**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SEC. 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For the fiscal year ended December 31, 2003**

 

**Commission File No. 333-103749**

 

**Maine &Maritimes Corporation**

(Exact name of registrant as specified inits charter)

 

**Maine**

(State or other jurisdiction ofincorporation or organization)

 

**30-0155348**

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

 

**209 StateStreet, Presque Isle, Maine**

(Address of principal executive offices)

 

**04769**

(Zip Code)

 

Registrant’s telephone number, including area code:  **207-760-2499**

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:  **Common Stock, $7.00 par value**

 

Name of each exchange on which registered:  **American Stock Exchange**

 

Securities registered pursuant to Section 12(g) of the Act:

**None**

Title of Class

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  ý.  No  o.

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K not contained herein, and will not be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K.  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).

Yes  o.  No  ý.

 

Aggregate market value of the voting stock held by non-affiliates atJune 30, 2003: $51,189,661.

 

The number of shares outstanding of each of the issuer’s classes ofcommon stock as of March 15, 2004.

 

Common Stock, $7.00 parvalue – 1,580,701 shares

 

**DOCUMENTS INCORPORATED BY REFERENCE**

TheCompany’s definitive proxy statement to be filed pursuant to Regulation 14A nolater than 120 days after December 31, 2003, which is the end of the fiscalyear covered by this report, is incorporated by reference into Part III.

 

 

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# **MAINE& MARITIMES CORPORATION**

**FORM 10-K**

**For the Fiscal Year Ended December 31, 2003**

 

*For Glossary of Terms, see Page 95*

 

TABLE OF CONTENTS

 
| **PART I**  |
|-------------|
| Item 1.     | Business |   |
|        | General | 4 |
|        | Discussion and Description of the Company’s  Growth Strategy | 4 |
|        | Description of Subsidiaries | 8 |
|        | Financial Information about Foreign and  Domestic Operations | 12 |
|        | Regulation and Rates | 12 |
|        | Franchises and Competition | 13 |
|        | Employees | 13 |
|        | Subsidiaries  and Associated Companies | 13 |
|        | Company Financial Information | 14 |
| Item 2.     | Properties,  System Security and Reliability | 14 |
| Item 3.     | Legal  Proceedings | 16 |
| Item 4.     | Submission of Matters to a Vote of Security Holders | 24 |
|        |   |   |
| **PART II** |
| Item 5.     | Market  for Registrant’s Common Equity, Related Shareholder Matters | 25 |
| Item 6.     | Selected  Financial Data | 26 |
| Item 7.     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 27 |
|        | Overview | 27 |
|        | Existing Operations | 30 |
|        | Critical Accounting Policies | 31 |
|        | Revenue Recognition | 31 |
|        | Pension  and Other Post-retirement Benefits | 32 |
|        | Utility Regulation | 32 |
|        | Results of Operations | 32 |
|        | Off-Balance Sheet Arrangements | 33 |
|        | Operating Revenues and Energy Deliveries | 34 |
|        | Operating Expenses | 35 |
|        | Operating Capital and Liquidity | 37 |
|        | Capital Resources | 38 |
|        | Energy Atlantic Activities | 39 |
|        | Reorganization Into Holding Company | 41 |
|        | Employees | 42 |
|        | Maine  Yankee | 43 |
|        | New Accounting Pronouncements | 45 |
|        | Regulatory Proceedings | 46 |
| Item  7a.   | Quantitative  and Qualitative Disclosures About Market Risk | 47 |
| Item 8.     | Financial  Statements and Supplementary Data | 47 |
| Item 9.     | Changes  In and Disagreements with Accountants | 47 |

 

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| **PART  III**    |
|------------------|
| Item  10.        | Directors  and Executive Officers of the Registrant | 48 |
| Item  11.        | Executive  Compensation | 49 |
| Item  12.        | Security  Ownership of Certain Beneficial Owners and Management | 49 |
| Item  13.        | Certain  Relationships and Related Transactions | 49 |
| Item  14.        | Controls  and Procedures | 50 |
|             |   |   |
| **PART IV**      |
| Item  15.        | Principal  Accountant Services and Fees | 50 |
| Item 16.  (a)(1) | Exhibits,  Financial Statement Schedules and Reports on Form 8-K | 50 |
|             |   |   |
|             | Report of Independent Auditors | 51 |
|             | Statements of Consolidated Income | 52 |
|             | Statements of Consolidated Cash Flows | 53 |
|             | Consolidated Balance Sheets | 54 |
|             | Capitalization and Liabilities | 55 |
|             | Statement of Consolidated Common  Shareholders’ Equity | 56 |
|             | Statement of Long-Term Debt | 57 |
|             |   |   |
|             | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | 58 |
|             | 1. |   | Accounting Policies | 58 |
|             | 2. |   | Income  Taxes | 61 |
|             | 3. |   | Energy Atlantic | 62 |
|             | 4. |   | Segment Information | 64 |
|             | 5. |   | Investments in Associated Companies | 67 |
|             | 6. |   | Short-Term Credit Arrangements | 67 |
|             | 7. |   | Accumulated Other Comprehensive Income  (Loss) | 68 |
|             | 8. |   | Long-Term  Debt | 68 |
|             | 9. |   | Stock Compensation Plan | 69 |
|             | 10. |   | Benefit  Plans | 70 |
|             | 11. |   | Fair Value of Financial Instruments | 73 |
|             | 12. |   | Commitments,  Contingencies and Regulatory Matters | 73 |
|             | 13. |   | Guarantor Arrangements | 79 |
|             | 14. |   | Acquisitions | 80 |
|             | 15. |   | Quarterly Information | 81 |
|             |   |   |   |   |
| ITEM 16. (a)(2)  | Exhibits, Financial Statement Schedules and Reports on Form 8-K | 82 |
|             |   |   |
|             | SIGNATURES | 84 |
|             | SCHEDULE II | 85 |
|             | CEO / CFO CERTIFICATIONS | 86 |
|             | INDEX TO EXHIBITS | 88 |
|             | GLOSSARY OF TERMS | 95 |

 

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**PART I**

 

**Item 1.****   Business**

 

**General**

 

Maine& Maritimes Corporation (“MAM” or the “Company”), a Maine corporation,became a holding company effective June 30, 2003.  MAM owns all of the common stock of Maine Public Service Company(“MPS”).  All other shares of MPS commonstock were converted into an equal number of shares of MAM common stock, whichare listed on the American Stock Exchange (“AMEX”) under the symbol “MAM.”  The reorganization into a holding companywas approved by MPS’s shareholders at its annual meeting on May 30, 2003.  The U.S. Securities and Exchange Commission(“SEC”) had previously accepted MAM’s S-4A Registration Statement forregistration.  Other required state andfederal regulatory agencies issued necessary approvals on various dates in2003.  Financial results and amountsshown through 2002 and the first three months of 2003 were reported by MPS.

 

MAMis the parent holding company for MPS, Energy Atlantic, LLC (“EA”), and Maine& Maritimes Energy Services Company (“MAMES”).  Maine & New Brunswick Electrical Power Company, Ltd(“Me&NB”), is a wholly-owned Canadian subsidiary of MPS.  MAMES (dba “The Maricor Group”) is theparent company of Maricor Ltd (“Maricor”), also a wholly-owned Canadiansubsidiary.  General descriptions ofthese companies and subsidiaries are discussed more fully below.

 

**Maine& Maritimes Corporation and Subsidiaries**

 

 

•                  MPSis a regulated electric transmission and distribution utility serving all ofAroostook County and a portion of Penobscot County in northern Maine.

 

•                  Maine& New Brunswick Electrical Power Company, Ltd, an inactive Canadiansubsidiary of MPS, formerly owned MPS’s Canadian electric generation assets.

 

•                  EnergyAtlantic, LLC is a licensed, but currently inactive Competitive Energy Supplier(“CES”) of retail electricity and formerly served the northern and centralregions of the state of Maine.

 

•                  Maine& Maritimes Energy Services Company (dba “The Maricor Group”) is adevelopment, engineering, energy efficiency and asset management firm focusedon markets in the United States providing fee-for-service mechanical andelectrical engineering services.

 

•                  MaricorLtd is a Canadian subsidiary of Maine & Maritimes Energy Services Company,whose principal business is primarily the delivery of similar products andservices as MAMES, but in Canadian markets.

 

**Discussion and Description of theCompany’s Growth Strategy**

 

MPS’sdecision to convert to a holding company structure and begin implementation ofa diversification and growth strategy was based on a combination of regulatoryand economic factors including, but not limited to: (a) the impacts ofderegulation and generation divestiture on MPS’s revenue model, (b) flat todeclining demographic and economic

 

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conditionswithin MPS’s service area; (c) regulatory constraints or barriers toimplementation of a growth strategy under MPS’s organizational structure; (d) adeclining rate base as a result of reductions in stranded costs as regulatoryassets; and (e) the strategic objective to implement an effective riskmanagement structure associated with the Company’s overall growth strategy.

 

Asa result of Maine’s deregulation and MPS’s generation divestiture, MPS nolonger serves as a vertically integrated electric utility.  With the exception of stranded costrecovery, MPS’s revenues come almost exclusively from regulated transmissionand distribution services associated with transporting electric supply.  MPS does receive varying returns on itsstranded regulatory assets, as well as varying returns on its regulatedtransmission and distribution rate bases. Generally, stranded cost represents the difference in value or contractvalue of generation assets in a regulated environment, as compared with marketvalues of these same assets or contracts for purchased power agreements.  In a regulated regime, investor-owned publicutilities are allowed to make a “fair” rate of return on their prudentlyinvested capital.  In practice, regulatorsset the price of electricity so that the utility receives enough income to payits financial obligations plus a reasonable return on its fixedinvestments.  In effect, historical oraccounting costs of asset installations determine the current market value ofcapital.  Regulators adjust the revenuestream up or down to allow a public utility to earn the approved rate of returnon the book value of its capital, which is also known in a regulatory contextas its “rate base.”  MPS continues toearn regulated rates of return on its transmission and distributionassets.  MPS’s distribution services areregulated by the Maine Public Utilities Commission (the “MPUC”) and itstransmission services are regulated by the U.S. Federal Energy RegulatoryCommission (“FERC”).

 

Basedon MPS’s current amortization of stranded costs and approved stranded costrates of return approved by the MPUC, and subject to a number of variablesembedded in the calculation of those stranded costs, the majority of MPS’sstranded cost should be recovered by the end of 2012.  A significant portion of MPS’s stranded costs are associated withan existing non-utility generator (“NUG”) supply contract referred to in thisdocument as the “Wheelabrator-Sherman NUG Contract.”  The Wheelabrator-Sherman NUG Contract resulted from the passageby the U.S. Congress of the 1978 Public Utilities Regulatory Policy Act(“PURPA”) and is summarized more fully below. The facility itself is a small bio-mass (principally wood chip) electricgeneration facility.  Over approximatelythe next eight years, MPS’s rate base will decline as these and other strandedcosts are reduced or eliminated. Management and the Board of Directors also believe that MPS’s rate basewill continue to decline as a result of: (a) the economic impact ofderegulation and generation divestiture on MPS’s core revenue model; (b) MPS’seconomically lagging service area; and (c) regulatory risks in connection withrate making and stranded cost recovery. Based on management’s and the Board of Directors’ assessment of MPS’sdeclining rate base, the decision was made to create a holding company, subjectto shareholder approval, and to implement a comprehensive growth strategy.

 

Althoughthe majority of MPS’s stranded cost rate base will decline gradually overapproximately the next eight years, MPS believes it will experience deferredstranded cost freed-up cash flows during the period from 2007 through 2012 ascertain stranded costs are recovered. This is a result of MPS’s historical decision to levelize its strandedcost portfolio and defer full recovery associated with its Wheelabrator-ShermanNUG Contract, These deferred stranded cost freed-up cash flows will not impactnet income.  Current plans for theanticipated stranded cost freed-up cash flows include: (a) utilizing such fundsto reduce debt; (b) maintaining an optimum regulatory capital structure; and(c) to dividend a portion of the stranded cost freed-up cash flows to theparent MAM for the purpose of financing in part or in whole potentialacquisitions consistent with the Company’s growth strategy.  While MPS believes it will receive fullstranded cost recovery and recovery of deferred collections, it cannot predictwith certainty future regulatory and/or legislative actions.  Regulatory and legislative risks may existrelative to full stranded cost recovery. In addition there are a number of variables, discussed in more detailbelow that may affect the timing and magnitude of MPS’s stranded cost recovery.

 

Managementand the Board of Directors have adopted what they believe to be a realistic andconservative growth strategy, focusing primarily, but not exclusively, onmarket opportunities within New England and Atlantic Canada.  As part of the Company’s growth and businessstrategy, focus and investments are being placed on strategies to improve theoverall performance, system reliability, economics and efficiencies of MPS’stransmission and distribution systems. These strategies include the adoption of new productivity enhancingtechnologies, changes in core business processes, adoption of integrated assetmanagement strategies, and development and implementation of long-termtransmission and distribution plans. These plans may also include the construction of additional regulated

 

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transmissionassets.  The goals of these efforts areto reduce overall annual capital, operating, and maintenance expenditures,while improving system and customer service performance.

 

MAM’sgrowth strategy centers on a diversification approach that expands theCompany’s business and revenue model to include, without limitation, mechanicaland electrical engineering services, energy efficiency solutions, air emissionsreductions, asset/facilities management related services and asset/facilityownership, in addition to its continuing focus on regulated and unregulatedutility services.  Unregulated utilityservices may include, but not be limited to, energy supply management andunregulated energy assets, such as central utility plants.

 

TheCompany is continuing to evaluate potential regulated and unregulated utilityacquisitions, such as small electric utilities, local natural gas distributioncompanies, fuel oil and propane distributors, electric transmission projectsand mid-stream natural gas assets across North America.  However, the Company cannot assure that suchacquisitions can or will be accomplished. Utility-related acquisitions are intended to seek to leverage MPS’s andother subsidiaries’ existing operating infrastructure, including withoutlimitation, call center and collections operations, telecommunicationstechnologies, billing and information technology applications, engineeringcapabilities, asset management systems, regulatory experience, and managementexpertise.  MAM’s proposed overallgrowth strategy will be heavily influenced by acquisitions that meet certaindesired strategic and financial criteria within the general categories definedbelow.  Implementation of theacquisition strategy is dependent upon, among other things, MAM’s and itssubsidiaries’ ability to raise sufficient capital.  MAM believes that it can raise necessary capital to implement itsacquisition strategy, but cannot assure investors of this ability.

 

Organizational Overview of Proposed Strategic VisionShowing Examples of Potential Business Sector Acquisitions

 

 

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*                 MAM does not warrant that it can or willimplement acquisitions in each of the revenue models. However, acquisitions ineach of the revenue models will be evaluated and are under consideration.

 

Asa part of the process in developing the Company’s growth strategy, market andpublic policy trends were analyzed for the Atlantic Canada and New Englandregions.  As a result of these analyses,it appears that a number of critical economic, environmental, energy, andinfrastructure trends are converging within these regions.  In Atlantic Canada, electric transmissionappears to be significantly limited and the adequacy of on-peak electricgeneration also appears to be unclear. The region has historically been highly dependent on oil as an energysource and has limited alternative fuel choice options, such as natural gas orother fuels for its electric generation. As a result, Atlantic

 

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Canadamay face near-term on-peak energy shortages and increasing energy priceissues.  The Company believes bothregions appear to face complex energy challenges in the near to long-term.  Also, should the cost of energy rise andavailability of energy supplies come into question, air quality concerns andrelated regulation and legislation may inhibit the construction of new,adequate generation within the region. Canada’s adoption of the Kyoto Protocol and the 28th AnnualConference of the New England Governors and the eastern Canadian PremiersResolution 28-7, a resolution concerning environmental projects and issues, areexamples of increasing public policies that are placing more stringent airquality requirements on the construction or refurbishment of energy producingor using facilities.  Management alsobelieves the combination of energy price, energy availability, and air qualityconcerns is exacerbated within the region due to additional apparentuncertainty concerning the economics and approval for the refurbishment andretooling of older, existing electric generation facilities that may include,for example a nuclear generation facility within New Brunswick, Canada.  Management believes that these public policyissues are placing new pressures on governments and organizations to improveenergy efficiency, gain greater control of energy costs, and reduce airemissions.  At the same time, Managementbelieves the two regions also face the reality that tax revenues and existingeconomic growth are inadequate to fund infrastructure renewals associated withschools, hospitals, municipal operations and universities.  This recognition appears to be bringingincreased focus on the significant deferred maintenance liabilities of publicassets, and the requirement to ensure that capital dollars for facilityrenewals and replacements are spent in the most optimal manner to extend thelife of such facilities, i.e. the facility asset lifecycles.  Consequently, Management believes thatgovernments, both domestic and foreign, are beginning to require lifecycleasset management plans and the determination of lifecycle costs beforeadditional capital dollars are spent for facility renewals andreplacements.  The Company’s overallgrowth strategy is primarily based on these beliefs, issues, observed trends,analyses and conclusions.

 

Utilizinga combination of strategic acquisitions and non-acquisition growth, theCompany’s business model, includes the acquisition of mechanical and electricalengineering companies offering asset lifecycle management and engineeringservices.  Through the integration ofengineering skills and certain asset lifecycle management software accessed bythe Company or its subsidiaries; MAMES’ and Maricor’s services are beingoffered to improve facility energy efficiency, define and reduce deferredmaintenance, extend asset lifecycles, and reduce air emissions.  These services are also intended to enhancethe economic efficiency of a facility’s electric and mechanical systemsresulting in reduced operating costs. In addition, the Company and its subsidiaries are focused on identifyingand developing energy asset related projects that may consist of either small“green field” development projects located on or related to a customer’spremises, or the acquisition of a customer’s energy assets, such as a centralutility plant or a district energy project, with a long-term contract from oneor more customers for the energy asset’s output.  These development projects may, or may not involve a third partyfinancing and ownership entity.  TheCompany intends to market such services within Atlantic Canada and New England,however it does not intend to be geographically limited to these regions.  Specific primary market sectors of emphasisinclude, without limitation, the government, university, school, hospital,commercial and institutional markets. MAMES and Maricor also offer fee-for-service engineering services, whichare provided to a broader cross-section of businesses and industries within theregions.

 

TheCompany’s intended strategic plan, subject to market opportunities andconditions, also includes the potential acquisition of a small, regional realestate development and facilities management business, which is intended tocompliment the Company’s asset or facilities-centric engineering businessmodel.  Efforts are on-going to evaluatemarket opportunities for the acquisition of such a firm within the AtlanticCanada and New England regions.  The Company’sintended objective is to acquire a small to medium real estate portfolio as apart of its acquisition of a real estate development and managementcompany.  The targeted real estateportfolio would ideally consist of non-operating and non-retail propertieswithin second and third tier growth markets within the target region, with anincreasing focus on the development of public facilities with long-term leasesmatching financing terms.  The Company’sentry and timing of such an entry into this market is primarily dependent uponmarket conditions and the availability of an acquisition on economicallyacceptable terms.  The Company cannotwarrant that it can or will succeed in achieving such an acquisition.

