interest coverageratio required under the MAM Credit Agreement with Bank of America or the TMGfacility with Katahdin Trust Company.  Bank of America and Katahdin Trust Company have granted waivers fromcompliance with the interest coverage ratio requirements for the third quarter.Also, based on the year-to-date net loss and projected fourth quarter results,Management anticipates the Company will not meet its interest coverage ratiofor the fourth quarter of 2006, and is currently negotiating covenant termswith these banks.

Beginning inJanuary 2007, MAM will be required to make payments on its $1.7 million termnote with Bank of America.  Ifunregulated operating cash flows are not sufficient to repay this debt or otherexisting debt as it comes due, the Company has access to its regular dividendsas well as the stranded cost freed-up cash flows of the regulated utility, aportion of which may be used for debt repayment within the dividend limitsdefined by the MPUC when the holding company was established.

The Company’s cashand cash equivalents as of September 30, 2006, were $485,000, down from $587,000at December 31, 2005.  The “Statements ofConsolidated Cash Flows” of the Company’s Consolidated Financial Statements aspresented in Part I, Item 1. of this Form 10-Q, reflects the Company’s sourcesand uses of capital.

Cash flow fromoperating activities for the first nine months of 2006 was $1.99 million,compared to $2.94 million in the first nine months of 2005.  The largest additions to the 2006 net losswere the add-backs of the goodwill impairment loss of $2.55 million, anddepreciation expense of $2.29 million. The depreciation expense add-back for 2005 was $2.1 million.  The deferral of regulated and debt issuancecosts was the largest decrease in operating cash flow, reducing the $2.79million net loss by $3.69 million in the 2006 statement.  The deferral for 2005 reduced operating cashflow by approximately $2.68 million.

Cash flow providedby financing for the first nine months of 2006 was $1.84 million fromshort-term borrowings.  This source ofcash was partly offset by repayments of long-term debt totaling $1.43 millionin the first nine months of 2006.  Cash flow provided by financing activitiesfor the first nine months of 2005 totaled $420,000, due to $2.89 million inadditional short-term borrowings, partly offset by $1.23 million paid individends during 2005 and $1.24 million in repayments of long-term debt.

Cash flow used for investing activities decreased cash by approximately$2.69 million in the first nine months of 2006. The largest use of cash for investing in 2006 were fixed assetacquisitions of $3.35 million, primarily investments in MPS transmission anddistribution assets, with another $244,000 used for settlement of the stockcontingencies associated with acquisitions of engineering firms in 2003 and2004.  The largest sources of cash frominvesting activities were the Maine Yankee stock redemptions of $600,000, andthe sale of stock by Maricor Properties for $429,000.  For the first nine months of 2005, cash flowused for investing activity totaled $3.88 million.  The Company’swholly-owned software technology subsidiary, Maricor Technologies, Inc.acquired lifecycle asset management software for $1.2 million, $50,000 of whichwas cash.  The Company also invested $4.17 million in other fixedassets within other segments, primarily the regulated electric utility.

In the long term, Management expects MAM’s cash flowto improve, as MPS begins in 2007 to recover deferred fuel and other strandedcosts which it currently defers.  Thecurrent cash expenditures for deferred fuel and Maine Yankee exceed therecovery of these stranded costs.  Whenthe Wheelabrator-Sherman contract expires in December 2006, this position willreverse, and recovery of stranded costs will exceed the cash outflows.  In accordance with the dividend rules put inplace when the holding company was created, a portion of the allowed MPS dividendmay be used by MAM for repayment of its debt.

Due to negative cash flows from stranded costdeferrals for MPS and start-up cash requirements for TMG and its other unregulatedsubsidiaries, Management is working to ensure the Company has adequate creditcapacity for the remainder of 2006 to cover sinking fund payments, constructionactivities and other financial obligations. To ensure adequate cash flows,Management has structured additional short-term borrowings, and may considerselling certain assets.