 

Financingof the Company’s growth strategy, depending on the specific acquisition target,may take the form of a number of different financing structures involving cash,equities and/or debt.  Financing mayinclude, without limitation, the issuance of additional common or preferredstock, vendor take backs, senior debt, private mezzanine debt securities, tax-exemptgovernment bonds, cash or acquisition earn-outs. In addition to itscompatibility with the Company’s growth strategy, each acquisition target isalso being evaluated based on its individual economic and strategic meritsrelative to long-term shareholder value. As the Company implements its growth strategy, a more definitive stockdividend policy may be adopted.  Such apolicy, if adopted by the Board of Directors, would be

 

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intendedto provide guidance relative to a definitive dividend payout range.  The Company, however, remains committed tomaintaining a market competitive dividend yield with an increasing focus on acombination of yield and stock value growth. However, the Company cannot warrant or define future dividends or sharevalue.

 

Asa first step in implementing the Company’s growth strategy, in November 2003,MAM formed MAMES and its Canadian subsidiary, Maricor in Canada.  MAMES and Maricor provide facilities-basedmechanical and electrical engineering services, asset lifecycle managementservices and solutions, energy efficiency, energy reliability, and emissionsreduction services.  Maricor’s firststrategic acquisition, Eastcan Consultants, Inc, (“Eastcan”) took place onDecember 1, 2003.  Eastcan is aregional, mechanical and electrical engineering firm, focused on the AtlanticCanada markets and headquartered in Moncton, New Brunswick, Canada, with anoffice in Saint John, New Brunswick, Canada. The acquisition represents an initial platform acquisition from which tobuild and/or acquire additional capabilities. MAMES, dba “The Maricor Group” intends to continue to evaluateengineering company acquisitions that provide market entry points into key marketswithin the target regions of New England, the U.S. and Atlantic Canada.

 

**Descriptionof Maine Public Service Company and Maine and New Brunswick Electrical PowerCompany, Limited**

 

MPSwas originally incorporated in the United States as the Gould Electric Company(“Gould”) in April, 1917 by a special act of the Maine legislature inconnection with the purchase and lease of all of the assets of the Maine andNew Brunswick Electrical Power Company, Limited, a Canadian company.  Me&NB, currently a wholly-owned Canadiansubsidiary of MPS, was incorporated in 1903 under the laws of the Province ofNew Brunswick, Canada.  Following thesale of its assets to Gould, Me&NB remained a subsidiary of Gould, andsubsequently MPS.  Me&NB wasprimarily a hydro-electric generating company. It owned and operated the Tinker hydro-electric station in NewBrunswick, Canada, until June 8, 1999, when these assets were sold by MPS toWPS Power Development, Inc. (“WPS-PDI”), a subsidiary of WPS ResourcesCorporation (“WPS”).  Prior to thegenerating asset sale, Me&NB sold energy not needed to supply its wholesaleNew Brunswick, Canada customers, to MPS. For the period 2000-2003, Me&NB has been inactive and did not haveunaffiliated customer revenues.

 

Followingits incorporation in the United States, Gould changed its name to Maine PublicService Company in August, 1929.  MPSwas a privately held subsidiary of the Consolidated Electric & Gas Companyuntil 1947, when its capital stock was sold as a result of Consolidated Electric& Gas Company’s forced divestiture. From 1947 until its corporate reorganization in 2003, MPS was thecorporate parent and traded under the stock symbol “MPS” on the AMEX.  MPS, until its generating assets were soldon June 8, 1999, produced and, until March 1, 2000, purchased electric energy forretail and wholesale customers.  MPScontinues to provide transmission services to former wholesale energy customersand transmission and distribution services to retail customers in the serviceterritory.  Geographically, its serviceterritory is located in a region of northern Maine comprised of all ofAroostook County and a portion of Penobscot County.  The service area covers a region approximately 120 miles long and30 miles wide, with a population of approximately 72,000.  Since March 1, 2000, the date retailelectric competition in Maine commenced, customers in MPS’s service territoryhave been purchasing energy from suppliers other than MPS.  This energy comes from CompetitiveElectricity Providers (“CEP”) or, if customers are unable or do not wish tochoose a competitive supplier, the Standard Offer Service (“SOS”)provider.  SOS providers are determinedthrough a bid process conducted by the MPUC.

 

Byregulatory order, on June 4, 1984, MPS entered into a Power Purchase Agreement(“PPA”) with the Sherman Power Company, which assigned its interest in theagreement to the Wheelabrator-Sherman Energy Company (“WS”), formerlySignal-Sherman Energy Company, for 17.6 megawatts of capacity, the delivery ofwhich began on July, 1986.  As statedabove, the WS facility is a NUG and qualifying facility as that term is definedby PURPA.  This PPA formed the basis ofwhat was to become the Wheelabrator-Sherman NUG Contract.  The stated legislative intent of PURPA wasto encourage more energy-efficient and environmentally-friendly commercialenergy production.  PURPA defined a newclass of energy producer called a qualifying facility (“QF”).  QFs are small-scale producers of commercialenergy who normally self-generate energy for their own needs and/or may sell theoutput under a PPA to a regulated utility. When a facility of this type meets the FERC’s requirements forownership, size and efficiency, utility companies are obligated under PURPA topurchase energy from these facilities based on a pricing structure referred toin a regulatory context as avoided cost rates. In the case of WS, the avoided cost rates were defined by the MPUC atthe avoided cost rate of another facility, the Seabrook nuclear facility’sfully embedded production cost, making these rates highly favorable to theproducer.  The difference between theseavoided costs rates and the market rate that would result

 

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froman arms length negotiation for the producer’s electric capacity is an importantcomponent of MPS’s WS stranded costs.

 

Theoriginal Wheelabrator-Sherman NUG Contract was scheduled to expire at the endof 2000; however, either party had the option to renew the contract for anadditional fifteen years.  MPS and WSagreed to amend the Wheelabrator-Sherman NUG Contract with the amendmentapproved by the MPUC in December, 1997. Under the terms of this amendment, WS agreed to reductions in the priceof purchased power of approximately $10 million over the contract’s current term.  MPS and WS also agreed to renew the contractfor an additional six years at agreed-upon prices.  MPS made an up-front payment to WS of $8.7 million on May 29,1998, with the financing provided by the Finance Authority of Maine(“FAME”).  This payment has beenreflected as a regulatory asset, as determined by the MPUC in its December,1997 order and, based on an MPUC order, included in stranded costs andrecovered in the rates of the transmission and distribution utility, beginningJanuary 1, 2001.  The amended contracthelped relieve the financial pressure caused by the closure of Maine Yankee in1997, as well as the need for substantial increases in MPS’s retail rates, andalso reduced MPS’s stranded costs.

 

Everytwo years, the WS output is sold via competitive bids, with the bidding processmonitored by the MPUC.  The sale of theWS output offsets the WS costs in determining this component of MPS’s strandedcosts.  For the period March 1, 2000 toFebruary 28, 2002, and from March 1, 2004 to the end of theWheelabrator-Sherman NUG Contract, December 31, 2006, WPS-PDI was thesuccessful bidder.  For the period March1, 2002 to February 29, 2004, EA took delivery of 40% of WS’s output, whileWPS-PDI took the 60% remainder.  MPSrecords the above-market cost of Wheelabrator-Sherman NUG Contract as astranded cost.

 

Asstated above, MPS’s Canadian Subsidiary, Me&NB has been inactive for theperiod of 2001-2003, as reflected in the table below.

 

MPS’sresearch and analyses of its service area indicate that MPS’s service area’seconomy, once heavily influenced by a significant military presence, continuesto be dependent upon agricultural and the forest products industries.  Potato farming and processing and themanufacturing of forest products, principally lumber, plywood, and orientedstrand board, continue to be dominant economic forces withinMPS’s service area.  The growing ofbroccoli has added diversity to the region’s agricultural economic base.  Tourism, particularly related tosnowmobiling and skiing, appears to be playing an increasingly significant rolein the area’s economy.  The medicalindustry represents a significant positive and growing economic force withinthe region, serving as a leading employer and job creation sector.  However, data appears to suggest that thenorthern Maine economy continues to lag behind national economic trends and isexperiencing population losses based on census data and recent projections,particularly among the service area’s youth and young adults.  Attracting new businesses and jobs tonorthern Maine in an effort to reverse out-migration trends appears to be acontinuing challenge to the area’s leaders and businesses, including MPS.  As a result of its service area’s economicchallenges, MPS has taken a lead role in forming a public/private partnershipfor economic progress in cooperation with the Northern Maine DevelopmentCommission.  Managed by a private-sectorinvestors’ council, MPS and its staff are serving as a private sector leader inhelping to execute a rational and results-oriented economic developmentprogram.  The Aroostook Partnership forProgress’s (“APP’s”) efforts are intended to increase the area’s emphasis oneconomic development through improved focus and funding for economicdevelopment.

 

**Energy Atlantic,LLC**

 

EAparticipated in the wholesale power market during 1999 and until March 1, 2000,when it began selling energy in the retail electricity market within the stateof Maine.  The retail market consists oftwo sectors, Standard Offer Service (“SOS”) and Competitive Energy Supply(“CES”), as mentioned above.  The MPUCrequests bids for SOS in each utility service territory.  As a result of this bidding process, EA was theSOS provider in Central Maine Power Company’s (“CMP’s”) territory from March 1,2000, until its contract expired on February 28, 2002.  Within MPS’s service territory, EA provided20% of the medium non-residential SOS from March 1, 2000 until February 28,2001.

 

EAalso provided energy to several large commercial customers in CMP’s territoryunder one-year CES contracts, which expired throughout 2001.  EA, along with its wholesale energysupplier, was not successful in obtaining any of the SOS in MPS’s serviceterritory starting March 1, 2001, nor CMP’s service territory starting March 1,2002.

 

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Originally,power for the sales noted above was obtained under an exclusive wholesale powersales agreement with Engage Energy America, LLC, (“Engage”), which expiredFebruary 28, 2002.

 

Aspart of a contract settlement between Engage and EA reached in May 2001, EA wasallowed to purchase energy from additional sources.  EA secured several wholesale sources of power, enabling it toparticipate in competitive markets within Maine.  EA’s CES sales to retail customers during 2003 produced far lessoperating margin than EA had previously earned from SOS in CMP’sterritory.  On February 24, 2003, EAannounced its intent to withdraw from the northern Maine market due to the lackof profitability and perceived risk profile in that market resulting from anilliquid wholesale market, inability to obtain price differentiated wholesaleelectric products, and other factors. EA continued to serve its existing contracts in northern Maine until theirFebruary 27, 2004, expiration date.  Inaddition, EA has not renewed its wholesale agreement for southern Maine supplyand has not renewed retail contracts within this region.  Management has ceased active retail CESwithin the state of Maine until market conditions, the availability of supply,the mandate for stringent credit requirements and risk environmentimprove.  Management will continue tomonitor both U.S. and Canadian deregulated markets to determine the appropriatetiming for possible re-entry into the deregulated retail market.  For further information regarding EA, itscontract settlement with Engage and its future business plans, see Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, “Energy Atlantic Activities,” such information is incorporated inthis section by this reference.

 

**Maine &Maritimes Energy Services Company (dba “The Maricor Group”) and Maricor Ltd**

 

InNovember 2003, MAM formed the wholly-owned subsidiaries MAMES in the UnitedStates (dba “The Maricor Group”), and its Canadian subsidiary, Maricor.  MAMES and Maricor are businesses organizedto provide, among other things, energy efficiency, energy reliability, airemissions reduction, fee-for-service mechanical and electrical engineering andlifecycle asset management services primarily within eastern Canadian provincesand New England.  MAMES is headquarteredin Presque Isle, Maine with offices in Portland, Maine and Rockland,Massachusetts.

 

Maricor’sfirst strategic acquisition, Eastcan Consultants, Inc, (“Eastcan”) took placeon December 1, 2003.  Eastcan, now anoperating division of Maricor, is a regional, mechanical and electricalengineering firm headquartered in Moncton, New Brunswick, Canada, with anoffice in St. John, New Brunswick, Canada. Eastcan was formed in 1978, in connection with the amalgamation ofseveral engineering firms in the Moncton, New Brunswick area.  Eastcan’s combined historical experience iswell in excess of five thousand building projects.  Eastcan’s clients generally include architectural firms,municipal, provincial and federal governments, private institutional,commercial facility owners and industrial or manufacturing operations.  Mechanical and electrical engineeringservice disciplines provided by the Eastcan Division of Maricor include,without limitation, the following:

 

**Mechanical Engineering Services:**

 

•                  Plumbing

•                  Heating

•                  Ventilation

•                  Air Conditioning

•                  Energy Conservation Studies and Audits

•                  Reports & Investigations

•                  Process Piping

•                  Fire Protection Systems

•                  Boiler Plants

•                  Petroleum Storage and Handling Systems

 

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**Electrical Engineering Services:**

 

•                  Lighting Calculations and Layouts

•                  Power Distribution (Buildings, IndustrialPlants, Process Equipment)

•                  Power Quality (Emergency generators, UPSsystems, Harmonic cancellations)

•                  Fire Alarm Systems

•                  Intrusion Alarm System Integration

•                  Public address system

•                  Power Factor Correction

•                  Reports & Investigations

 

Tocomplement Maricor’s service and product offerings, MAM and MAMES havepartnered with Delinea Corporation of Dallas, Texas, a leading softwareapplication and business process outsourcing company focused on the energyindustry, and acquired exclusive marketing rights to their Strategic AssetManagement (“SAM”) technology-based solutions for select markets within theU.S. and Canada.

 

Delinea’sSAM offerings are industry-leading solutions for organizations that are seekingto preserve and maintain the value of their investments in infrastructure,facilities and fixed assets.  SAMprovides the technology and services required to effectively manage the totallifecycle of capital assets, as well as the daily operations of facilities andfixed assets.  Its strategic planningcapabilities are used to quantify, prioritize and optimize the capitalinvestments required to maintain and preserve facilities and assets, whileproviding decision-making support to effectively manage these criticalrequirements in accordance with capital budgets and available funding.

 

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**Financial Information about Foreign and DomesticOperations**

*(In Thousands of U.S. Dollars)*

 
|                                  |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Revenues from Unaffiliated Customers: |   |     |   |     |   |     |   |
| MAM-United States                     |   | —   |   | —   |   | —   |   |
| MPS-United States                     |   | 31,739   |   | 31,401   |   | 31,780   |   |
| Energy Atlantic-United States         |   | 6,064    |   | 6,901    |   | 15,771   |   |
| Energy Atlantic-U.S. - SOS Margin     |   | —   |   | 5,802    |   | 2,147    |   |
| Total Domestic                        |   | 37,803   |   | 44,104   |   | 49,698   |   |
| * Subsidiaries-Canada                 |   | 58       |   | —   |   | —   |   |
| Total                                 |   | 37,861   |   | 44,104   |   | 49,698   |   |
|                                  |   |     |   |     |   |     |   |
| Intercompany Revenues:                |   |     |   |     |   |     |   |
| MAM-United States                     |   | —   |   | —   |   | —   |   |
| MPS-United States                     |   | —   |   | —   |   | —   |   |
| EA-United States                      |   | 9        |   | 9        |   | 3        |   |
| Total Domestic                        |   | 9        |   | 9        |   | 3        |   |
| Subsidiaries-Canada                   |   | —   |   | —   |   | —   |   |
| Total                                 |   | 9        |   | 9        |   | 3        |   |
|                                  |   |     |   |     |   |     |   |
| Operating Income (Loss):              |   |     |   |     |   |     |   |
| MAM-United States                     |   | (457     | )      | —   |   | —   |   |
| MPS-United States                     |   | 3,704    |   | 3,523    |   | 5,379    |   |
| EA-United States                      |   | (164     | )      | 3,349    |   | 1,006    |   |
| Total Domestic                        |   | 3,083    |   | 6,872    |   | 6,385    |   |
| Subsidiaries-Canada                   |   | 77       |   | (7       | )      | (25      | )      |
| Total                                 |   | 3,160    |   | 6,865    |   | 6,360    |   |
| Net Income (Loss)                     |   |     |   |     |   |     |   |
| MAM-United States                     |   | (418     | )      | —   |   | —   |   |
| MPS-United States                     |   | 3,238    |   | 3,089    |   | 4,331    |   |
| EA-United States                      |   | (116     | )      | 3,444    |   | 897      |   |
| Total Domestic                        |   | 2,704    |   | 6,533    |   | 5,228    |   |
| Subsidiaries-Canada                   |   | 102      |   | 10       |   | 9        |   |
| Total                                 |   | 2,806    |   | 6,543    |   | 5,237    |   |
| Identifiable Assets:                  |   |     |   |     |   |     |   |
| MAM-United States                     |   | 2,408    |   | —   |   | —   |   |
| MPS-United States                     |   | 134,996  |   | 134,883  |   | 136,931  |   |
| EA-United States                      |   | 2,024    |   | 6,324    |   | 5,632    |   |
| Total Domestic                        |   | 139,428  |   | 141,207  |   | 142,563  |   |
| Subsidiaries-Canada                   |   | 1,841    |   | 779      |   | 772      |   |
| Total                                 |   | 141,269  |   | 141,986  |   | 143,335  |   |

 

The identifiable assets, by company, are those assets used in eachcompany’s operations, excluding intercompany receivables and investments.  For 2003 and 2002, identifiable assetsreflects the reclassification of accrued removal obligations as a liabilityfrom accumulated depreciation.

 

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* The term “Subsidiaries Canada” above includes allapplicable financial information for Me&NB and Maricor.

 

**Regulation and Rates**

 

Theinformation with respect to regulation and rates is presented in Item 3 below,“Legal Proceedings,” such information is incorporated in this section by thisreference.

 

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**Franchises and Competition**

 

Exceptfor consumers served at retail by municipal electric utilities within MPS’sservice area, MPS has a nearly exclusive franchise to deliver electric energyin its service territory.  Foradditional information on changes to the structure of the electric utilityindustry in Maine, see Item 7 below, Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, “Overview,” incorporated hereinby this reference.  For information onthe competitive conditions facing EA, MAMES and Maricor see also Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, “Energy Atlantic Activities,” such information is incorporated inthis section by this reference.

 

MAMESand Maricor operate in competitive markets and do not have exclusivefranchises.  Competition comes primarilyfrom other local or regional mechanical and electrical engineering firms, aswell as local, regional or national energy services companies.  Public policies related to energy, energy efficiency,asset lifecycle management, and air emissions may impact the overallmarket.  The Company has observed thatincreasing interest rates generally tend to negatively impact the market forfee-for-service mechanical and electrical engineering services.  However, increasing interest rates alsoappear to increase the demand for energy efficiency and asset lifecyclemanagement services.  The Company cannotwarrant or predict these economic effects and makes no predictive statement asto future market or competitive trends.

 

**Employees**

 

Theinformation with respect to employees is presented in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations,“Employees,” such information is incorporated in this section by this reference.

 

**Subsidiaries****,Affiliated and Associated Companies**

 

Asstated above, MAM became a holding company effective June 30, 2003.  All 1,574,582 shares of MPS common stockwere converted on the books on that date into an equal number of MAM commonstock, which are listed and traded on the AMEX.  MAM owns 100% of the common stock of MPS.

 

MPSowns 100% of the common stock of Me&NB. Me&NB owned and operated the Tinker hydro-electric station locatedin the Province of New Brunswick, Canada, prior to its sale on June 8, 1999,and has not conducted active business since the sale.

 

OnAugust 24, 1998, the MPUC approved the formation of what was then MPS’sunregulated subsidiary, EA.  EA beganformal operations on January 1, 1999, performing various non-core activities,such as wholesale marketing of electric power and the sales of energy-relatedproducts and services.  EA began retailsales activity on March 1, 2000, the date retail electric competition commencedin Maine.  As a start-up unregulatedsubsidiary, the MPS Board of Directors and the MPUC limited MPS’s capitalcontributions to a maximum of $2 million, subsequently amended to $2.5 millionduring 2002.  With the formation of MAM,MPS’s interest in EA was transferred to the new holding company.  EA is currently an inactive subsidiary ofMAM.

 

MPSowns 5% of the common stock of Maine Yankee, which operated an 860 MW nuclearpower plant (the “Plant”) in Wiscasset, Maine. On August 6, 1997, the Board of Directors of Maine Yankee voted topermanently cease power operations and to begin decommissioning the Plant.  The Plant experienced a number ofoperational and regulatory problems and did not operate after December 6,1996.  The decision to close the Plantpermanently was based on an economic analysis of the costs, risks anduncertainties associated with operating the Plant compared to those associatedwith closing and decommissioning it. The Plant’s operating license from the Nuclear Regulatory Commission(“NRC”) was due to expire on October 21, 2008. For further information regarding Maine Yankee and its decommissioningprogress, see Item 7 below, Management’s Discussion and Analysis of FinancialCondition and Results of Operations, “Maine Yankee,” such information isincorporated in this section by this reference.

 

MPSalso owns 7.49% of the common stock of Maine Electric Power Company, Inc.,(“MEPCO”).  MEPCO owns and operates a345-KV (kilovolt) transmission line about 180 miles long, which connects theNew Brunswick Power (“NB Power”) system with the New England Power Pool(“NEPOOL”).

 

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InNovember 2003, MAM formed MAMES in the United States, now dba “The MaricorGroup,” and MAMES’ Canadian subsidiary, Maricor.  MAM owns 100% of the stock in MAMES.  MAMES has a 100% ownership interest in Maricor.  In December 2003, Maricor acquired EastcanConsultants, Inc., which is a regional mechanical and electrical engineeringfirm headquartered in Moncton, New Brunswick, Canada with an office in St. John,New Brunswick, Canada.  Eastcan iscurrently an operating division of Maricor. An organizational diagramillustrating the various corporate relationships described in this section isprovided above in Part 1, Item 1, Business, “General” and is incorporated inthis section by this reference.

 

**Company Financial Information**

 

Thepublic may read and copy any materials the Company files with the SEC at theSEC’s Public Reference Room at 450 Fifth Street, N.W. Washington, D.C.  20549. The public may obtain information on the operation of the PublicReference Room by calling the SEC at 1-800-SEC-0330.

 

TheCompany is an electronic filer and the SEC maintains an Internet site thatcontains reports, proxy and information statements, and other informationregarding issuers that file electronically with the SEC athttp://www.sec.gov.  The Company alsomaintains an Internet site containing such reports atwww.maineandmaritimes.com.  All suchreports, including annual reports on Form 10-K, quarterly reports on Form 10-Q,and current reports on Form 8-K, may be downloaded from such site withoutcharge.  Also listed at the Company’ssite under Investor Relations, Corporate Governance, is the Code of Ethics forSenior Financial Officers and all other Principal Executive Officers andManagers, as well as the Company’s policy regarding Insider Trading andDissemination of Inside Information.

 

**Item 2.****   Properties**

 

Asof December 31, 2003, MPS had approximately 380 circuit miles of transmissionlines and MPS owned approximately 1,730 miles of distribution lines, all inAroostook County and a portion of Penobscot County in northern Maine.  There are no material physical assets held,owned or controlled by any of the Company’s other subsidiaries.

 

Substantiallyall of the properties owned by MPS are subject to the liens of the First andSecond Mortgage Indentures and Deeds of Trust.

 

Inresponse to a Maine environmental regulation to phase out Poly ChlorinatedBi-phenol (“PCB”) transformers, MPS has implemented a program to eliminatetransformers on its system that do not meet the new state environmentalguidelines.  The program will test thealmost 13,000 distribution transformers over a ten-year period.  In addition, transformers that pass theinspection criteria will be refurbished and refitted with lightning arrestorsand animal guards.  The initial cost ofthe ten-year program was estimated to be $5 million.  After three years, MPS has spent approximately $1,033,000 underthe program.  MPS is currently in itsfourth year of this ten-year program.

 

**SystemSecurity and Reliability**

 

During2002, the engineering consulting firm of R.W. Beck, Inc. (“R.W. Beck”), wasretained to undertake a comprehensive facilities evaluation and engineeringaudit of the MPS transmission and distribution systems.  The purpose of the evaluation and audit wereto provide a comprehensive condition baseline of the transmission anddistribution systems as a beginning basis for development of new transmissionand distribution system plans and the implementation of asset managementinitiatives.  As a result of thecondition baseline and increasing focus on system planning, MPS has implementeda continuous in-the-field inspection program for transmission and distribution.  The inspection program has been facilitatedby the investment in new mobile equipment allowing for “top down” inspectionsversus traditional pole climbing or “bottom up” processes.  Further, MPS has begun development oftwenty-year distribution and transmission planning processes.  These planning processes are intended tofocus on means to improve overall system reliability, while minimizinglifecycle asset management costs and reducing future required capitalexpenditures.

 

Froma transmission perspective, the R.W. Beck audit noted that transmission linesappeared to be in good condition and reasonably maintained.  However, they did note on a relative basisthat certain lines were older, but in good condition with the exception of someof the oldest wood pole lines and areas where bird (woodpecker) damage is aproblem.  Through MPS’s in-the-fieldtransmission inspection program, structures in need of repair or replacementare

 

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beingidentified and repaired or replaced. Current plans are to undertake complete inspections of MPS’stransmission system every two years.

 

Auditsof the Company’s substations and substation-related business processes werealso undertaken by R.W. Beck.  Theoverall ratings for substations were lower than desired, due to the fact thatalmost half of the distribution substations rely on power transformers thathave exceeded their useful lives or are within five years of exceeding theiruseful lives.  While certain transformersare beyond their normal life expectancy, MPS has implemented a comprehensivetesting program to identify problem transformers, implementing preventivemaintenance to extend equipment life expectancies, or replacing suchtransformers.  As part of the systemplanning process, MPS is developing a plan to replace older transformers, whichwill focus on consolidating substations where possible, all a part of MPS’slong-term system planning process.

 

MPShad planned to reduce its annual capital expenditures to a level approximatelyequal to its rate of depreciation.  Dueto MPS’s desire to consolidate facilities and ensure increased systemreliability, management believes that renewal and replacement capitalexpenditures for the next two to three years may remain at more recenthistorical levels of $4.0 million to $6 million annually.  Such expenditure levels do not include thepossible construction of additional transmission as later described.

 

Asa result of the closure of an on-system generation facility and uncertaintyconcerning other merchant and non-merchant generation facilities within theMaritimes and northern Maine regions, MPS continues to evaluate systemsecurity, particularly from an on-peak generation resource perspective. Throughload-flow analysis and utilization of specific contingency or transmissionoutage scenarios, it has been determined that under a single contingency oroutage condition and during peak load situations, a system-wide outage ispossible if at least 50 MW’s of on-system generation are not operating.  Additionally, under certain conditions, theanalyses noted that a second contingency or transmission line outage could notbe survived within a thirty-minute time frame when similar conditions existedafter a single contingency.  AlthoughMaine Public Service Company does not have a bulk delivery transmission systemas defined by the Northeastern Power Coordinating Council (“NPCC”), MPS isusing NPCC’s standards for planning criteria. It should be noted that potential contingencies that were studiedfocused on situations that could impact MPS’s transmission and distributionsystems, even though certain transmission assets are located in Canada and areowned by other companies or organizations. MPS has contingency plans to mitigate such conditions or events in thecase that a major transmission outage or system outage occurred.

 

Asa result of internal and external transmission system security studies in thefall of 2002, a unique risk to the MPS system was identified due to a conditionon an NB Power breaker at the Beechwood 138 kV substation in Canada.  The risk was that for a single breakermalfunction at Beechwood substation, MPS could lose two of its three maininterconnections with NB Power.  Theloss of these interconnections, coupled with the uncertainty of on-systemmerchant generation levels, required MPS to act to prevent conditions thatcould result in an outage. Consequently, MPS paid NB Power $125,900 in December of 2003, forinstalling a series breaker, which eliminated this risk to the MPS transmissionsystem.

 

Inorder to address system security and reliability needs, MPS is also evaluatingthe construction of additional interconnections with NB Power.  Such projects, subject to further analysisand regulatory approvals, would increase available and total transmissioncapacities.  In addition, MPS isevaluating the merits of joining a new Independent System Operator (“ISO”) orRegional Transmission Organization (“RTO”). At this time it is unclear as to the potential outcome of theseefforts.  Further, due to shortages ofpeaking generation capacity within the Maritimes region, MPS is evaluatingother non-transmission options to ensure system reliability.  Such alternative options may requirelegislative or regulatory approvals.

 

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**Item 3.****   LegalProceedings**

 

**Item 3 (i)Maine and Maritimes Corporation**

 

(a)                             Maine Public Utilities Commission, Request for Approval ofReorganization of MPS Into a Holding Company Structure, Docket No. 2002-676

 

OnOctober 31, 2002, MPS filed a request for MPUC approval of the formation of aMaine-based holding company structure. Under this structure, MPS, EA, as well as other affiliates orsubsidiaries, the creation of which was anticipated to occur at a later date,would become subsidiaries of a holding company, HoldCo.  In its application, MPS stated that thecorporate restructuring would be accomplished through a “reverse triangularmerger,” similar to the one employed in CMP’s Application for Approval ofReorganization, of Transactions with Affiliated Interests, and Transfer ofAssets, MPUC Docket No. 97-930.

 

Theproposed MPS restructuring constituted a reorganization requiring MPUC approvalpursuant to the provisions of 35-A M.R.S.A. § 708.  In addition to the proposed reorganization, MPS also requestedthe approval of certain stock issuances and affiliated interest transactions.

 

Specifically,MPS requested MPUC approval of the following transactions and arrangements:

 

1.               the creation of a corporation (“HoldCo”) thatbecame the parent company of MPS through its ownership of all outstandingcompany stock of MPS;

 

2.               the creation of a corporation (“MergeCo”)whose only purpose was to facilitate the corporate reorganization and which,when organized, became a wholly-owned subsidiary of HoldCo and which ceased toexist, once it had served its purpose;

 

3.               the conversion and exchange of all theoutstanding shares of MPS’s common stock into an equal number of shares ofHoldCo’s common stock (to the degree that the conversion and exchange of MPSstock to be effected in that transaction was deemed to constitute an issuanceof utility stock within the meaning of 35-A M.R.S.A. §§ 901and 902);

 

4.               the merger of MergeCo into MPS, with MPS asthe surviving corporation, and the resulting conversion of the outstandingshares of MergeCo common stock into a number of shares of the common stock ofMPS equal to the number of shares of MPS’s common stock outstanding immediatelyprior to the share conversion described in item 3 above, which was deemedissued by MPS for this purpose;

 

5.               the dividend by Maine Public Service of itslimited liability company interests in Energy Atlantic to HoldCo pursuant to35-A M.R.S.A. §§ 708, 901 and 902;

 

6.               the execution and delivery of the Managerialand Support Services Agreement and approval of the cost manual submitted inconjunction therewith pursuant to 35-A M.R.S.A. § 707;

 

7.               the winding up and dissolving of Me&NB atsuch future time as MPS might deem appropriate pursuant to 35-A M.R.S.A. § 708;and,

 

8.               the transfer, after the merger date, (i) ofassets that were not “necessary or useful” within the meaning of Section 1101of title 35-A, from MPS to any MPS affiliate, and (ii) the transfer of allother assets from MPS to HoldCo or any non-MPS HoldCo subsidiary in the totalamount of up to $1,000,000 over the three-year period beginning upon the mergerdate.

 

MPSalso requested that the Commission authorize the creation of HoldCo and MergeCowithin thirty days of the date of its filing. This “interim approval” was for the limited purpose of making necessaryfilings with the Securities and Exchange Commission under the Public UtilityHolding Company Act and for executing a registration statement under federalsecurities law.  As part of this requestfor interim approval, MPS also represented that should the Commission havedenied its petition for reorganization, or if for any other reason theirorganization did not occur, it would dissolve both HoldCo and MergeCo.

 

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Subsequentto its filing, MPS received and responded to several requests for informationfrom the MPUC and the Office of Public Advocate, an intervenor in theproceeding, and met on several occasions with interested parties.  The parties settled all issues in theproceeding, and entered a signed Stipulation formally approved by the MPUC onMarch 26, 2003.  The text of the MPUCOrder, Docket No. 2002-676 may be viewed as Exhibit 99(ao) of this Form 10-Ksuch information is incorporated in this section by this reference.  MPS also filed, on March 11, 2003, a FormS-4 Registration Statement with the Securities and Exchange Commission for“Maine & Maritimes Corporation” the entity designated as “HoldCo” in thisdisclosure.  The reorganization becameeffective June 30, 2003.

 

At MPS’s****Annual Meeting ofShareholders, held on May 30, 2003, shareholders of MPS voted to approve its plan to create aholding company structure, under MAM. Of the shares eligible to vote, 57.07% voted “For” the holding companyproposal, 10.19% voted “Against,” and 32.74% abstained or were “broker novotes.”  The reorganization wascompleted by July 1, 2003.  No change inbeneficial ownership resulted from the reorganization, which is described inmore detail in the Form S-4/A of MAM filed with the Commission on April 15,2003 and is incorporated in this section by this reference.  The filing is reviewable on the SEC’swebsite at “http://www.sec.gov/edgar” or on the MAM Investor Relations page athttp://www.maineandmaritimes.com/corporate/1373T04_CP.PDF.

 

Underthe new holding company corporate structure, MPS became a separate subsidiaryof MAM.  EA, previously MPS’sunregulated competitive electricity supply company also became a directsubsidiary of, MAM.  Me&NB, which isan inactive Canadian company, remained a direct subsidiary of MPS.

 

Followingthe July 1, 2003 completion of the reorganization, shares of MPS common stockwere converted on the books (with no exchange of certificates) into the samenumber of shares of common stock of MAM. The MAM common stock shares are currently traded on the AMEX under theticker symbol “MAM.”

 

**Item 3 (ii)MPS Rate Cases**

 

(a)                             Maine Public Utilities Commission, Request for Approval of AlternativeRate Plan, MPUC Docket 2003-85.

 

Asreported in prior MPS and MAM quarterly reports on Form 10-Q which areincorporated in this section by this reference, on March 6, 2003, MPS submittedits formal “Request for Approval of Alternate Rate Plan” (the “ARP”) (MPUCDocket 2003-85). The proposal was a seven-year rate plan for its distributiondelivery services with a target implementation date on or before July 1, 2003.The ARP was an alternative form of regulating MPS’s distribution assets,similar to the performance rate plans the MPUC has adopted for CMP and BangorHydro-Electric Company.  In accordancewith a state statute enacted during the course of MPS’s ARP proceedings, Maineutilities requesting an ARP are required to file cost-of-service financialinformation as part of the proceeding. In connection with this aspect of the ARP review and analysis, MPS hadbeen authorized by, and had received final approval from the MPUC to increaseits electric delivery rates.  Also in connection with this process MPSannounced that effective October 1, 2003, MPS would increase the distributioncomponent of its electric delivery rate by 6.23% for a total increase in itselectric delivery rate of 3.44%, for a total revenue increase of $940,000.  However, during the compliance filing phaseof this proceeding, an issue arose concerning the calculation of rate sheetsand the corresponding retail distribution and transmission revenues.  Following the entry of a procedural order, discovery, and a publicconference a SupplementalStipulation in this case was entered into and filed with the Maine PublicUtilities Commission (“MPUC”) on October 17, 2003, correcting the allocation ofrevenues between distribution and transmission, and resulting in MPS increased its total electric deliveryrate by 3.78%, or a total revenue increase not to exceed $1,126,552.  As a result, effective November 1, 2003, MPSdistribution rates were increased.  Thisincrease included $685,037 in distribution revenues and $441,515 intransmission revenues.  A copy of the Stipulation and the Orderapproving the increase may be viewed on the MPUC website athttp://www.state.me.us/mpuc/ and is incorporated in this section by thisreference**. **Following theentry of the order approving the Supplemental Stipulation, the ARP proceedingwas bifurcated and on December 29, 2003, MPS notified the MPUC of its intentionto withdraw the remaining elements of the ARP docket.  For the purposes of future rate proceedings MPS will continue toevaluate if an ARP is in the best interest of MPS, its shareholders andconsumers or if it should continue to proceed with cost-of-service rate filingsas it has done in the past.

 

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Asa part of this rate case, the MPUC approved MPS’s request to fix its debtinterest rates through the purchase of interest rate swap derivatives.  Prior to MPS’s fixing of its interest ratesthrough such interest rate swaps, all of its debt had been subject to variableinterest rates.  Given the long-termnature of MPS’s debt, management believed that locking the rates athistorically low levels reduced future shareholder and consumer risksassociated with the volatility of interest rates.  Effective interest rates achieved by the swaps for MPS’s variablerate debt through maturity range from 2.79% to 4.68%.  See Item 16(a) of this Form 10-K, Note 8 of the ConsolidatedFinancial Statements, “Long-Term Debt” for a description of these debt issuesand associated swap rates.

 

(b)                            Maine Public Utilities Commission Investigation into MPS’s StrandedCostRevenue Requirementsand Rates in MPUC Docket No.2003-666.