OnJuly 5, 2006, Maricor Properties borrowed $2.45 million CDN from Merrill LynchMortgage Lending to refinance short-term debt at the Royal Bank of Canada.  The new debt is a 10-year mortgage loan, withmonthly payments of principal and interest based on a 25-year amortizationschedule throughout the term of the loan, and the remaining loan balancepayable at the end of the term.  Theinterest rate is variable, calculated as the greater of: (a) 135 basis pointsover the yield on the Government of Canada mortgage benchmark bond most closelyapproximating the term of the loan, or (b) a floor of 5.20%.  As of the date of borrowing, the interestrate was 6.011%.  This loan is secured bythe Vaughan Harvey Blvd property in Moncton, New Brunswick, and is guaranteedby Ashford Investments Inc.

Underthe terms of the credit agreement with Katahdin Trust Company, the $1 millionTMG line of credit must be repaid in full for at least one 30-day period duringeach year.  On July 19, 2006, KatahdinTrust Company waived this requirement for 2006.

OnAugust 4, 2006, Maricor Properties also borrowed $4.05 million CDN from MerrillLynch Mortgage Lending to refinance the J. Angus MacDonald Building.  The proceeds were used to repay the StandardLife mortgage.  The debt is a 10-yearmortgage loan, with monthly payments of principal and interest based on a25-year amortization schedule throughout the term of the loan, and theremaining loan balance payable at the end of the term.  The interest rate is variable, calculated asthe greater of (a) 135 basis points over the yield on the Government of Canadamortgage benchmark bond most closely approximating the term of the loan or (b)a floor of 5.20%.  As of the date ofborrowing, the interest rate was 5.695%. This loan is secured by the J. Angus MacDonald building, and isguaranteed by Ashford Investments Inc. and Maricor Properties.

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TheCompany has the ability to raise capital through the issuance of common andpreferred stock.  The Company is authorized by its Articles ofIncorporation to issue up to 5 million shares of common stock and 500,000shares of preferred stock.  MPS can also issue $2.5 million of firstmortgage bonds and $15.8 million of second mortgage bonds without bondableproperty additions.

The Maricor Groupincurred equity price risk when it bought the stock of certain of itssubsidiaries.  Part of the considerationwas MAM stock.  In the event that theprice of MAM common stock was trading below a specified price when the sellerwished to relinquish it, The Maricor Group (or the applicable subsidiary)agreed to pay the difference.  There arecurrently 27,723 shares outstanding pursuant to this kind of agreement.  At a market price of $16.75 per share atSeptember 30, 2006, the total exposure is approximately $547,000.

In accordance with ratestipulations approved by the MPUC, for ratemaking purposes, MPS is required tomaintain a capital structure not to include more than 51% common equity for thedetermination of delivery rates.   Also,in the order approving the reorganization of MPS and the formation ofMaine & Maritimes Corporation, the parties stipulated to severalrestrictions on the capital structure of MPS and MPS’s ability to make dividendpayments to MAM.  As of September 30, 2006, MPS is in compliance with allof these conditions.

***New AccountingPronouncements***

Fornew accounting pronouncements, see Part I, Note 1, of the Company’sconsolidated financial statements, incorporated in this section by thisreference.

***RegulatoryProceedings***

For regulatory proceedings, see Part II, Item 1, “LegalProceedings,” which is incorporated in this section by this reference.

***Item 3.Quantitative and Qualitative Disclosures about Market Risk***

The following list represents Maine & MaritimesCorporation’s more significant market risks. While every effort is made to describe the character of the organization’srisks, it cannot warrant that this list is all inclusive.  The Company, where possible, does take stepsin each of the following areas to attempt to mitigate such risks.