 

Aspreviously reported in the prior MPS 8-K filing of March 2, 2004, MPS receivedfinal approval from the MPUC for the stranded cost revenue component of itselectric delivery rates. Under Title 35-A of the Maine Revised StatutesAnnotated, Section 3208, the MPUC is required to periodically investigate andadjust the stranded cost charges reflected in the rates of a transmission anddistribution utility.  In accordance with this provision, on September 16,2003, in Docket No. 2003-666, the MPUC issued a notice of investigation inorder to determine whether MPS’s rates must be changed effective March 1, 2004to reflect any changes in MPS’s stranded costs.  On February 27, 2004, theMPUC issued an order approving a stipulation under which MPS is allowed torecover $11,785,339 per year to satisfy its approved stranded cost revenuerequirements for the “rate effective period,” which began March 1, 2004, andwill end on December 31, 2006.  Theapproved revenue requirement for the rate effective period ended February 29,2004 was $11,540,000.  Under theapproved stipulation MPS’s stranded cost rates approved in Docket No. 2003-85will remain in effect during the rate effective period**.**  Thestipulation approved by the MPUC in Docket No. 2003-666 also approved andreaffirmed each of the elements and associated balances of MPS’s recoverablestranded costs.

 

As explained more fullybelow, during the course of Docket No. 2003-666 the parties reviewed the mannerin which MPS was recovering and accounting for its carrying charges associatedwith the deferred fuel element of its stranded cost.  As a result of the stipulation approved in Docket No. 2003-666,MPS will record deferred income tax expense associated with deferred fuelcarrying charges during the rate effective period from March 1, 2004 throughDecember 31, 2006, as compared to past treatment where such expense wasdeferred for future recovery.  Becausethe deferred fuel carrying charge component of MPS’s stranded costs is notexpected to be fully amortized until 2012, MPS anticipates that deferred incometax expense will be incurred through 2012, subject to future stranded costfilings with the MPUC.  In Dockets Nos.98-577 and 2001-240, the parties stipulated that MPS would accrue carryingcosts on its unrecovered fuel balance (the “deferred fuel account”) during therespective rate effective period at its net of tax cost of capital rate. Consistent with the stipulation in Docket No. 2001-240, MPS accrued a carryingcharge using the net of tax rate of 7.98% through October 31, 2003 appliedagainst its unrecovered deferred fuel balance.  From November 1, 2003 toDecember 31, 2003 MPS accrued its carrying charge using a net of tax rate of 7.06%,based on the cost of capital approved in Docket No. 2003-85 (described inDocket No. 2003-85 Partial Stipulation filed on September 2, 2003).

 

During the course of theDocket No. 2003-666 proceeding, MPS determined that it had not previouslyrecognized accumulated deferred income taxes with respect to the carryingcharges on the deferred fuel account and that the recording of a deferred taxliability on its balance sheet pursuant to FAS 109 in the amount of $2.896million was required. The deferred fuel balance as of March 1, 2004 prior toany adjustment was $18,838,000.  Underthe stipulation MPS is allowed to adjust its accumulated deferred income taxaccount and the deferred fuel balance by $2,896,000, as of March 1, 2004,resulting in a total deferred balance as of March 1, 2004 of $21,734,000. Under the approved stipulation the parties also agreed that the returncomponent on the deferred fuel balance should be reduced in such a manner thatratepayers were held harmless on a net present value basis as a result of theMarch 1, 2004 adjustment to the deferred fuel balance.  During the rateeffective period ending on December 31, 2006, the overall pre-tax returncomponent on the deferred fuel balance will be 8.28%, reflecting a 6.17% returnon equity.  The return on the deferred fuel balance will be reviewed infuture stranded cost rate setting proceedings and will be adjusted as necessaryin order that the present value of the revenue requirements of the deferredfuel account without the adjustments described above equals the present valueof the revenue requirements of the deferred fuel account with theadjustments.  MPS concludes that as a result of this stipulation and theforegoing described adjustment to the deferred fuel balance and the accumulateddeferred income tax liability that no further adjustment is necessary under FAS109 in order to reflect prior unrecorded deferred income taxes.

 

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Thedecreased cost of capital rate beginning on March 1, 2004 will have an impacton future stranded cost earnings and stranded cost freed-up cash flows, butwill not impact future distribution or transmission earnings.  In the year2004, MPS anticipates that it will record deferred income tax expense ofapproximately $412,000 associated with the deferred fuel carrying charges.  The amount of deferred income tax expenserecorded in future years will vary depending upon the amount of the accruedcarrying charge in any year, and the tax rates then in effect.  MPS anticipates that earnings from carryingcharges on its stranded costs in 2004 will be approximately $267,000 lower thanthe amount that would have been recorded had MPS continued to use the originalcost of capital on its deferred fuel balance, for a total earnings impact of$679,000 in 2004.  The impact on futureearnings resulting from the agreed upon lower cost of capital, when comparedagainst the cost of capital used in prior stranded cost filings, will vary.  Schedules filed by MPS as part of the stipulation in Docket No.2003-666 reflect the deferred fuel balance as of March 1, 2003, certainadditions relating to the Wheelabrator-Sherman above-market contract throughDecember 2006, and the amortization of the deferred fuel balance though 2012.  Applying these assumptions, current taxrates and the agreed upon cost of capital, MPS anticipates that the impact onfuture earnings resulting from recording deferred income taxes on accruedcarrying charges and applying a lower cost of capital to the deferred fuelbalance could range from $1.0 million in 2005, increasing to $1.2 million in2007, then gradually decreasing to $17,000 in 2012.  These amounts may vary with changes in the deferred fuel balanceand other variables which MPS cannot predict with certainty at this time.  Management is analyzing means to mitigatethe impact of this stipulation on future net income and stranded cost freed-upcash flows.

 

Inaddition to the return allowed on its deferred fuel account as set forth above,under the approved stipulation MPS shall be allowed to recover the followingpre-tax returns on the applicable stranded cost rate base components during therate effective period: (i) the pre-tax return on unrecovered balance of theWheelabrator-Sherman NUG Contract Buydown shall be 2.79% plus its FAME issuancecosts; (ii) the pre-tax return on the unrecovered Seabrook Investment andapproved special rate contract costs shall be 11.74%; and, (iii) the pre-taxreturn on the Maine Yankee decommissioning related costs shall be 8.56%.  The stipulation and any accompanyingexhibits can be found on the MPUC website at www.maine.gov.us/mpuc and areincorporated in this section by this reference.

 

(c)**                            **Federal Energy Regulatory Commission Approvalof Wholesale Transmission Rates, FERC Docket No. ER00-1053

 

TheFERC approved MPS wholesale transmission rates effective June 1, 2002, in FERCDocket No. ER00-1053, a proceeding related to MPS’s Open Access TransmissionTariff (“OATT”) discussed below.  OnAugust 6, 2002, MPS notified the MPUC of its intention to implement theassociated transmission component of its retail transmission and distribution(“T&D”) rates, with the new rates effective October 1, 2002.  The FERC maintains jurisdiction over alltransmission rates.  This implementationincreased overall delivery rates by approximately 2%.  MPS increased its transmission rates subject to refund andissuance of a final order by FERC, which was issued in March, 2003.

 

(d)                            Federal Energy Regulatory Commission 2003 Open Access TransmissionTariff Formula Rate filing, FERCDocket ER00-1053-009

 

Aspreviously reported in prior MPS quarterly reports on Form 10-Q which isincorporated in this section by this reference, pursuant to Section 2.4 of theSettlement Agreement filed on September 30, 2000, in Docket No. ER00-1053-000,and accepted by the FERC on September 15, 2000, MPS provided parties and FERCstaff on June 10, 2003 the changed Open Access Transmission Tariff (“OATT”)Formula Rate charges that MPS proposed to apply on June 1, 2003 together withback-up materials. On June 1, 2003 the Formula Rate charges became effectivesubject to a refund that may occur in connection with a settlement stipulationcurrently being negotiated by the parties to the proceeding. The initial notificationfor the 2003 filing was filed with the FERC on March 31, 2003.  In its 2003 OATT filing, MPS provided theproposed changes to its OATT Formula Rate to the intervening parties and FERCstaff.  In general, MPS sought a slightmodification to its rate formula under its transmission tariff.  On February 11, 2004, following discussionsto resolve all outstanding issues in the 2003 informational filing, MPS, theparties, FERC Trial Staff, and the MPUC****reacheda settlement agreement (the “Settlement Agreement”) regarding changes to theMPS Formula Rate.  The SettlementAgreement and OATT revisions filed reflect and set forth the agreementreached.  Specifically, the parties andthe FERC Trial Staff agreed to certain provisions and changes to MPS’s FormulaRate and OATT as summarized below and in the revised MPS OATT pages.  The revised MPS OATT pages in redline andnon-redline format are included in Attachment A to the Settlement Agreement.  The provisions and changes agreed to aresummarized as follows:

 

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•                  A fixed 11% return on common equity shallcontinue to be used.  The formula makesclear that the return on common equity may not be changed unless pursuant tosection 205 or 206 of Federal Power Act, 16 U.S.C. §§ 824d, 824e.

 

•                  In calculating the weighted overall return,MPS’s actual long term debt and preferred costs will be calculated as specifiedin Note 1 of Statement AV of the Formula Rate. For the three years ending June 1, 2006, MPS’s equity ratio will be (1)the actual equity ratio as calculated according to Formula Rate Statement AV or(2) 53%, whichever is lower, and MPS’s debt ratio will be (a) the actual debtratio as calculated according to Formula Rate Statement AV or (b) 100% less 53%less the actual preferred stock ratio, whichever is higher.

 

•                  Effective January 1, 2004, MPS will beginbooking depreciation accruals for the certain plant accounts at the ratesspecified, and depreciation expense reflecting these rates will be included inthe MPS Formula Rate be used in the OATT charges to be effective June 1, 2005.Formula Rate Statement AJ makes clear that the depreciation rates may not bechanged unless pursuant to section 205 or 206 of Federal Power Act, 16 U.S.C.§§ 824d, 824e.

 

•                  Depreciation rates for certain plant accountswill be effective January 1, 2003 and depreciation expense reflecting accrualsat these rates and will be included in the MPS Formula Rate and will be used inthe OATT charges to be effective June 1, 2004. Formula Rate Statement AJ makesclear that the depreciation rates may not be changed unless pursuant to section205 or 206 of Federal Power Act, 16 U.S.C. §§ 824d, 824e. Also theproposed amounts of depreciation accrual previously recorded through December 31,2002 and related to Account 350.2 and 350.3 will not be reversed and willcontinue to be recognized as credits to rate base.

 

•                  MPS will continue to include intangible plantin rate base, and in addition, MPS will reduce intangible plant by accumulated amortization(reflected on Formula Rate Statement AE) and include an amortization ofintangible plant in the calculation of depreciation and amortizationexpense.  Formula Rate Statement AJshall be modified to include the intangible amortization in total general plantdepreciation and intangible amortization. The transmission labor allocator shall be used to allocate total generalplant depreciation and intangible amortization to the transmission function.  MPS will use a three-year amortizationperiod for computer hardware and software related intangible plant, except thatextraordinary software investment that on a project basis exceed $100,000 shallbe amortized over seven years, with appropriate recognition of deferred taxes.  In the informational filing MPS makes eachyear pursuant to Section 2.4 of the Settlement Agreement, MPS will includeworksheets that detail the following information regarding projects beingamortized in Account 303: a description of the project, beginning and endingbalances, the annual amortization and total accumulated amortization for thatproject.  A sample worksheet is includedin Attachment B of the Settlement Agreement.

 

•                  MPS will allocate external regulatoryexpenses to all customers based on a load ratio share basis beginning with testyear 2002 expenses.  The currentthree-year amortization will continue. A conforming change to Formula Rate Schedule 1b will be made.

 

•                  A revenue credit for rents in Account 454(pole attachments, etc.) shall be added to the Formula Rate Statement AU.  A conforming change to Formula Rate Schedule2 will be made.

 

•                  MPS will add a new line item to Schedule 2 ofthe Formula Rate to reduce rate base for deferred directors’ fees.  The amount of directors’ fees to be shown onSchedule 2 of the Formula Rate will be developed on Formula Rate Statement AD2.

 

•                  MPS will modify the Formula Rate StatementAF2 to reduce rate base by the net of amounts in Account 228.3 (i.e. Accounts228.310, 228.320, and 228.330) minus the amount in Account 186.991.  MPS will average the beginning and end ofyear balances in the accounts and allocate the net of the averages to thetransmission function using the transmission labor allocator.  Formula Rate Schedule 2 will be modified toadd a line item for pensions and benefits.

 

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•                  All costs: (1) of generation, (2) of enteringthe generation business and (3) of any other non-transmission business(regulated or non-regulated) activities – including all deferred income taxesand an appropriate allocation of administrative and general expenses – shall beexcluded from the transmission rate. Any costs of starting or operating any business other than transmissionor distribution that have or will be incurred as of January 1, 2003 shall beseparately identified and segregated so that transmission customers can reviewthose costs.  MPS will maintainsufficient records to enable customers to monitor these costs and to ensure thatthese costs are identified and not charged to transmission customers, and toenable MPS to support and explain its allocation of costs.  Any information provided by MPS regardingthese costs will be treated as supporting documentation under Section 2.3 ofthe Settlement Agreement and any disputes concerning that information will beresolved under the terms of Section 2.3 and not Section 2.4.

 

•                  In the informational filing MPS makes eachyear pursuant to Section 2.4 of the Settlement Agreement, MPS will includeworksheets that detail the treatment of deferred taxes related to AcceleratedCosts Recovery System (“ACRS”) / Modified Accelerated Cost Recovery System(“MACRS”) property.  Specifically, MPSwill demonstrate by journal or account entries that the tax benefits related tothe tax deductions for the retirement of ACRS/MACRS property and for costs ofremoval of that property were credited to Account 282 or 283.  A sample worksheet is included in AttachmentB of the Settlement Agreement.

 

•                  For retail transmission charges, MPS changedthe retail transmission rates each year on October 1.  Specifically, MPS will add the following language to the FormulaRate Schedule 1.1.1: “Retail transmission price changes will take effect onOctober 1.  The transmission revenueeffect of any difference (positive or negative) between when transmission pricechanges would normally occur (June 1) and when they actually occur (October 1)will be accrued with interest, calculated pursuant to Section 35.19a for FERC’sregulations and included in the next determination of transmission prices forretail transmission customers.” Certain clean-up edits to the Formula Rate werealso made.

 

MPSwill also modify OATT Schedule 2, Reactive Support and Voltage Control fromGeneration Sources Service to specify the allocation of reactive supportcosts.  MPS will allocate reactivesupport charges on a load ratio share basis. For wholesale customers, charges for reactive support shall occur eachmonth on an as billed basis.  For retailcustomers, the reactive support charges shall be rolled into the retailtransmission revenue requirement on a prospective yearly basis with a true-upthe next year.  This change to Schedule2 was effective April 1, 2003.  MPS alsowill add Schedule 4 to the Formula Rate to describe the allocation of reactivesupport costs and modify Schedule 1.1.2 to reflect the allocation for retailtransmission customers.

 

Theparties also agreed that if there is a conflict between the Formula Rate andOATT, changes listed in Section 2.2 of the Settlement Agreement and changesreflected on the Formula Rate and OATT pages included in Attachment A to theSettlement Agreement will control.

 

Consistentwith the 2000 Settlement Agreement, the parties also agreed that before eachannual (June 1) adjustment under MPS’s Formula Rate, MPS shall provide theParties and Commission Trial Staff with the changed charges that MPS proposesto apply on June 1 together with back-up materials.  MPS will use its best efforts to provide that information by May15 of each year. MPS will submit an informational filing with the Commissionsetting forth the changed charges by June 15 of each year. If a party to theSettlement Agreement disputes the annual charge change, that party will possessthe right to raise any issue with the Commission (even after June 15).  MPS will respond to reasonable requests forsupporting documentation requested by any party or FERC Trial Staff (even afterJune 15).

 

Theparties also agreed that by March 1, 2006, MPS will meet with the parties andFERC Trial Staff to determine if any of the parties or FERC Trial Staff believethat the Formula Rate does not produce reasonable results.  If MPS and the parties and FERC Trial Staffare unable to reach agreement, then MPS will submit by April 30, 2006, undersection 205 of the Federal Power Act, 16 U.S.C. § 824d, a unilateralfiling with FERC restating or revising the Formula Rate.

 

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Asa result of the settlement, MPS will rebill OATT customers for charges underthe OATT related to the implementation of the Rate Formula changes effectiveJune 1, 2003.  The rebilling shallinclude interest computed under 18 C.F.R. § 35.19a.  For the purpose of keeping the total retailtransmission and distribution rate constant until the October 1, 2004, MPS willnot rebill the retail transmission customers until October 1, 2004.  At the time of the retail transmissionrebilling, MPS will include refunds with interest pursuant to 18 C.F.R.§ 35.19a for the rebilling and any appropriate surcharges with interestcalculated pursuant to FERC regulations, 18 C.F.R. § 35.19a, associatedwith the delay in implementation of the 2003 retail transmission change incharges from June 1, 2003 to October 1, 2003. Also included in the rebilling will be the yet unbilled refunds andsurcharges associated with past periods, including but not limited to thoseassociated with the delay in implementation of the 2002 retail transmissionchange in charges from June 1, 2002 to October 1, 2002, and the 2003 retailtransmission change in charges from June 1, 2003 to November 1, 2003, andrefunds associated with the settlement filed on March 7, 2003 in Docket No.ER03-1053-008.

 

MPShas requested among other things that the FERC accept the 2003 informationalfiling and the proposed OATT revisions. On February 17, 2004 FERC issued its Notice of Filing and established apublic comment date deadline of March 3, 2004. The matter has been briefed to the Commissioners who had no objectionsto any provisions of the MPS filing.  Anorder approving the 2003 informational filing and OATT revisions is expectedduring the first quarter of 2004.  TheSettlement Agreement, cover correspondence and its attachments are submittedwith this filing as Exhibit 99(aq), and are incorporated in this section bythis reference.

 

**Item 3(iii)Other MPS Matters:**

 

(a)                             Maine Public Utilities Commission Notices of Inquiry, MPUC Dockets No.2003-82; 2003-423.

 

OnFebruary 11, 2003, the MPUC initiated a formal Notice of Inquiry (“NOI”) intothe status of the competitive market for electricity supply in northern Maine(MPUC Docket No. 2003-82).  The NOI isnot directed at MPS or any specific party or entity but is a general inquirydesigned to gather information about the adequacy of existing marketstructures, rules and laws in light of the limited number of supplier/generatorparticipants in the region.  The MPUC’sinquiry is for the purpose of identifying potential concerns related tonorthern Maine’s supply and market situation, and to explore possiblesolutions.  In contrast to the rest ofMaine, which is part of the Independent System Operator – New England(“ISO-NE”) region, northern Maine and MPS are electrically interconnected tothe Canadian Maritimes region, which also includes the electric loads andgeneration of New Brunswick, as well as Nova Scotia and Prince EdwardIsland.  Load and generation in northernMaine, which comprises MPS’s service territory, are interconnected to the restof Maine and New England only by transmission through New Brunswick.  The Northern Maine Independent SystemAdministrator (“NMISA”) operates the bulk power and transmission systems forthe region.  The divestiture of generationassets in connection with the Maine Electric Industry Restructuring Act eliminatedrate regulation for the production and sale of electricity supply as of March1, 2000.  During the subsequent periodof time, the retail and wholesale markets have experienced a limited number ofparticipants.  In furtherance of theMPUC’s inquiry, it requested comments on a number of issues related to theseunique market conditions.  MPS hasprovided comments for the MPUC’s consideration.  There have been no other material or further developments in thisproceeding during 2003. At this time MPS cannot predict the nature or theoutcome of any finding, decision or ruling by the MPUC in this proceeding.

 

OnJune 18 2003, the MPUC also initiated a similar Notice of Inquiry and Requestfor Comments concerning “Incentives to Promote Energy Efficiency and Securityof the Electric Grid” (MPUC Docket No. 2003-423).  MPS provided comments to the MPUC on July 7, 2003.  There have been no other material or furtherdevelopments in this proceeding during 2003. At this time the Company cannot predict the nature or the outcome of anyfinding, decision or ruling by the MPUC in this proceeding.

 

(b)                            Wholesale StandardOffer – MPUC Docket No. 2003-677 and Sale of Capacity and Energy Available fromWheelabrator-Sherman Energy Company.

 

Aspreviously reported in prior MPS Form 8-K reports, on September 16, 2003, theMPUC issued an Order Regarding Standard Offer Provider For Maine Public ServiceCompany (Docket No. 2003-670) to resolve all issues regarding the upcomingstandard offer solicitation for all customer classes in MPS’s serviceterritory.  Pursuant to Maine’s ElectricRestructuring Act, the MPUC administers periodic bid processes to selectproviders of SOS.  The current SOSprovider arrangement for all three sets of customer classes in MPS’s serviceterritory terminated on

 

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February29, 2004.  Accordingly, the MPUCsolicited bids for MPS SOS customers beginning on March 1, 2004.  WPS ESI was awarded the Standard Offer forall customer classes for the period March 1, 2004 through February 28, 2006, aswell as the entitlement to capacity and energy from Wheelabrator-Sherman(“WS”), located in Sherman, Maine, for the term beginning at the hour ending on1:00 p.m. on March 1, 2004 through the expiration of the Wheelabrator-ShermanNUG Contract in December 2006.  The bidsolicitation can be viewed at http://www.mainepublicservice.com.

 

(c)                             WPS CanadaGeneration, Inc. – FERC Docket Nos. ER03-689-000, et al.; and WPS CanadaGeneration, Inc. FERC Docket No.ER-04-210-000; WPS Reactive Power Service Rate(“RPS”) matter.

 

OnApril 1, 2003, as amended on April 8, 2003, WPS Canada filed rate schedules forMPS and the NMISA, Rate Schedule FERC Nos. 2 and 3, respectively to obtain$142,734 per year in compensation for WPS’s RPS service.  Parties, including MPS intervened and/orprotested the WPS RPS rate case. While this charge has no direct effect on MPSor the Company’s shareholders, MPS and other parties intervening in the matter,believed that the charge sought by WPS Canada Generation, Inc. (“WPS”) was notjustified and therefore contested the issue. By order issued May 19, 2003, the FERC accepted the RPS rate schedulesfor filing, established that rate schedules would become effective on April 2,2003, subject to refund, provided for a hearing, held the hearing in abeyanceand established settlement procedures. On July 29, 2003, the Chief Judge ordered the termination of thesettlement procedures and ordered the institution of “Track II” hearingprocedures.  Direct and rebuttaltestimony was submitted.  MPS filed itstestimony on this case on October 17, 2003. MPS also, as a precautionary measure, included the pass-through of thischarge in its settlement proposal in its FERC OATT case described above, in theevent that WPS was successful in obtaining FERC approval for this charge.  A settlement in principal was reached priorto the commencement of the actual hearing in the matter.  The parties finalized a settlement in thematter resolving all outstanding issues in the above referenced dockets and onFebruary 10, 2004 the settlement agreement, its appendices, an “ExplanatoryStatement in Support of the Settlement,” and redlined rate sheets were filedwith the FERC Presiding Administrative Law Judge.

 

(d)                            Maine Public Utilities Commission, Application for Exemption of Chapter304 (MPUC Docket No. 2003-122).

 

OnFebruary 21, 2003 the Company filed with the MPUC an “Application for Exemptionof Chapter 304” (MPUC Docket No. 2003-122). In connection with MPS’sreorganization (discussed in Item 3 (i) (a) above) and EA’s withdrawal fromretail electricity markets in northern Maine, MPS filed with the MPUC onFebruary 21, 2003, an “Application for Exemption of Chapter 304” to exempt MPSand EA from certain management restrictions. These restrictions had been imposed to allow EA to engage in energymarketing activities within MPS’s service territory.  A series of settlement conferences were held between the MPUCAdvisory Staff, the Office of the Public Advocate, WPS Energy Services, Inc.and MPS. On June 24, 2003, the parties submitted a Stipulation to theMPUC.  The MPUC issued an OrderApproving Stipulation in this matter on July 24, 2003, which approved a partialwaiver of the requirements of Chapter 304 (the “304 Order”) and resolved allissues in this matter.  Under theprovisions of the 304 Order, MPS is exempted from the employee sharingprovisions of Chapter 304 of the Commissions Rules subject to certain specifiedconditions.  The exemptions and waiversgranted in the 304 Order are expressly contingent on the condition that EAcease marketing in MPS’s service territory effective March 1, 2003.  The 304 Order also provides that the partiesto the proceeding may revisit the matter in the event EA should subsequentlychoose to re-enter the northern Maine retail electricity market in thefuture.  In connection with itsannounced intent to withdraw from the retail electricity markets in northernMaine EA has ceased all of its energy marketing activities in MPS’ serviceterritory effective March 1, 2003, as well as the balance of the State. A copy of the Stipulation and the 304 Orderapproving the stipulation may be viewed on the MPUC website athttp://www.state.me.us/mpuc/**.**

 

(e)                             Settlement of Maine Yankee Litigation.

 

Ashas been previously reported by the Company in its 8-K and 10-Q quarterlyreports, in May 2000, Maine Yankee terminated its decommissioning operationscontract with Stone & Webster Engineering Corp. (“Stone & Webster”)pursuant to the terms of the contract. Stone & Webster disputed Maine Yankee’s grounds for thetermination.  In June 2000, Stone &Webster filed a voluntary petition under Chapter 11 of the United StatesBankruptcy Code with the United States Bankruptcy Court for the District ofDelaware.  As a result of the BankruptcyCourt approving the Third Amended Plan of Reorganization in the Stone andWebster Bankruptcy, all litigation between Maine Yankee and the bankruptcyestate was settled.  In connection withthis settlement, Maine Yankee also withdrew its complaint against Envirocare,Inc. in Federal District Court.  SeePart II, Item 7 below, for a more detailed discussion of Maine Yankee.

 

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

 

Atthe 2003 Annual Meeting of Stockholders of MPS held on May 30, 2003, twomatters were voted upon.  First was theuncontested election of Robert E. Anderson, Michael W. Caron, and Nathan L.Grass for terms ending in 2006, and David N. Felch for a term ending in 2004;each was elected.

 

Secondwas the approval of the agreement and plan of merger and reorganization tocreate a holding company structure under Maine & Maritimes Corporation,with the following recorded vote:

 
|                                                             |   | **For** |   | **Against** |   | **Non-Votes  and  Abstentions** |   |
|------------------------------------------------------------------|--------|---------|--------|-------------|--------|---------------------------------|--------|
| Approval of the Agreement and Plan of  Merger and Reorganization |   | 898,535 |   | 160,464     |   | 515,323                         |   |

 

Ofthe total shares eligible to vote, 57.07% voted in favor of the proposal.

 

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**PART II**

 

**Item 5****.****   Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities**

 

Maine& Maritimes Corporation became a holding company effective June 30,2003.  All 1,574,582 shares of MPScommon stock were converted on that date into an equal number of MAM commonstock, which are listed and traded on the AMEX under the trading symbol“MAM.”  As of December 31, 2003, therewere 890 holders of record of the Company’s common stock, with 1,580,512 sharesoutstanding.  As of December 31, 2002,common stock shares outstanding for MPS were 1,574,115.

 

Dividenddata and market price related to the common stock are tabulated as follows forthe two most recent calendar years:

 
|            |   | **Market  Price** |   | **Dividends** |   |
|-----------------|--------|-------------------|--------|---------------|--------|
|            |   | **High**          |   | **Low**       |   | **Paid Per  Share** |   | **Declared  Per Share** |   |
| 2003            |   |              |   |          |   |   |   |   |   |
| First Quarter   |   | $                 | 32.26  |          | $      | 24.99 |   | $ | .37 |   | $ | .37 |   |
| Second Quarter  |   | $                 | 32.95  |          | $      | 26.36 |   | .37 |   | .37 |   |
| Third Quarter   |   | $                 | 36.90  |          | $      | 31.60 |   | .37 |   | .37 |   |
| Fourth Quarter  |   | $                 | 35.95  |          | $      | 34.37 |   | .37 |   | .38 |   |
| Total Dividends |   |              |   |          |   | $ | 1.48 |   | $ | 1.49 |   |
|            |   |              |   |          |   |   |   |   |   |
| 2002            |   |              |   |          |   |   |   |   |   |
| First Quarter   |   | $                 | 30.48  |          | $      | 28.75 |   | $ | .35 |   | $ | .35 |   |
| Second Quarter  |   | $                 | 30.55  |          | $      | 29.50 |   | .35 |   | .35 |   |
| Third Quarter   |   | $                 | 29.84  |          | $      | 25.60 |   | .35 |   | .37 |   |
| Fourth Quarter  |   | $                 | 34.59  |          | $      | 24.25 |   | .37 |   | .37 |   |
| Total Dividends |   |              |   |          |   | $ | 1.42 |   | $ | 1.44 |   |

 

Dividendsdeclared within the quarter are paid on the first day of the succeedingquarter.

 

TheCompany has determined that the common stock dividends paid in 2003 are fullytaxable for federal income tax purposes. These determinations are subject to review by the Internal RevenueService, and shareholders will be notified of any significant changes.

 

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

 
| **Plan Category**                                      |   | **Number of  securities  to be issued upon  exercise of  outstanding options,  warrants and rights** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights** |   | **Number of  securities remaining  available for future issuance  under equity compensation  plans  (excluding securities reflected in  column (a)** |   |
|--------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                   |   | **(a)**                                                                                              |   | **(b)**                                                                            |   | **(c)**                                                                                                                                              |   |
|                                                   |   |                                                                                                 |   |                                                                               |   |                                                                                                                                                 |   |
| Equity compensation plan approved by  security holders |   | 10,500                                                                                               |   | 31.48                                                                              |   | 139,500                                                                                                                                              |   |
|                                                   |   |                                                                                                 |   |                                                                               |   |                                                                                                                                                 |   |
| Equity compensation plan approved by  security holders |   | 0                                                                                                    |   | n/a                                                                                |   | 0                                                                                                                                                    |   |
|                                                   |   |                                                                                                 |   |                                                                               |   |                                                                                                                                                 |   |
| Total                                                  |   | 10,500                                                                                               |   | 31.48                                                                              |   | 139,500                                                                                                                                              |   |

 

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Sale of Unregistered Securities

 

OnDecember 1, 2003, the Company issued 5,529 shares of its common stock inconnection with the acquisition by its Canadian subsidiary, Maricor Ltd, of allof the outstanding common shares of Eastcan Consultants, Inc., a closely heldCanadian corporation.  No underwriterwas used.  The persons who acquired thesecurities were Michael C. Gillis, Malcolm A. MacLellan, Richard Keirstead,Stephen Erb, and Scott Mowery.  Theconsideration is stated in Item 16(a) to this Form 10-K, Note 14 to theConsolidated Financial Statements, “Acquisitions.”  The securities were issued under the exemption provided bySection 4(2) of the Securities Act of 1933 as a transaction by an issuer notinvolving a public offering.

 

**Item 6****.****   SelectedFinancial Data**

 

Afive-year summary of selected financial data (1999-2003) is as follows:

 

**Five-YearSummary of Selected Financial Data**

 
|                                                    |   | **2003**   |        | **2002**   |   | **2001**    |   | **2000**   |        | **1999**   |   |
|---------------------------------------------------------|--------|------------|-------------|------------|--------|-------------|--------|------------|-------------|------------|--------|
| Income Statement Data:                                  |   |       |        |       |   |        |   |       |        |       |   |
| Revenues (1)                                            |   | $          | 37,860,509  |       | $      | 44,104,133  |   | $          | 49,698,040  |       | $      | 78,238,279 |   | $ | 67,456,117 |   |
| Net Income Available for Common Stock                   |   | $          | 2,805,601   |       | $      | 6,543,421   |   | $          | 5,236,527   |       | $      | 5,300,632 |   | $ | 4,005,556 |   |
| Basic and Diluted Net Income Per Share of  Common Stock |   | $          | 1.78        |       | $      | 4.16        |   | $          | 3.33        |       | $      | 3.34 |   | $ | 2.48 |   |
|                                                    |   |       |        |       |   |        |   |       |        |       |   |
| Balance Sheet Data:                                     |   |       |        |       |   |        |   |       |        |       |   |
| Total Assets (2)                                        |   | $          | 141,268,765 |       | $      | 141,986,156 |   | $          | 143,334,943 |       | $      | 150,856,876 |   | $ | 171,548,480 |   |
| Capitalization:                                         |   |       |        |       |   |        |   |       |        |       |   |
| Long-Term Debt Outstanding                              |   | $          | 30,680,000  |       | $      | 33,765,000  |   | $          | 34,940,000  |       | $      | 35,990,000 |   | $ | 42,015,000 |   |
| Less amount due within one year                         |   | 1,450,000  |        | 3,085,000  |   | 1,175,000   |   | 1,050,000  |        | 25,000     |   |
| Long-Term Debt                                          |   | 29,230,000 |        | 30,680,000 |   | 33,765,000  |   | 34,940,000 |        | 41,990,000 |   |
| Common Shareholders’ Equity                        |   | 46,984,490 |        | 47,029,071 |   | 42,731,149  |   | 39,585,951 |        | 37,159,608 |   |
| Total Capitalization                                    |   | $          | 76,214,490  |       | $      | 77,709,071  |   | $          | 76,496,149  |       | $      | 74,525,951 |   | $ | 79,149,608 |   |

 

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(1)          Electricrestructuring in Maine began on March 1, 2000, with MPS providing onlytransmission and distribution (“T&D”) or delivery services subsequent tothat date.  Prior to March 1, 2000, MPSprovided electric power to its customers by operating its own generatingfacilities, principally located in Canada, or by purchasing power.  The MPUC allowed the recovery of strandedcosts from our customers, beginning March 1, 2000.  MPS’s sales in MWH’s are comparable to pre-March 1, 2000sales.  Financial results for periodsbefore March 1, 2000, reflect revenues and associated expenses for deliverycharges and electric power provided to our customers.  After March 1, 2000, MPS’s revenues do not reflect revenuesassociated with electric power.  Afterconsidering the differences above, comparisons of financial results for periodsprior to March 1, 2000, to periods after that date are difficult and theCompany makes no conclusion or statement with respect to such comparisons.

 

(2)          For2003 and 2002, total assets reflects the reclassification of accrued removalobligations as a liability from accumulated depreciation.

 

SeeItem 7a, “Quantitative and Quantitative Disclosures about Market Risk,”incorporated in this section by this reference, concerning material risks anduncertainties which could cause the data reflected herein not to be indicativeof the Company’s future financial condition or results of operations.

 

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**Item 7****.****   Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations should be read in conjunction with the Company’s ConsolidatedFinancial Statements, Item 16(a) of this Form 10-K.

 

ThisManagement’s Discussion and Analysis contains certain forward-lookingstatements, as defined by the SEC, such as forecasts and projections ofexpected future performance or statements of management’s plans andobjectives.  These forward-lookingstatements may be contained in filings with the SEC and in press releases andoral statements.  You can identify thesestatements by the fact that they do not relate strictly to historical orcurrent facts.  They use words such as“anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” andother words and terms of similar meaning in connection with any discussion offuture operating 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 could potentially differmaterially from these statements. Therefore, no assurance can be given that the outcomes stated in suchforward-looking statements and estimates will be achieved.

 

Factorsthat could cause actual results to differ materially from our projectionsinclude, among other matters, electric utility restructuring; future economicand demographic conditions within MPS’s service area and unregulated markets;changes in tax rates; interest rates or rates of inflation; ability to raisecapital; pace and success of merger and acquisition efforts; terrorism; changesin the construction industry; changes in Canadian currency rates; length ofsales cycles; developments in state, provincial and national legislative andregulatory environments in the United States and Canada; ability to recruitindividuals with necessary skill sets; increased competition by existing or newcompetitors in the Company’s unregulated markets; changes in technology; newinnovations; changes in NAFTA; increased environmental regulations and otherregulatory or market-based conditions.

 

**Overview**

 

MAM,a Maine corporation, became a holding company effective June 30, 2003, and ownsall of the common stock of MPS.  All ofthe shares of MPS common stock were converted on the books into an equal numberof shares of MAM common stock, which are listed on the AMEX under the trading symbol“MAM.”

 

Priorto electric retail deregulation within the state of Maine and its divestitureof generation, MPS served as a regulated and vertically integrated electricutility.  As a result of deregulationand generation divestiture, MPS’s revenue model and rate base underwentsignificant change. Today, MPS’s returns are based on specifically allowablerates of return, as permitted by the MPUC and the FERC on various physical andregulatory assets, referred to as “MPS’s rate base.”  While rates of return may remain more stable, should the overallrate base decline, then earnings will also decline.  MPS’s current rate base consists primarily of transmission anddistribution networks (poles, wires, substations buildings and rolling stock),as well as regulatory assets that include stranded costs associated with thesale of generation, closure of generation and/or purchase poweragreements.  MPS’s primary regulatoryasset or stranded cost is associated with the Wheelabrator-Sherman NUGContract, more fully described within this 10-K (see Item 1 above, Business,“Discussion and Description of the Company’s Growth Strategy;” and “Descriptionof Maine Public Service Company (“MPS”) and Maine and New Brunswick ElectricalPower Company, Limited (“Me&NB”)”). In the case of the WS stranded cost, the amount of stranded cost uponwhich MPS receives a return is based on the difference between the actualcontract price and the bid price for the facilities output received through abid process overseen by the MPUC on a periodic basis.