(a)            TheCompany had material interest rate risk until MPS fixed interest rates on threevariable rate debt issues on September 9, 2003, with a derivative interest rateswap transaction. Upon execution of the interest rate swaps on September 9,2003, MPS effectively fixed through maturity the rates on the 1996 Series duein 2021 and the 2000 Series due in 2025 at 4.57% and 4.68%, respectively. Therate on the 1998 Notes due in 2008 was also fixed at 2.79% through maturity. Asof September 30, 2006, the 1996 and 2000 Series and the 1998 FAME Notes hadoutstanding balances of $13.6 million, $9.0 million and $4.12 million,respectively. The fixed rates on the 1996 and 2000 Series debt issues arehigher than the previous floating rates and continue to be as of the date ofthis filing. The fixed rate on the 1998 Notes is less than the previousfloating rate.  The estimated netcarrying value of these cash flow hedges at September 30, 2006, is $(1.5)million and is recorded on the Balance Sheet as “Carrying Value of InterestRate Hedge.”   The Company still retainsinterest rate risk on its variable rate lines of credit and on its $2.2 millionterm note.

Althoughincurring no up-front cost to execute the swaps, MPS is currently incurringincreased interest expenses. For the third quarter of 2006, the fixed interestrates resulted in interest payments of $29,000 more than the payments thatwould have been required under the variable rates, and $116,000 more for thefirst nine months of 2006.  However,Management believes that the fixing of interest rates over the terms of thedebt will serve to protect both shareholders and consumers in the long-termfrom what it believes to be upward variable interest rate pressures.

(b)           TheCompany’s 50% owned unregulated real estate development and investmentsubsidiary, Maricor Properties Ltd, and its subsidiaries, Cornwallis CourtDevelopments Ltd and Mecel Properties Ltd, are subject to certain risks anduncertainties including, but not necessarily limited to interest rate risksassociated with variable interest rates; shifts in local real estate marketconditions; market-based competition; the inability to fully lease rentalproperties; facility performance related to unforeseen or unknown structural,mechanical and/or electrical systems failures; unexpected increases in propertyrehabilitation costs; new government regulations; and tenant credit and defaultrisks.

(c)            Transactionswith Me&NB; The Maricor Group, Canada Ltd; and Maricor Properties Ltd aresubject to foreign currency translation risk. Income and expenses aretranslated at average rates of exchange for the period of time the income isearned or the expenses are incurred. Assets and liabilities are translated atperiod-end exchange rates.  Historically,the exchange

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                          rates between the Canadiandollar and US dollar have been relatively stable.  The general trend throughout 2005 andyear-to-date in 2006 has the Canadian dollar strengthening against the USdollar.  This has resulted in increasedcarrying value of the assets and liabilities of the Company’s Canadiansubsidiaries.  The Company does notcurrently have hedging arrangements to protect it from changes in theseexchange rates.

(d)           TheMaricor Group and its subsidiaries incurred equity price risk when it boughtthe stock of certain of its subsidiaries. Part of the consideration was MAM stock. In the event that the price of MAM common stock was trading below aspecified price when the seller wished to relinquish it, The Maricor Group (orthe applicable subsidiary) agreed to pay the difference.  Settlement of these obligations does notimpact net income or the original purchase price.  The settlement is recorded as a reduction ofthe additional paid-in capital, effectively reducing the recorded value of thestock issued during the transaction.

Thereare currently 27,723 shares outstanding pursuant to this kind ofagreement.  At a market price of $16.75per share at September 30, 2006, the total exposure is approximately$547,000.  A $1 change in the share priceup to the specified prices in the purchase and sale agreements will increase ordecrease this estimated obligation by approximately $28,000.  These obligations are expected to be settledin 2007.

Market price protection of a different sort was givenby Maricor Technologies when it acquired the HCI assets.  Part of the consideration there was MAMpreferred stock which is convertible into 26,000 shares of MAM common stock onFebruary 15, 2009, subject to some other conditions.  To the extent that the market price of MAMcommon stock is then below $25 per share, the number of shares issuable onconversion is ratably increased, which could result in further dilution of MAM’scommon stock.

(e)            Developmentrisks can occur regarding energy-related asset development projects pursued byTMG.  Projects, such as co-generation andcentral utility plant facilities may require considerable upfront investment inthe development and sales process which are recovered once the sale isconsummated.  Should no sale occur, thesecosts may be incurred as expenses versus capitalized.