 

TheWheelabrator-Sherman NUG Contract expires in late 2006.  However, MPS chose to levelize its strandedcost payments from consumers, such that the recovery of stranded costs would beequal over a longer period of time, as opposed to higher consumer costs over ashorter recovery period, declining on an annualized basis.  Consequently, the full recovery of WSrelated stranded costs will not occur until 2012, although payments to WS ceasebeginning in 2007.  As stranded costsdecline, absolute returns will consequently decline as the rate base isreduced.  During the period 2007 through2012, MPS will experience strong stranded cost freed-up cash flows as a resultof the end of the above-market contract with WS and having levelized its strandedcosts.  The deferment of stranded costsimpacts stranded cost freed-up cash flows, but will not impact net income.

 

Dueto MPS’s declining rate base (as a result of deregulation, generationdivestiture and amortization of stranded costs), combined with current strandedcost freed-up cash flows forecasts during the period noted, management and

 

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theboard of directors of MPS determined that now is an opportune time to grow anddiversify MPS.  As a part of the overallstrategy to grow, as noted, MAM was formed as the holding company for MPS andother subsidiaries and affiliated companies. Based on covenants agreed to between MPS and the MPUC in forming theholding company, restrictions were placed on MAM as it relates to the financialmanagement of MPS, helping to insulate the regulated utility from possibledetrimental impacts of deregulated companies and diversification.  These covenants are described in greaterdetail in Item 3, “Legal Proceedings,” Item 3(i)(a) and Item 3(iii)(d).

 

MAM’soverall growth strategy consists of the following proposed strategic andtactical actions:

 

•                  Improve the overall operation and economicviability of MPS:

 

•                  Ensure the effective operation of MPS,ensuring its continued contribution to overall MAM earnings and ensuringincreased effectiveness of capital deployment based on return on capitalemployed (“ROCE”) evaluations.

 

•                  Improve overall MPS transmission systemsecurity through the development of increased total and available transmissioncapacities, deploying capital for new construction based on a FERC allowed rateof return basis.

 

•                  Deploy capital based on the development andimplementation of comprehensive 20-year transmission and distribution system plansthat seek to optimize reliability, while reducing required infrastructure.

 

•                  Implement integrated asset management systemsand processes to improve overall reliability and extend assets’ lifecycles.

 

•                  Reorganize the utility, creating andincreasing the operational responsibilities of Field Services, migratingincreased decision making to the field.

 

•                  Improve overall management of MPS throughimproved skill sets, business processes, and systems, including theinstallation of a new financial system with utility enterprise managementcomponents.

 

•                  Increase the overall integration andapplication of technologies to achieve increased productivity, such asinstallation of automated meter reading devices.

 

•                  Monitor rates to ensure such rates are fullycompensatory and allow for achievement of allowable rates of return on equity,requesting rate increases as required from regulatory bodies.

 

•                  Pursue an acquisition strategy focusing onthe “roll-up” of regional mechanical and electrical engineering firms withinNew England and the eastern Canadian provinces to provide a platform foradditional growth and accretive net income to cover organic growth initiatives.

 

•                  Identify and pursue acquisitions of smallerregional mechanical and electrical engineering firms that have the ability todominate individual local markets.

 

•                  Develop and implement “franchised-type”systems, processes, products and services to support acquired engineeringfirms, limiting required integration issues and improving overall performance.

 

•                  Increase product offerings focused onfacility lifecycle management utilizing an information-based technologyplatform, providing clients turnkey development of asset assessments and assetlifecycle plans, including optimization of their capital expenditure programs.

 

•                  Increase service offerings in the areas ofenergy efficiency and air emissions reductions to complement fee-for-serviceengineering services.

 

•                  As a part of facility lifecycle managementservices, identify and evaluate energy-related assets that can be acquired,such as central utility plants and central heating and/or cooling districts.

 

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•                  Identify and evaluate the acquisition orstart-up of an energy supply management services company to complementengineering and facility lifecycle management services.

 

•                  Identify, evaluate and pursue the potentialacquisition of other regulated or unregulated energy companies, such as smallelectric utilities or electric utility non-generating assets, small natural gaslocal distribution companies, oil distributors and/or propane distributors.

 

•                  Implement an aggressive acquisition analysisteam to evaluate utility-type assets and businesses within North America.

 

•                  Evaluate opportunities to leverage scale andsynergies with MAM’s ownership of MPS, a regulated transmission anddistribution utility.  Potentialsynergies include the following:

 

•                  Billing, credit collection and remittanceservices

•                  Information technology services

•                  Engineering services

•                  Administrative and accounting services

•                  Call center operations

•                  SCADA operations

•                  Human resource related services

 

•                  Focus on markets that provide a demographicand economic hedge to MPS’s service area.

 

•                  Focus on related businesses within marketsthat have a complimentary cash flow to offset MPS’s inverse bell curve strandedcost freed-up cash flow.

 

•                  Identify, evaluate and pursue the potentialacquisition of regional real estate development and management companies withan existing and diverse portfolio of real estate assets, focused on secondaryand tertiary growth markets within the eastern Canadian provinces.

 

•                  Ensure strong lease coverage of assets withan asset focus on public sector facilities, such as schools and governmentbuildings, where leases match the term of financing.

 

•                  Focus on a portfolio of commercial andnon-retail properties in both downtown redevelopment districts and businesspark settings.

 

•                  Focus on the integration of engineeringservices in support of facility management.

 

•                  Focus on energy supply chain managementoptimization.

 

Beyondthe impacts of electric retail deregulation and generation divestiture,management closely monitors legislative activities and regulations.  Both regulatory and legislative risks arethe major risk concerns impacting MPS. Management believes that as unregulated energy commodity pricesincrease, long-term concerns exist that increased pressures will be placed onregulated distribution costs. Management anticipates that scale and technology will be the drivingforces impacting the long-term view of distribution and transmissionassets.  Accordingly, management hasconcluded that acquiring technology and additional businesses that utilizecommon services can create synergies that achieve scale, thus resulting inbetter control of increasing operating costs.

 

Inorder to enhance overall financial management capabilities and to ensurecompliance with the Sarbanes-Oxley Act of 2002, MPS is implementing a tier-onefinancial system, which includes a utility enterprise management suite.  MPS’s need for an improved technologysystem, improved management financial reporting and full compliance withSection 404 of the Sarbanes-Oxley Act has resulted in increased technology andaccounting expenditures.  Spreadingthese costs over a larger base of businesses is an important part of ouroverall strategy.

 

AlthoughMPS is prohibited, except under certain, very limited regulatory exceptions,from owning and operating electric generation, management is closely evaluatinggeneration resource conditions within northern Maine and the

 

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CanadianMaritimes control area.  Managementbelieves that peaking capacity is a significant problem within the region andthat this problem is currently exacerbated by uncertainties concerning thefuture and cost of Orimulsion® fuel supplies to generation facilities withinNew Brunswick, Canada, as well as the future of the Point Lepreau nucleargeneration station also in New Brunswick, Canada.  The Company has learned that the New Brunswick Department ofEnergy has enlisted a nuclear expert to examine and give advice to thegovernment on the potential refurbishment of the Point Lepreau nucleargeneration station.  Management believesthe estimated anticipated cost of $910 million (CN$) to refurbish PointLepreau, is a significant investment in generation that does not provideadditional generation capacity to the region. Given these and other multi-national issues, policies and decisions thatimpact generation supply planning and adequacy, management is concerned aboutthe uncertainties relative to generation resources availability and thepotential impact such uncertainties may have on MPS’s, and the Company’s futureoperations.

 

Toaddress these resource availability concerns, MPS is, among other things,evaluating additional transmission interconnections that could potentiallyincrease its overall total and available transmission capacities with NB Power.  MAM anticipates that the effectiveness ofthese lines will in part be dependent upon the future of an additional 345 KVtransmission project currently jointly proposed by NB Power and Bangor HydroElectric Company, that would among other things provide an additionalinterconnection of NB Power’s system with the New England ISO.  This 345 KV transmission project is in thepreliminary permit stages and it is not certain that it will be constructed.  Management expects to re-evaluate the MPStransmission interconnections should this project not proceed.

 

Dueto the lack of sustainable profitability of EA and its risk profile, MAM alsointends to enhance its unregulated earnings over the next several years toreplace those previously provided by EA. MAM will retain EA as a subsidiary and maintain its various licenses toensure EA’s option of returning to the retail electric sales market shouldconditions change and liquidity improve.

 

Boththe ability to raise the necessary capital and the availability of adequate investmentcapital to allow for full implementation of the MAM strategic vision arecritical success factors.  MAM isevaluating a number of financing options, including the possible securitizationof the above-described stranded cost freed-up cash flows (see Item 1 above,Business, “Discussion and Description of the Company’s Growth Strategy.”)resulting from deferred stranded cost recovery.  Such a technique may require regulatory and/or legislativeapprovals.  Other options for financingmay include, but are not limited, to the issuance of additional shares ofstock, either common or preferred, and various forms of debt.  Debt financing strategies may require thatMAM set a defined dividend policy providing guidance of a target payout range.

 

Beyondissues related to capital formation, management anticipates that theeffectiveness of MAM’s strategic vision and acquisition strategy will begreatly dependent upon the availability and quality of marketopportunities.  Management believes thatby evaluating numerous local markets within the New England, U.S. and AtlanticCanadian provinces, a greater number of small to mid-range acquisitioncandidates are possible and is therefore focusing its efforts in these regions.

 

**Existing Operations**

 

Theaccompanying consolidated financial statements include the financial results ofthe Company and its subsidiaries:

•                  MPS, its electric transmission anddistribution delivery company, and its wholly-owned, inactive Canadiansubsidiary, Me&NB;

•                  EA, its CES retail electric marketingcompany;

•                  MAMES, (dba “The Maricor Group”), and itsCanadian subsidiary, Maricor, who provide mechanical and electricalengineering, energy efficiency, air emissions reduction, and lifecycle assetmanagement services.

 

MPSis an electric transmission and distribution delivery company servingapproximately 35,000 retail electric customers in northern Maine.  MPS is subject to the regulatory authorityof the MPUC for its distribution rates and the FERC for its transmissionrates.  Current rates are determinedusing traditional rate base, and rate of return ratemaking principals,including a cost-of-service methodology, used by the regulatory agencies.  Other investor-owned electric utilitieswithin the state of Maine are under Alternative Rate Plans (“ARP’s”) andutilize

 

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PerformanceBased Rates (“PBR’s”).  MPS continues toevaluate the merits of an ARP and possible migration to PBR’s.  (See Part 1, Item 3, “Legal Proceedings”Item 3 (ii)(a) above).  However,management believes that implementation of PBR’s under an ARP could result indetrimental financial impacts due to the lack of growth within MPS’s servicearea.  Typically, ARP’s with PBR’srequire productivity offsets to achieve allowed rates of return and managementbelieves such productivity offsets will not be achievable in the absence ofeconomic growth.

 

MAMES, and its wholly-ownedCanadian subsidiary, Maricor, offer mechanical and electrical engineeringservices, including asset development, energy efficiency services, airemissions reduction services, and lifecycle asset management services.  In addition, MAMES and Maricor offer a rangeof solutions to reduce facility lifecycle costs, identify and reduce deferredmaintenance liabilities and improve environmental performance.  MAMES’ and Maricor’s value propositionencompasses the development, management, operation and modernization ofphysical assets for environmental and financial sustainability.

 

Target markets within theeastern Canadian provinces and Atlantic Canada primarily include, but are notnecessarily limited to, governments, universities and colleges, hospitals andother health care facilities, schools, commercial retail and officefacilities.  While not a target market,MAMES and Maricor can and do provide engineering-related services to theindustrial sector.  MAMES and itssubsidiary, Maricor currently have offices in Presque Isle and Portland, Maine;Rockland, Massachusetts; and Moncton and Saint John, New Brunswick, Canada.

 

The Maricor Group’s servicescategories generally include:

 

•                  **Planning & Efficiency Services** – facility audit and condition assessments,asset modernization and development planning, energy and environmentalperformance analysis, capital budgeting and planning services and a website-based planning advisor;

•                  **Operational Services** – asset operations management and asset information management;

•                  **Modernization Services** – mechanical and electrical engineering, energy engineering, airemissions reductions, project management and commissioning services; and

•                  **Development Services** – energy asset ownership, design and build services, projectmanagement and commissioning services, such as central utility or districtenergy projects.

 

Thissection and the accompanying text explain the general financial condition ofthe Company and its subsidiaries and their results of operations.  This explanation includes:

 

•                  factors that affect our business;

•                  the sources of our revenues and changesbetween years;

•                  our operating expenses and changes betweenyears;

•                  the sources of our operating capital; and

•                  the impact of the above on our financialcondition.

 

**Critical Accounting Policies**

 

Inpreparing the financial statements in accordance with generally acceptedaccounting principles, management must often make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues, expenses andrelated disclosures at the dateof the financial statements and during the reporting period.  Some of those judgments can be subjectiveand complex, and actual results could differ from those estimates.  The Company’s most critical accountingpolicies include the determination of the appropriate accounting for itspensions and other post-retirement benefits, the recognition of its revenues,the effects of utility regulation on its financial statements and its riskmanagement activities.

 

**Revenue Recognition**

 

MPSrecords an estimate for revenue for electricity delivered, but not yet billedto customers.  This estimate requiresMPS to make certain assumptions.  Achange in those assumptions could cause the amounts reported as revenues tochange.  EA’s previous sales can beclassified into two general categories: SOS in CMP’s service territory which

 

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expiredFebruary 28, 2002, and CES sales to individual retail customers within thestate of Maine, all of whichexpired by February 27, 2004. For SOS, revenues were received and expenses were paid directly by anescrow agent which was controlled by Engage Energy America, LLC (“Engage”).  EA received a percentage of the net profitfrom the sale of energy.  CMP bore SOSaccount collection risks, as they were required to remit the amounts billed 26days after the billing date to the escrow account mentioned above and maintainthe billing and customer service relationship. EA recorded the accrued net margin of the SOS activity as revenue in thefinancial statements.  For CES sales, EAnegotiated the price directly with the customer, maintained customer serviceresponsibility and had collection risk. EA has withdrawn from the market until market conditions improve and nolonger serves CES or SOS customers. CES activity is recorded on a gross basisto include the related revenues and purchased power expenses.  Additionally, EA’s activity has beenaccounted for as non-trading since management has determined it does not meetthe definition of a trader as defined in EITF 98-10 which was amended by EITF02-03.  Refer to Item 16(a) of this Form10-K, Note 3 to the Consolidated Financial Statements, “Energy Atlantic” forfurther discussion.

 

**Pension and O****therPost-retirement Benefit Plans**

 

TheCompany has pension and other post-retirement benefit plans, principallyhealthcare benefits, covering substantially all of its employees andretirees.  In accordance with Statementof Financial Accounting Standards No. 87, “Employer’s Accounting for Pensions,”and Statement of Financial Accounting Standards No. 106, “Employer’s Accountingfor Post-retirement Benefits Other Than Pensions,” the valuation of benefitobligations and the performance of plan assets are subject to variousassumptions.  The primary assumptionsinclude the discount rate, expected return on plan assets, rate of compensationincrease, health care cost inflation rates, expected years of future serviceunder the pension benefit plans and the methodology used to amortize gains orlosses.  Changes in those assumptionscould also have a significant effect on the Company’s non-cash pension incomeor expense or the Company’s post-retirement benefit costs.  For additional information on the Company’sbenefit plans, see Item 16(a) of this Form 10-K, Note 10 to the ConsolidatedFinancial Statements, “Benefit Plans,” which is incorporated in this section bythis reference.

 

**Utility Regulation**

 

MPSis subject to the regulatory authority of the MPUC and the FERC.  As a result of the ratemaking process, theapplications of accounting principles by MPS differ in certain respects fromapplications by non-regulated businesses. Approximately 84% of the Company’s 2003 revenues, as depicted in the“Operating Revenues and Energy Deliveries” section below, derived from MPS’sregulated operations are accounted for pursuant to Statement of FinancialAccounting Standards No. 71, “Accounting for the Effects of Certain Types ofRegulations.”

 

Priorto the start of deregulation in Maine on March 1, 2000, the MPUC determined theamount of stranded costs to be recovered via rates.  MPS’s annual amortization of its stranded costs represents theamounts allowed by the MPUC in the determination of revenue requirements.

 

**Results of Operations**

 

Earnings and Dividends

 

Earningsper share and net income for 2003, along with the corresponding information for2002 and 2001 are as follows:

 
|               |   | **(Dollars  in Thousands)** |   |
|--------------------|--------|-----------------------------|--------|
| **Net Income ***   |   | **2003**                    |   | **2002** |   | **2001** |   |
| MAM/MAMES          |   | $                           | (416   | ) | $ | — |   | $ | — |   |
| MPS-Core T&D   |   | 3,338                       |   | 3,099 |   | 4,340 |   |
| EA                 |   | (116                        | )      | 3,444 |   | 897 |   |
| Total Company      |   | $                           | 2,806  |   | $ | 6,543 |   | $ | 5,237 |   |
|               |   |                        |   |   |   |   |   |
| Earnings per Share |   | $                           | 1.78   |   | $ | 4.16 |   | $ | 3.33 |   |

 

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**Due to the immateriality of eliminationamounts, they have been grouped with appropriate line items*

 

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Netincome above is allocated based upon the segment allocation as presented inItem 16(a) of this Form 10-K, Note 4 of the Notes to Consolidated FinancialStatements, “Segment Information.”

 

Asa part of the formation of the holding company, certain MPS staff weretransferred to MAM. Also, certain administrative, legal, professional,governance, and professional costs were assigned to MAM, following MPUCapproved cost allocation process.  Inaddition, certain costs associated with merger and acquisition due diligenceactivities were included in MAM costs. In December, 2003, MAM formed MAMES and MAMES’ Canadian subsidiary, Maricor.  In addition, during the same time frameMaricor purchased Eastcan Consultants, a mechanical and electrical engineeringfirm headquartered in Moncton, New Brunswick, Canada, with an office in SaintJohn, New Brunswick.

 

MPScore T & D earnings were $3,378,000 for 2003, compared to $3,099,000 and$4,340,000 in 2002 and 2001, respectively. Earnings for 2003 increased by $239,000 over earnings in 2002.  Sales in 2003 increased by 1.9% over 2002,contributing an additional $203,000, net of income taxes.  As more fully explained in the “LegalProceedings” section of this Form 10-K, the MPUC allowed recovery, over sevenyears, of the VERP expenses charged to 2002 earnings, resulting in an increasein 2003 net income of $236,000, net of income taxes, after considering twomonths of amortization.  In addition,reductions in transmission and distribution expenses of $131,000, net of incometaxes, and in interest costs of $192,000, net of income taxes, also contributedto the increase in earnings.  Offsettingthese increases in earnings were additional expenses of $245,000, net of incometaxes, associated with the approval of the holding company and increases indepreciation and amortization of $122,000, net of income taxes.  Earnings for 2002 compared to 2001 wereimpacted by incremental charges for MPS’s Voluntary Early Retirement Program(“VERP”) of $242,000, net of income taxes, and expenses associated with seekingapproval for the formation of the holding company of $105,000, net of incometaxes.  MPS incurred additional expensesfor employee benefits, principally pension and medical costs, and insurancecosts, resulting in a reduction in earnings of $723,000, net of incometaxes.  In addition, consulting fees forevaluating business processes at MPS and legal expenses for regulatory affairsand compliance with provisions of the Sarbanes-Oxley Act of 2002, furtherreduced net income by $575,000, net of income taxes.  Offsetting these additional expenses was a reduction of MPS’sborrowing costs of $361,000, net of income taxes, and increased operatingrevenues for MPS of $235,000, net of income taxes, as 2002 sales were 1.4% morethan 2001 sales.