 ***Item 4. Controls and Procedures***

a)              Evaluation of Disclosure Controls andProcedures

The Company’sManagement, including the Company’s Interim Chief Executive Officer, and ChiefFinancial Officer, are responsible for establishing and maintaining disclosurecontrols and procedures for the Company and its subsidiaries.  Management has designed such controls andprocedures to (a) give reasonable assurance that the information required to bedisclosed by the Company in reports that it files under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the SEC, and (b) ensure that such information isaccumulated and communicated to Management to allow timely decisions regardingrequired disclosure.  Managementevaluated the Company’s disclosure controls and procedures as of the end of theperiod covered by this quarterly report. Based on the evaluation, the aforementioned officers concluded that theCompany’s disclosure controls and procedures are working effectively.

b)             Changes in Internal Control over FinancialReporting

There was no change in the Company’s internal control over financialreporting that occurred during the most recent fiscal quarter.

 

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 **PART II.OTHER INFORMATION**

***Item 1. LegalProceedings***

**Maine Public Utilities Commission2006 Distribution Rate Case**

On January 11, 2006, MPSfiled a notice with the MPUC under Docket No. 2006-24 that it intended to seeka 4% increase in overall electric rates.  Subsequently, on March 13, 2006,the Company filed for an increase in distribution revenue of $3.24 million, a9.9% increase in average electric delivery rates. The Company participated indiscovery on its request and subsequently updated its filing on June 15, 2006.The supplemental filing revised the Company’s request to increase distributionrevenue by $2.68 million, an 8.64% increase in average electric delivery rates.

During June 2006, theCompany entered into settlement discussions with the parties to Docket No.2006-24. The discussions led to a Stipulation that was filed with theCommission on June 23, 2006. The Stipulation proposed an increase to theCompany’s distribution revenue of $1.75 million effective on July 15, 2006. Additionally, the Company agreed to deferits increase in the Demand-Side Management (“DSM”) mil rate and its decrease inthe transmission component of its delivery rate until July 15, 2006, asdescribed below.  The net effect of thethree retail rate changes was an increase to annual retail delivery revenue ofapproximately $1.33 million or an average increase to the Company’s electricdelivery rate of 3.84%. The Stipulation was approved by the Commission on July5, 2006, and new distribution rates implementing the net retail revenue changebecame effective as of July 15, 2006.

The stipulation requiredadjustment of the amortization of the Oracle system from a seven-yearamortization period to a ten-year amortization period, retroactive to thecapitalization of the system in 2004. The impact of this adjustment of approximately $128,000 was recognizedin the second quarter of 2006.  MPS alsoagreed to certain service quality index standards as part of this stipulation.

**MPUC Approves the Pass-Through of RetailTransmission Rates to MPS Retail Jurisdictional Customers, and the Increase toDSM Mil Rate, MPUC Docket No. 2003-516**

Per agreement with theMaine Public Utilities Commission, the new transmission rates for retailcustomers were put into retail rates on July 15, 2006, to coincide with MPS’sdistribution rate increase.  These rateswere approved by the MPUC on July 5, 2006. Per this filing, the DSM mil ratewas increased by 20%, or an increase of approximately $111,000, and the retailtransmission rate was decreased by 13.43%, or approximately $534,000.

**Maine Public Utilities Commission2006 Stranded Cost Rate Case**

TheCompany filed its 2006 Stranded Cost case on August 31, 2006, in MPUC DocketNo. 2006-506. The filing is an update of the Stipulation in the prior StrandedCost case, MPUC Docket No. 2003-666. MPS is proposing that stranded cost ratesremain the same as those agreed to in the prior filing. The initial caseconference was held on September 26, 2006. Discovery on the case is currentlyunderway. MPS does not anticipate any significant issues in this case.

**Federal Energy Regulatory Commission2006 Open Access Transmission Tariff Formula Rate Filing**

On May 31, 2006, pursuantto Section 205 of the Federal Power Act, 16 U.S.C. Section 824d, andTitle 18 CFR Sections 35.11 and 35.13 of the regulations of the FERC,MPS submitted for filing its proposed revisions to its FERC Open AccessTransmission Tariff in Docket No. ER 05 (the “2006 OATT”) to modify itstransmission rate formula.  MPS filed itsupdated rates under the 2006 OATT formula on June 15, 2006, pursuant to DocketER00-1053, with an effective date of June 1, 2006, for both wholesale andretail customers, subject to a customer refund that may occur as a result ofthe proceeding and potential settlement negotiations.  The retail transmission revenue requirementwas decreased by approximately $534,000 on July 15, 2006, under the 2006OATT.  This represented a decrease of13.43% to the transmission component of retail delivery rates. The primaryreasons for the decrease were a shift in costs between transmission anddistribution and the settlement of the 2005 Open Access Transmission Tariffthrough rates, as described more fully below.

Asettlement between the parties to the 2006 OATT was reached on September 14,2006. The Company’s FERC attorneys have circulated the draft stipulation to allof the interested parties. The significant elements of the settlement includedan ROE 0f 10.5% on transmission assets, recovery of 90% of the expendituresassociated with Line 3875 in transmission rate base to be amortized over threeyears, the inclusion of new depreciation rates beginning January 1, 2007, andOracle allocation consistent with the distribution rate case.

The Company expects theFERC will approve the settlement later this year.

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**Federal Energy Regulatory Commission2005 Open Access Transmission Tariff Formula Rate Filing**

On May 31, 2005, pursuantto Section 205 of the Federal Power Act, 16 U.S.C. Section 824d, andTitle 18 CFR Sections 35.11 and 35.13 of the regulations of the FERC,MPS submitted for filing its proposed revisions to its FERC Open AccessTransmission Tariff in Docket No. ER 05 (the “2005 OATT”) to modify itstransmission rate formula.  MPS filed itsupdated rates under the 2005 OATT formula on June 15, 2005, pursuant to DocketER00-1053 with an effective date of June 1, 2005, for both wholesale and retailcustomers, subject to a customer refund that may occur as a result of theproceeding and potential settlement negotiations.  The retail transmission revenue requirementwas increased by approximately $289,000 on June 1, 2005, under the 2005OATT.  This represented an increase of 8%to the transmission component of retail delivery rates or an overall impact ontotal retail delivery rates of 0.7%.  Theprimary reasons for the increase were the increase to costs due to mandatedSarbanes-Oxley requirements, and the purchase of a new Oracle-based accountingsystem.

As part of the settlementdata request process, the Company identified several adjustments to its FERCForm 1 filing for 2004, which flow through the Company’s transmission rateformula.  The approximate net impact ofthese corrections, once implemented, will be to reduce the overall increase tothe projected retail transmission revenue and result in a revised projected netincrease to the retail transmission revenue requirement of approximately$171,000 instead of the previously projected increase of approximately$288,000.  The final Settlement Agreement for the 2005 OATT was filed with theFERC on April 14, 2006, and final approval was received from the FERC on June21, 2006.  This adjustment flowedthrough the MPS OATT effective June 1, 2006, and is being passed through retailrates beginning on July 15, 2006.

**Requests for Issuance of Certificatesof Public Convenience and Necessity in Connection With the Construction of aProposed Transmission Line and Various Transmission Service Reservations.**

On October 4, 2004, MPSfiled a Petition with the MPUC requesting the issuance of a Certificate ofPublic Convenience and Necessity (“CPCN”) pursuant to 35-A M.R.S.A. Section3132 to construct a 138 kV transmission line originating at an existingsubstation in Limestone, Maine and extending to the Canadian Border nearHamlin, Maine.