 

In2003, EA incurred a loss of $116,000 with the reduction in 2003 CES sales,compared to the two previous years, and with the termination of SOS service inCMP’s territory after February 28, 2002. EA earnings for 2002 were $3,444,000, or $2.19 per share.  As more fully explained in the “EnergyAtlantic Activities” section below, EA’s earnings include $1.89 per share representingthe recognition in September 2002, of the final settlement between EA andEngage Energy America, LLC (“Engage”) and the reversal of regulatoryassessments associated with power arrangements.  EA earnings in 2001 reflect a $1.08 million charge in accordancewith a settlement agreement with EA’s supplier for Standard Offer Service inCentral Maine Power Company’s service territory, Engage Energy America,LLC.  This charge reduced earnings pershare by $.69.

 

Returnon equity (net income divided by average shareholders’ equity) for 2003 was6.0% compared to 14.6% for 2002 and 12.7% for 2001.  The core T&D business earned a return on equity of 8% in 2003compared to 7.6% and 10.5% for 2002 and 2001, respectively.  As explained in the “Legal Proceedings”section of this Form 10-K, the MPUC authorized a return on equity of 10.25%starting November 1, 2003, compared to 10.7% prior to that date.

 

EffectiveOctober 1, 2001, the Board of Directors increased the quarterly dividend by$.03 per share from $0.32 per share to $0.35 per share, or $1.40 per share peryear.  The quarterly dividend wasincreased by $0.02 per share to $0.37 per share effective October 1, 2002, foran annual dividend payment of $1.48 per share. Effective January 1, 2004, the Board of Directors increased thequarterly dividend by $0.01 per share to $0.38 per share, for an annualdividend of $1.52 per share.

 

**Off-Balance Sheet****Arrangements**

 

Except for operating leases used for office andfield equipment, vehicles and computer hardware and software, accounted for inaccordance with Financial Accounting Standards No. 13 (“FAS 13”), “Accountingfor Leases” and

 

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noted in Footnote 12 to these financial statements,the Company has no other off-balance sheet arrangements.  See Item 16(a) of this Form 10-K, Note 12 toConsolidated Financial Statements, “Commitments, Contingencies and RegulatoryMatters,” under “Off-BalanceSheet Arrangements” for a summarizationof payments for leases for a period in excess of one year for the years endedDecember 31, 2003 and 2002.

 

**Operating Revenues and EnergyDeliveries**

 

Consolidatedrevenues and Megawatt Hours (“MWH”) delivered for the years 2003, 2002 and 2001are as follows:

 
|                                           |   | **2003**    |   | **2002** |    | **2001**    |   |
|------------------------------------------------|--------|-------------|--------|----------|---------|-------------|--------|
| **(Dollars in Thousands)**                     |   | **Dollars** |   | **MWH**  |    | **Dollars** |   | **MWH** |   | **Dollars** |   | **MWH** |   |
| Residential                                    |   | $           | 13,264 |     | 175,435 |        | $      | 12,672 |   | 169,489 |   | $ | 12,382 |   | 166,012 |   |
| Large Commercial                               |   | 4,791       |   | 165,467  |    | 4,799       |   | 166,954 |   | 4,684 |   | 160,575 |   |
| Medium Commercial                              |   | 5,292       |   | 106,073  |    | 5,166       |   | 103,840 |   | 5,242 |   | 107,207 |   |
| Small Commercial                               |   | 6,400       |   | 89,882   |    | 6,091       |   | 86,639 |   | 5,994 |   | 85,605 |   |
| Other Retail                                   |   | 788         |   | 3,357    |    | 774         |   | 3,345 |   | 767 |   | 3,309 |   |
| Total Regulated Retail                         |   | 30,535      |   | 540,214  |    | 29,502      |   | 530,267 |   | 29,069 |   | 522,708 |   |
| Energy Atlantic Competitive Energy Supply      |   | 6,064       |   | 114,405  |    | 6,899       |   | 148,072 |   | 15,771 |   | 375,768 |   |
| Total Retail                                   |   | 36,599      |   | 654,619  |    | 36,401      |   | 678,339 |   | 44,840 |   | 898,476 |   |
|                                           |   |        |   |     |    |        |   |   |   |   |   |   |   |
| Other Operating Revenues                       |   | 1,262       |   |     |    | 1,901       |   |   |   | 2,711 |   |   |   |
| Total Operating Revenues                       |   | 37,861      |   |     |    | 38,302      |   |   |   | 47,551 |   |   |   |
| Energy Atlantic Standard Offer Service  Margin |   | —      |   |     |    | 5,802       |   |   |   | 2,147 |   |   |   |
| Total Revenues                                 |   | $           | 37,861 |     |    |        | $      | 44,104 |   |   |   | $ | 49,698 |   |   |   |

 

----

** Due tothe immateriality of elimination amounts, they have been grouped withappropriate line items.*

 

For2003, regulated retail sales for MPS were 540,214 MWH compared to 530,267 MWHand 522,708 MWH in 2002 and 2001, respectively.  2003 retail sales were 1.9% higher than sales in 2002 and 3.3%higher than sales in 2001.  Residentialsales in 2003 were 3.5% higher than 2002 sales and 5.7% higher than 2001.  This increase is believed to be attributableto a colder than normal winter in 2003, as compared to 2002.

 

Salesto MPS’s large commercial customers in 2003 were 0.9% less than 2002, but 3.0%higher than 2001 sales.  Sales to MPS’slargest customer, McCain Foods, were 65,814 MWH, 0.7% less than 2002 sales of66,301 MWH, but 12.3% higher than 2001 sales of 58,629 MWH.  Sales to food processing customers, otherthan McCain Foods, in 2003 were 15,858 MWH compared to 15,831 MWH in 2002 and23,225 MWH in 2001.  The closing ofMaine Frozen Foods in 2002 was the principal reason for the reduction insales.  Sales to wood product customersin 2003 were 76,248 MWH, 1.6% less than 2002 sales of 77,495 MWH, but 4.6% morethan 2001 sales of 72,922 MWH.  Thesecustomers have benefited from the historically low interest rates and theincreased demand for new homes and home remodeling projects.

 

Salesto MPS’s medium commercial customers increased by 2,233 MWH to 106,073 MWH in2003, as compared to 103,840 MWH in 2002, but were 1,134 MWH less than 2001sales of 107,207 MWH.  Small commercialcustomer sales were 89,882 MWH, compared to sales in 2002 and 2001 of 86,639MWH and 85,605 MWH, respectively.  Theincrease in sales to these two classes of customers reflects the colder thannormal weather in 2003, as well as the general improvement of overall regionaleconomic conditions, including the retail sector.

 

TheMPUC has jurisdiction over MPS’s retail rates. On November 1, 2003, and on October 1, 2002, MPS’s rates were increasedby approximately 3% and 2% respectively. These retail rate increases included the retail portion of previouslyFERC approved transmission increases. The FERC has jurisdiction over MPS’s transmission rates,

 

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includingthe rates charged for wheeling revenues, as discussed below.  For more information on the regulatoryorders approving the recent rate increases, see Item 3, “Legal Proceedings,”Item 3 (ii) (c) and (d) of this Form 10-K.

 

Asmore fully explained in the “Energy Atlantic Activities” section below, EAprovided CES and SOS during the three-year period.  In 2001, CES sales of 375,768 MWH produced $15.8 million ofrevenues.  In 2000, with its arrangementwith Engage Energy America, LLC (“Engage”), EA provided CES service to severallarge customers, principally in southern Maine.  However, these contracts expired in 2001, resulting in reducedsales and revenues for 2002 and 2003. In addition, EA had difficulties procuring competitive energy supplies,given MPS’s conservative fiscal policies regarding risk tolerance and creditcoverage.  As a result, sales in 2002were 148,072 MWH and $6.9 million, further dropping to 2003 sales of 114,405MWH and $6.1 million in revenues.  TheSOS margin represents the net margin sales of SOS to approximately 525,000residential and small commercial customers in Central Maine Power Company’sservice territory from March 1, 2000 through February 28, 2002. As more fullyexplained in the “Energy Atlantic Activities” section below, EA was not thesuccessful bidder for providing SOS after March 1, 2002, and received a finalaccount settlement with Engage in 2002. This final account settlement with Engage, of approximately $4.6million, before income taxes, is reflected in the 2002 SOS margin of $5.8million.  In 2001, the SOS margin of$2.15 million reflects a $1.8 million before-tax charge for a contractsettlement with Engage.  As notedherein, EA has now ceased operations and no longer serves customers inMaine.  Its inactive status will remainunder review by management, and the Company intends to maintain certainlicenses in order to preserve the option of returning to the market shouldmarket conditions and other risk factors improve.

 

Otheroperating revenues in 2003 were $1,262,000 compared to $1,901,000 in 2002 and$2,711,000 in 2001.  Wheeling revenuesin 2003 were $318,000 less than 2002 and $448,000 less than 2001, reflectingthe reduction in use of MPS’s transmission system by on-system generators.  As more fully explained in Item 3 “LegalProceedings,” Item 3(ii) (b) of this Form 10-K, the MPUC, in its stranded costreview, adjusted the treatment of certain customer discounts through flexiblepricing adjustments, effective March 1, 2002. As a result, the revenues recognized from flexible pricing adjustmentsin 2003 were $335,000 less than 2002 and $1,096,000 less than 2001.

 

**Operating Expenses**

 

Forthe three-year period 2001 to 2003, unregulated energy supply, regulatedoperation and maintenance expenses and unregulated operation and maintenanceexpenses and stranded costs are as follows:

 
| **(Dollars in Thousands)**                     |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Unregulated Energy Supply – EA            |   | $        | 5,220  |     | $      | 5,533    |   | $ | 14,984 |   |
| Regulated Operation and Maintenance            |   |     |   |     |   |     |   |
| Transmission and Distribution                  |   | $        | 3,114  |     | $      | 3,334    |   | $ | 3,343 |   |
| Customer Service                               |   | 1,452    |   | 1,635    |   | 1,452    |   |
| Administrative and General                     |   | 7,857    |   | 8,076    |   | 5,616    |   |
| Total Regulated Operation and Maintenance      |   | $        | 12,423 |     | $      | 13,045   |   | $ | 10,411 |   |
| Unregulated Operation and Maintenance          |   |     |   |     |   |     |   |
| Holding Company Formation (MPS)                |   | $        | 639    |     | $      | 209      |   | $ | — |   |
| Energy Atlantic                                |   | 1,018    |   | 1,445    |   | 1,226    |   |
| MAM/MAMES                                      |   | 696      |   | —   |   | —   |   |
| Total Unregulated Operation &  Maintenance |   | $        | 2,353  |     | $      | 1,654    |   | $ | 1,226 |   |
| Stranded Costs                                 |   |     |   |     |   |     |   |
| Wheelabrator-Sherman                           |   | $        | 8,711  |     | $      | 8,308    |   | $ | 9,003 |   |
| Maine Yankee                                   |   | 2,661    |   | 3,008    |   | 3,170    |   |
| Seabrook                                       |   | 1,110    |   | 1,110    |   | 1,110    |   |
| Amortization of Gain from Asset Sale           |   | (443     | )      | (2,988   | )      | (4,863   | )      |
| Deferred Fuel and Special Discounts            |   | (3,278   | )      | (677     | )      | 840      |   |
| Total Stranded Costs                           |   | $        | 8,761  |     | $      | 8,761    |   | $ | 9,260 |   |

* *

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**Due to theimmateriality of elimination amounts, they have been grouped with appropriateline items.*

 

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Theunregulated energy supply expenses represent EA’s purchases of energy to supplytheir CES customers.  As more fullyexplained in the “Energy Atlantic Activities” section below, EA was purchasingpower from Engage Energy America, LLC (“Engage”) for a two-year period thatended on February 28, 2002.  BeginningMarch 1, 2002, for a two-year period, EA was awarded a contract by the MPUC for40% of the output (55,000 MWH) from the Wheelabrator-Sherman facility to be usedfor CES sales in northern Maine.  Inaddition, EA has a power supply arrangement with Duke Energy Trading &Marketing (“DETM”) to provide power to CES customers in southern and centralMaine.  The reduction in purchases ofenergy supply from $14,984,000 in 2001 and $5,533,000 in 2002 to $5,220,000 in2003 reflects the reduction in sales achieved by EA, as presented in the“Operating Revenues and Energy Deliveries” section above.  During 2000, the first year of deregulationin Maine, several large industrial customers purchased power from EA underone-year agreements, which expired at various times during 2001.

 

Transmissionand distribution expenses in 2003 were $3,114,000, a reduction of $220,000 fromexpenses in 2002 and $229,000 from expenses in 2001.  The reduction in tree-trimming expenses due to the “in-sourcing”of vegetation management, was the primary reason for the decrease in expensesin 2003 compared to 2002 and 2001.

 

In2003, customer service expense was $1,452,000 compared to $1,635,000 and $1,452,000for 2002 and 2001, respectively.  In2002, MPS’s charge-offs for bad debts increased by $191,000 over 2001,reflecting the bankruptcies and plant closings of several customers during2002, while 2003 approximated 2001.  Theimplementation of automatic meter reading in 2003, for approximately one thirdof our customers, helped to further reduce customer service costs compared toexpenses in 2002.

 

Administrativeand general expenses in 2001 were $5,616,000 increasing to $8,076,000 in 2002and $7,857,000 in 2003.  As more fullyexplained in the “Employee” section below, employees representing approximately7% of the workforce participated in a voluntary early retirement program(“VERP”) in 2002.  The cost of theprogram was $402,000 which was charged to fourth quarter 2002 earnings.  As more fully explained in the “LegalProceedings” section above, in early 2003 MPS filed for a rate increase.  One of the elements in the rate request wasrecovery of these VERP costs.  However,recovery of these costs was not approved by the MPUC when the program wasinstituted in 2002.  When the MPUCissued its rate orders in the fall of 2003, thereby assuring MPS of therecovery of the $402,000 in VERP costs, MPS reduced 2003 administrative andgeneral expenses.  After adjusting forthe impact of the VERP discussed above, employee benefits, principally employeeand retiree medical expenses and pension expenses were $2.1 million in 2003compared to $2.3 million in 2002 and $1.5 million in 2001.  The increases in pension expenses in 2002and 2003 reflect the lower discount rates used to determine pension liabilitiesand lower returns realized in pension investments with the sluggish investmentmarkets in 2002 and 2001.  Medical costscontinue to escalate comparable to national trends.  As mentioned in the “Employee” section below, employeecontributions have increased and retirees began contributing to help offsetescalating costs.  In 2003, regulatory,consulting and legal expenses totaled $2.1 million compared to $1,598,000 in2002 and $824,000 in 2001.  The dramaticincrease in these expenses in 2003, and 2002 over 2001, reflect costsassociated with compliance with the Sarbanes-Oxley Act of 2002; legal and rateconsulting assistance in the preparation, filing and advocacy of MPS’s rateplan filed with the MPUC during the first quarter of 2003 and approved by theMPUC in the fourth quarter of 2003; legal services associated with thepreparation, filing and advocacy concerning MPS’s federal Open AccessTransmission Tariff (“OATT”) filed in the second quarter of 2003 with a finalFERC rate order in the first quarter of 2004; the completion of transmissionand distribution, as well as information systems benchmarking audits, enablingincreased asset management, increased prioritization of capital expenditures,increased productivity and improved reliability; and finally, review offinancial strategies and financing options. MPS’s insurance expenses in 2003 increased by $168,000 over 2002 andwere $289,000 more than 2001.  Theseincreases have followed the national trends of increased premiums for propertyand casualty insurance after the terrorist attacks on September 11, 2001, andincreased Directors’ and Officers’ liability insurance costs followingcorporate scandals at several major corporations.

 

Unregulatedoperation and maintenance expenses were $2,353,000 in 2003 compared to$1,654,000 in 2002 and $1,226,000 in 2001. In late 2002, and for the first six months of 2003, MPS incurredexpenses associated with the formation of the new holding company, MAM, of$209,000 and $639,000, respectively. During 2003, EA’s

 

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operatingexpenses were $1,018,000 compared to $1,445,000 in 2002 and $1,226,000 in2001.  Expenses in 2002 were higher dueto an increase in bad debt expense, legal expenses associated with the Engagesettlement and consulting fees.  During2003, EA reduced costs with the reduction in business activity.  In July 2003, MAM began formally assessingbusiness opportunities and potential acquisition targets.  During the last six months of 2003, MAM andMAMES collectively spent $696,000 on these activities.

 

Beginningon March 1, 2000, MPS began recovering stranded costs from its retailcustomers.  As discussed in Item 3“Legal Proceedings” section, the MPUC reviewed MPS’s stranded costs andadjusted MPS’s recovery effective March 1, 2002.  MPS recognized stranded costs of $8,761,000 for 2003 and 2002 and$9,260,000 for 2001.

 

Thereduction of stranded costs in 2003 and 2002 reflects the reduction in revenuerequirements as discussed in Item 3 of the “Legal Proceedings” section.  The stranded costs for WS and Maine Yankeerepresent actual cash expenses during the year, while other costs reflect theamortization or recognition of regulatory assets and regulatory liabilities.

 

**Operating Capital and Liquidity**

 

TheCompany’s “Statements of Consolidated Cash Flows,” of the Company’sConsolidated Financial Statements as presented in Item 16(a) of this Form 10-K,reflects the Company’s liquidity and sources of operating capital.  Net income of $2.8 million for 2003generated $3.9 million in cash flow provided by operating activities.  The change in deferred regulatory and debtissuance costs of $6.8 million, principally the deferral of additional WSstranded cost, which was partially offset by an increase in deferred incometaxes of $3.6 million, and accounted for the biggest charge on cash flowcompared to prior years.  Net cash flowused for financing activities totaled $2.7 million.  During 2003, $2.9 million was paid in dividends and $3.1 millionwas used for sinking fund payments to retire long-term debt.  The dividend payment amount reflects fivequarters of dividends paid during 2003 due to timing of funding requirements.  These payments were offset by short-termborrowings of $3.35 million.  In 2003,$2.8 million of net cash flow was used for investing activities.  The Company invested $4.9 million inelectric plant and an additional $527,000 in MAMES, principally its purchase ofEastcan Consultants, Inc.  During 2003,the final $2.1 million was withdrawn from the trust account for the 2000 seriesof tax-exempt bonds for the construction of qualifying distribution property, and$525,000 was received for the partial redemption of Maine Yankee common stock.