The project was proposed inorder to ensure the reliability and integrity of the MPS transmission gridunder scenarios of reduced on-system generator availability and peak loadgrowth.  MPS submitted that the availablefirm transfer capability of the transmission system when added to the remainingon-system hydro generation was not sufficient to meet peak load conditions,should existing on-system wood-fired generation become unavailable.  The proposed line would have addressed thisby significantly increasing the load-serving capability of the northern Maineregion and would have served to reinforce the vital transmission ties betweennorthern Maine and the New Brunswick transmission grid.  Additional benefits of the proposed lineinclude the potential for increasing the number of competitive retail electricsuppliers and increasing the attractiveness of the region for development ofadditional generation, such as wind farms, by providing increased transmissionexport capacity.

The MPUC Commissionersdeliberated the Docket on August 29, 2005, and denied the petition, determiningthat there was no immediate reliability risk in northern Maine.  The Commission concluded that the risk oflosing on-system wood-fired generation was not sufficient to warrant the newtransmission line.  The Commission’sOrder denying the certificate, which was issued on October 21, 2005, describedactions to be taken by MPS and the Northern Maine Independent SystemAdministrator (“NMISA”) to reduce certain reliability risks identified byMPS.  The Company filed forreconsideration of the Order on November 8, 2005, based on the possibility thatAroostook Wind Energy Company, LLC (“AWE”) might elect to utilize the CPCNrequested by MPS in this Docket in order to have MPS construct transmissionfacilities necessary to connect their proposed generation project to the MPSelectrical system.  On March 30, 2006,the Company filed a status report with the Commission with regard to theproposed transmission facilities.  MPSexpects the MPUC to respond to the status report in the near future.  Additionally, on November 23, 2005, theCommission granted an MPS request for suspension of certain of the specificrequirements of the October 21, 2005, Order pending Commission consideration ofcertain proposed market rule changes which NMISA presented to the Commission onMarch 1, 2006.  Through September 30,2006, approximately $844,000 was spent on this transmission project.

As noted above, as aresult of the proposed settlement of its 2006 Open Access Transmission TariffFormula Rate Filing.  MPS expects to recover approximately 90% of the expendituresassociated with Line 3875 in transmission rate base to be amortized over threeyears.

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***Item 1A.  Risk Factors***

TheCompany incorporates by reference.the Risk Factors identified in Item 1A. ofMAM’s 2005 Form 10-K and subsequent Forms 10-Q The following risk factors include new risk factors which we haveidentified during the quarter, as well as risk factors that have changedmaterially since year-end.

***Strategic Risk***

Managementand the Board are currently assessing the strategic options available to theCompany in this time of transition. During this period, the Company faces risks associated with itscorporate strategy, including potential loss of acquisition targets should theCompany restart the growth strategy, equity risk associated with changingshareholder base dependent on strategy chosen and the risks inherent in anychange in strategy from redistribution of resources and the time required tocatch traction should a new strategy be selected.

***Liquidity and Capital Formation Risk***

MAM’s current liabilities of $21.76 million as ofSeptember 30, 2006, exceed its current assets of $11.29 million by$10.47 million.  This exposes MAM tothe risk of being unable to fulfill its obligations in 2006 and 2007. However,of these current liabilities, $7.4 million represent short-term borrowings ofMPS associated primarily with its stranded cost recovery (see below); another$3.64 million represents short-term borrowings of MAM, while the remainingbalance is the $1 million line of credit for TMG. MAM has taken steps tomitigate this short-term risk before and after year-end, includingidentification of additional sources of financing and options to reduce ordefer costs.

In the long term, Management expects MAM’s cash flowto improve, as MPS begins in 2007 to recover deferred fuel and otherstranded costs which it currently defers. The current cash expenditures fordeferred fuel and Maine Yankee exceed the recovery of these stranded costs. Whenthe Wheelabrator-Sherman contract expires in December 2006, this positionwill reverse, and recovery of stranded costs will exceed the cashoutflows.  In accordance with thedividend rules put in place when the holding company was created, a portion ofthe allowed MPS dividend may be used by MAM for repayment of its debt.

***Lack of Profitable Operations fromUnregulated Business***

Theunregulated engineering services and software technology segments have not beenprofitable to date.  The Company acquiredthese segments starting in 2003,  Pleaseread the in-depth analysis in the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations in this Form 10-Q and in MAM’s2005 Form 10-K.  As noted there,Management can give no assurances that these ventures will be successful.  Further, failure to become profitable mayresult in a requirement that the Company further reduce the amount of goodwillassociated with these acquisitions.

***Resignation of CEO; Other Employee Transition Risk***

MAM’s former Chief Executive Officer resigned inAugust 2006.  The Company faces risks ofinstability and uncertainty during the current transition period until theBoard settles on a direction for the Company and selects a new CEO.  Additional risk resulted from the reductionin force in September 2006, as the Company reallocates work andresponsibilities, including those of the CEO, among existing employees andboard members.  Management has mitigatedthese risks through transition planning, and documentation of separation rightsand other resources.

***EquityPrice Risk***

The Maricor Group and its subsidiaries incurred equityprice risk when it bought the stock of certain of its subsidiaries.  Part of the consideration was MAM stock.  In the event that the price of MAM commonstock was below a specified price when the seller wished to relinquish it, TheMaricor Group (or the applicable subsidiary) agreed to pay the difference.  Settlement of these obligations does notimpact net income or the original purchase price.  The Company records such settlements asreductions of the additional paid-in capital, effectively reducing the recordedvalue of the stock issued during the transaction.

There are currently 27,723 shares outstanding pursuantto this kind of agreement.  At a marketprice of $16.75 per share at September 30, 2006, the total exposure isapproximately $547,000.  A $1 change inthe share price up to the specified prices in the purchase and sale agreementswill increase or decrease this estimated obligation by approximately$28,000.  The Company expects to settlethese obligations in 2007.

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***Debt Covenants***

MAM and certain of its subsidiaries have obtainedfinancing with financial and other covenants, such as debt service coverageratios. In a default, the lender can require immediate repayment of thedebt.  This could also trigger increasesin interest rates, difficulty obtaining other sources of financing andcross-default provisions within the debt agreements.  MAM obtained a waiver from Bank of Americafor third quarter compliance with the debt covenants for the line of credit.

***Attraction andRetention of Qualified Employees***

MAM primarily operates in service sectors, and dependsheavily on attracting and retaining qualified employees, including engineersand electricians.  MAM maintainscompetitive wage and benefits packages for its employees to aid in attractingand retaining staff.

***Item 2.Unregistered Sales of Equity Securities and Use of Proceeds***

None

***Item 3. Defaultsupon Senior Securities***

None

***Item 4. Submissionof Matters to a Vote of Security Holders***

None

***Item 5. OtherInformation***

None

***Item 6. Exhibits***

Certain of the following exhibits, identified by anasterisk (*) are filed with this Form 10-Q. Certain other of the following exhibits have previously been filed withthe Securities and Exchange Commission, and are incorporated herein byreference.
| 3(a)   |   | Articles of Incorporation (Exhibit 3(a) to 2004 MAM  Form 10-K).                                     |
|--------|--------|------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                 |
| 3(b)   |   | By-laws of the Company (Exhibit 3(b) to 2004 MAM  Form 10-K).                                        |
|   |   |                                                                                                 |
| *10(a) |   | Resignation and Severance Agreement between Maine  & Maritimes Corporation and J. Nicholas Bayne |
|   |   |                                                                                                 |
| *10(b) |   | Separation Agreement between Maine & Maritimes  Corporation and Kurt Tornquist                   |
|   |   |                                                                                                 |
| *10(c) |   | Retention Bonus Agreement between Maine &  Maritimes Corporation and Michael Williams.           |
|   |   |                                                                                                 |
| *31    |   | Rule 13a-14(a)/15d-14(a) Certifications                                                              |
|   |   |                                                                                                 |
| *32    |   | Certification of Financial Reports Pursuant to 18  USC Section 1350                                  |

 

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SIGNATURE

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

MAINE & MARITIMESCORPORATION

(Registrant)

 

Date:  November 13,2006
| /s/ Randi J. Arthurs             |
|----------------------------------|
| Randi J. Arthurs                 |
| Vice President  & Controller |

 

 

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