 

In2002, net cash flows of MPS provided by operating activities were $6.9 million,while net income for the year was $6.54 million.  In 2002, $3 million ofthe gain from the 1999 sale of the generating assets was amortized, whileregulatory assets increased by $1.9 million to reflect the rate treatment ofstranded costs, which both reduced cash flows. During 2002, MPS paid $2.2 million in dividends, retired $1.2 million oflong-term debt and reduced short-term borrowings by $1.2 million, for a totalof $4.6 million used for financing activities.  In 2002, $5.9 million wasinvested in electric plant with $3.7 million withdrawn from the trust accountfor the tax-exempt bonds.  In addition, MPS received approximately $375,000for the partial redemption of its Maine Yankee common stock.  As ofDecember 31, 2002, approximately $2.1 million remained in the tax-exempt trustfund to be used for the construction of qualifying property through October2003.

 

Netcash flows provided by operating activities were $10.1 million in 2001. Net income for the year was $5.24 million.  The collection ofaccounts receivable, principally the collection by EA of the SOS servicereceivable from the escrow agent, accounted for most of the increase in cashflows from operating activities.  In2001, MPS paid $2.1 million in dividends while reducing short-term borrowingsand long-term debt by $2 million.  During 2001, MPS received $1.05 millionfrom a settlement with CMP concerning the 1999 sale of Wyman Unit No. 4, aswell as $0.5 million for a partial stock redemption from Maine Yankee.  Asmentioned above, MPS has available proceeds from the issuance of tax-exemptbonds in 2000.  During 2001, $2.0 million was withdrawn from the trustaccount for the construction of qualifying distribution property.  As ofDecember 31, 2001, approximately $5.7 million remained in the tax-exempt bondtrust fund to be used for the construction of qualifying property.  In2001, $4.7 million was spent for electric plant.

 

Foradditional information regarding construction expenditures for 2001 to 2003 andanticipated construction expenditures for 2004, see Items 16(a) of this Form10-K, Note 12 of Notes to Consolidated Financial Statements, “Commitments,Contingencies and Regulatory Matters — Construction Program.”

 

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Tosatisfy working capital requirements, MPS uses short-term borrowings from itsrevolving credit agreement of $6 million.  The agreement is secured by $6million of first mortgage bonds and its due date has been extended to June 6,2004.  In addition, on October 1, 2003, MPS executed an additional $3million line of credit with the Bank of New York.  This new facility is unsecured and will expire on March 29,2004.  MPS is currently seekingextensions of these facilities and management believes this effort will besuccessful.  Interest rates on this newfacility are comparable to the rates on the existing revolving creditagreement.  The additional facilityprovides an additional source of short-term borrowings in the event requiredborrowings exceed the existing revolving credit agreement.  At the end of 2003, MPS had $6.2 million ofshort-term debt compared to $2.8 million and $3.95 million at the end of 2002and 2001, respectively.  This short-term debt increase is a result of thelong-term repayments described above. During 2001 to 2003, the interest rates on these short-term borrowingswere below the existing prime rate.  For additional information on theshort-term credit facility, see Item 16(a) of this Form 10-K, Note 6 of theNotes to Consolidated Financial Statements, “Short-Term CreditArrangements.”  Based on current projections for 2004, the Companyestimates that operating cash flows and short-term borrowings via availablecredit facilities will be sufficient to cover MPS’s other sinking fundpayments, construction activities, and other financial obligations.

 

**Capital Resources**

 

TheCompany has the ability to raise capital through the issuance of common andpreferred stock, as approved by the stockholders at the May 30, 2003, AnnualMeeting.  The Company is authorized to issue up to 5,000,000 shares ofcommon stock.  In addition, the Company’sArticles of Incorporation authorize the issuance of 500,000 shares of preferredstock with the par value of $0.01 per share. MPS can also issue $2.5 million of first mortgage bonds and $14.3million of second mortgage bonds without bondable property additions.

 

Withthe sale of the generating assets and the use of sale proceeds to redeem debt,MPS’s long-term debt has decreased.  On January 1, 1999, MPS had $47.2million of long-term debt compared to $30.68 million at the end of 2003. MPS’s long-term debt currently consists of two series of tax-exempt bondsissued on behalf of MPS by the Maine Public Utility Financing Bank (“MPUFB”)totaling $22.6 million, and a series of bonds issued by FAME of $8.08 million,which provided MPS with the funds necessary for the up-front payment torestructure the WS PPA, as mentioned above.

 

TheMPUFB has issued its tax-exempt bonds on behalf of MPS for the construction ofqualifying distribution property.  Originally issued for $15 million andreduced with generating asset sale proceeds, the 1996 Refunding Series had$13.6 million outstanding at December 31, 2003 and is due in 2021.  OnOctober 19, 2000, the 2000 Series of bonds was issued in the amount of $9million, with these bonds due in 2025.  The proceeds of the 2000 Serieswere placed in trust to be drawn down for the reimbursement of issuance costsand for the construction of qualifying distribution property. For bothtax-exempt bond series, a long-term note was issued under a loan agreementbetween MPS and the MPUFB, with MPS agreeing to make payments to the MPUFB forthe principal and interest on the bonds.  Concurrently, pursuant to aletter of credit and reimbursement agreement, the Bank of New York hasseparately issued its direct pay letter of credit (“LOC”) for the benefit ofthe holders of each series of bonds.  Both LOC’s are due to expire in June2004.  Management is currently seeking an extension of this facility andbelieves the effort will be successful. To secure MPS’s obligations under the letter of credit and reimbursementagreement for the 1996 Refunding Series, MPS issued second mortgage bonds inthe amount of $14.4 million in June 2002.  For the 2000 series, MPS issuedfirst and second mortgage bonds, in the amounts of $5 million and $4.525million, respectively, to secure MPS’s obligation under the letter of creditand reimbursement agreement for this series.  For both series, MPS has theoption of selecting weekly, monthly, annual or term interest rateperiods.  For both series, MPS has continued to use the weekly interestrate period.  Since issuance, the average of these weekly rates was 2.99%and 1.97% for the 1996 Refunding Series and the 2000 Series,respectively.  As more fully explained in the “Legal Proceedings” sectionof this Form 10-K, in September 2003, MPS executed an interest rate swapagreement with Fleet National Bank for the remaining terms of the issues withan effective fixed rate of 4.57% for the 1996 series and 4.68% for the 2000series.  By its rate order in Docket No.2003-85, the MPUC approved the execution of the agreements and allowed recoveryof the additional interest costs.

 

OnMay 29, 1998, FAME issued $11,540,000 of its Taxable Electric RateStabilization Revenue Notes, Series 1998A (MPS) (the “Notes”) on behalf ofMPS.  The Notes were issued pursuant to, and are secured under, a TrustIndenture by and between FAME and Peoples Heritage Bank, Portland, Maine, asTrustee (“the Trustee”), for the purpose of:  (i) financing the up-frontpayment to Wheelabrator-Sherman of approximately $8.7 million, as required

 

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underan amended purchase power agreement; (ii) for the Capital Reserve Fund, asrequired by FAME under theirElectric Rate Stabilization Program; and (iii) for issuancecosts.  The Notes are limited obligations of FAME, payable solely out ofthe trust estate available under the Indenture, principally the Loan Note andLoan Agreement with MPS and the Capital Reserve Fund held by the Trustee. MPS issued $4 million of its first mortgage bonds and the MPUC alsoapproved the execution of an interest rate swap agreement with Fleet NationalBank for the remaining term of the issue with an effective fixed rate of 2.79%.

 

In accordance with rate stipulations approved by theMPUC, for ratemaking purposes, MPS is required to maintain a capital structurenot to include more than 51% common equity for the determination of deliveryrates.

 

In the order approving the reorganization of MPS andthe formation of the new holding company, Maine & Maritimes Corporation,parties stipulated to several conditions. The following relate to the availability of capital resources for MAMvia its relationship with MPS:

 

•                  MPS will not makeany loan to, or guarantee or assume any obligation of, MAM or any of itsaffiliates without prior MPUC approval.

•                  The MPUC will notplace additional restrictions, in advance, on the dividend policy of MPS.  The Board of Directors of MPS will continueto set dividend policy for MPS with due regard for the financial performance, needsand health of MPS and the maintenance of a safe, efficient and reasonablecapital structure.  Commencing on July1, 2003, if at any time MPS’s common dividend payout ratio (dividends per sharedivided by earnings per share) exceeds 1.0 (i.e. 100%) on a two-year rollingaverage basis, MPS will notify the MPUC in writing within thirty (30) days ofthe end of the calendar quarter (assuming a dividend is paid July 1, 2003, theinitial two year period shall be April 1, 2001 through March 31, 2003.)  The required notification should explain thecircumstances (extraordinary or not) of this event and the financial conditionof MPS.  Moreover, the MPUC reserved theright in the future, should financial circumstances warrant, to impose limitationson the dividend policy of MPS.

•                  Securitiesissuances by MPS will be done independently of MAM and subject to such MPUCapprovals as required.  The proceeds ofany securities issued by MPS will be used exclusively by MPS for its business.

•                  MAM’s totalnon-utility investment, excluding accumulated unregulated retained earnings,will not exceed fifty million dollars (US$50,000,000) and such amount willexclude retained earnings from EA, provided that MPS may at any time seek anenlargement of this limitation for good cause shown.

•                  Without prior MPUCapproval, MAM will not sell, pledge or otherwise transfer any common stock ofMPS.

•                  To protect andmaintain the financial integrity of the regulated utility, MPS and MAM agreedto maintain the common equity ratio of MPS at a level of not less than fortyeight percent (48%) of the total capital at all times, provided that the MPUCmay establish, for good cause shown, a lower ratio in connection with itsauthorization of a future debt issuance proposed by MPS.  Total capital is defined as the sum of thefollowing components:  common equity,preferred equity, long-term debt, current maturities long-term debt (“CMLTD”),long-term capital leases, current maturities long-term capital leases, andshort-term debt.

 

**EnergyAtlantic Activities**

 

EA’s net loss for 2003 was $116,000 compared to netincome of $3,444,000 and $897,000 for 2002 and 2001, respectively.  EA’s loss in 2003 reflects the gradualtermination of service as contracts expire in northern Maine.  The current standard offer pricing in Maine,the lack of wholesale choices and liquidity within northern Maine, and theincreased credit requirements associated with acquiring wholesale electricitysupply have hampered EA in competing for sales.  The Company maintains a conservative risk management philosophyand has limited the transactions that EA can undertake as a buyer or seller inorder to limit and mitigate potential transaction risk exposures.  EA earnings for 2002 and 2001 were impactedby settlements with its energy provider.

 

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EnergyAtlantic’s historical energy sales can be classified into two generalcategories:  Standard Offer Service (“SOS”) in CMP’s service territorywhich expired February 28, 2002, and Competitive Energy Supply (“CES”) sales toindividual retail customers within the state of Maine.  Effective February 27, 2004, EA no longerserves CES or SOS retail customers and has discontinued service.  Originally, EA obtained power for the salesin CMP’s territory under an exclusive wholesale power sales agreement withEngage Energy America, LLC.

 

Duringthe third quarter 2002, EA and Engage concluded their business relationshippursuant to the terms of their agreement. Following completion of the final scheduled audit, the final escrowdisbursements were made to EA and Engage on September 30, 2002.  As a result of the final account settlement,EA recognized the $4.8 million of additional standard offer service SOS revenueduring the third quarter of 2002 with an after-tax impact of $2.9 million, or$1.84 per share.

 

EApreviously entered into a contract for 40% of the output of the WS energyfacility for the two years beginning March 1, 2002 and expiring on February 29,2004.  The output from this take-or-pay contract amounted to approximately55,000 MWH annually and was being used to provide electricity for additionalCES sales within MPS’s service territory.  This contract was a take-or-paycontract, which carried more counterparty risk than others entered into byEA.  To mitigate this risk, EA entered into a contract with NB Power,whereby NB Power committed to buy WS output in excess of load requirements inthe MPS service territory at a rate indexed to the price of 3% Sulphur Max No.6 residential oil into New York Harbor, which was intended to reflect NBPower’s avoided cost, subject to a floor and ceiling.  All output was soldto CES customers, therefore limiting the risk that energy would be sold to NBPower.  In addition, NB Power committed to sell electricity to EA whenload exceeded WS output at a fixed on and off-peak rate.

 

Inaddition, EA had a power supply relationship with Duke Energy Trading andMarketing (“DETM”) for electricity in CMP’s service area.  In connectionwith this relationship, and certain transactions between EA and DETM, MPSprovided a contractual guarantee on behalf of EA in an aggregate amount of onemillion dollars ($1,000,000).  This guarantee was related specifically tothe delivery and/or receipt of electric power between EA and DETM.  Thisguarantee was renewed in September of 2002 for an additional year.  Effective March 21, 2003, DETM agreed towaive this credit requirement in lieu of EA’s commitment to maintain a $1million ($1,000,000) minimum bank account balance.  On January 27, 2004, EA notified DETM in writing of the impendingexpiration of the Master Service Agreement between EA and DETM on March 1,2004.  This correspondence was to notifyDETM of EA’s expiration of its commitment to maintain a $1 million ($1,000,000)minimum account balance as credit coverage.

 

Thefollowing illustrates the types of risk EA was exposed to in connection withthe contracts for supply and sales:

 

•                  Counterparty risk including the possibilityof the other parties’ failure to fulfill their contractual obligations to EAsuch as:

 

a)              Deliverability risk, referring to EA notbeing able to serve contracted load due to the supplier’s failure to provideenergy.

 

b)             Transmission risk, indicating EA’s relianceon utilities, such as the Company, Central Maine Power and BangorHydro-Electric, to physically transport energy to EA’s customers.

 

c)              Credit risk exposure, depending on EA’scustomers’ ability to pay, which may deteriorate during a general economicdownturn or when a commercial customer experiences financial difficulty.

 

•                  Market liquidity risk encompasses the risk ofbeing forced to buy or sell energy on the open market.  This would haveoccurred (1) if energy had not been available from WS, NB Power or other energysupply arrangements, while the contracted customer load must still be satisfiedor (2) if the existing customer load deteriorated and NB Power could not buythe excess power from WS, as contracted.

 

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•                  Forecasting risk exposure includes possibleinaccuracy in the estimation of energy supply requirements.  One of EA’ssuppliers required a 24-month forecast of load for each commitment to a 1 MWblock of energy.  Although there was no penalty for not using all of theenergy, EA could have been assessed a penalty for using more than the amountcontracted.

 

•                  Market-based cost risk is exposure totransactions tied to market indexes, such as the arrangement to sell excess WSpower to NB Power at a current market-indexed rate.

 

Withthe expiration of the SOS arrangement in CMP’s service territory, EA has beenadversely impacted by the decrease in revenues and correspondingly,earnings.  In 2002, EA realized SOSmargin in CMP’s service territory of approximately $5.8 million, which includedthe final account settlement discussed above.  EA had no SOS activity in2003.  On February 24, 2003, EAannounced its intent to withdraw from the northern Maine market due to the lackof profitability in that market, the lack of price differentiated electricproducts within the Maritimes and Northern Maine Independent SystemAdministrator markets, and the overall illiquidity of the wholesale powermarket, as well as other risk factors. EA continued to serve its existing contracts in northern Maine throughtheir expiration on February 27, 2004. CES sales, primarily in northern Maine, were approximately $6.1 millionin 2003.

 

EA’sdecision to withdraw from the northern Maine market not only minimized its riskprofile, but EA believed this action would substantially relieve any underlyingconcerns that could exist in connection with the issue of employeesharing and EA’s energy marketing activitieswithin MPS’s service territory.  OnFebruary 21, 2003 MPS filed with the MPUC an “Application for Exemption of Chapter304” to exempt the Company and EA from certain management restrictions thathave arisen due to this aspect of the corporate relationship.  (MPUC Docket No. 2003-122).  The proceeding is discussed above in Item 3,“Legal Proceedings” Item 3(iii)(d).  Inconnection with its announcedintent to withdraw from the retail electricity markets in northern Maine, EAceased all of its energy marketing activities in MPS’s service territory aswell as the balance of the State, effective March 1, 2003.  Currently,EA is an inactive subsidiary and management has ceased all active retail CESactivity on behalf of EA within the State of Maine until market conditions, theavailability of supply, the mandate for stringent credit requirements and riskenvironment improve.  Management willcontinue to monitor both U.S. and Canadian deregulated markets to determine theappropriate timing for possible re-entry into the deregulated retail market.

 

**Reorganization Into Holding Company******

 

OnOctober 4, 2002, MPS’s Board of Directors authorized MPS to reorganize into aholding company structure.  As a result, MPS became a wholly-ownedsubsidiary of MAM, the new holding company. Me&NB, remained a subsidiary of MPS, and will remain so until allobligations have terminated, at which time it is proposed the subsidiary may bedissolved.  The ownership of EA was alsotransferred to the holding company, MAM.  To achieve this corporatestructure, stock in MPS was exchanged for stock in the new holding companythrough a “reverse triangular merger.”  MPS undertook the reorganizationin order to maintain its focus on its core regulated business, while at thesame time positioning MAM for more diversified growth.

 

Thereorganization required the approval of the MPUC, acceptance of the S-4A registrationby the U.S. Securities and Exchange Commission, an application under the PublicUtilities Holding Company Act, and approval from the FERC under the FederalPower Act.  Among the first steps authorized by the Board was the filingof a petition for MPUC approval on October 31, 2002, and the preparation andfiling of documents necessary for other state and federal regulatoryapprovals.  Certain other regulatory and non-regulatory consents were alsoobtained in connection with MPS’s outstanding indebtedness.

 

Followingthe regulatory approval, application and registration process, MPS requestedshareholder approval for the reorganization.  Prior to MPS’s AnnualShareholder Meeting, specific details concerning the holding company wereprovided to shareholders.  Investor tours and a web cast were held priorto the 2003 Annual Shareholders Meeting to detail plans and answer specificshareholder questions.

 

Subsequentto its filing, MPS received and responded to several requests for informationfrom the MPUC and the Office of Public Advocate, an intervenor in theproceeding, and met on several occasions with interested parties.  The parties settled all issues in theproceeding, and entered a signed Stipulation formally approved by the MPUC on

 

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March26, 2003.  The text of the MPUC Order,Docket No. 2002-676 may be viewed as Exhibit 99(ao) of this Form 10-K suchinformation is incorporated in this section by this reference.  MPS also filed, on March 11, 2003, a FormS-4 Registration Statement with the Securities and Exchange Commission for“Maine & Maritimes Corporation” the entity designated as “HoldCo” in thisdisclosure.  The reorganization becameeffective June 30, 2003.

 

At MPS’s****Annual Meeting ofShareholders, held on May 30, 2003, shareholders of MPS voted to approve its plan to create aholding company structure, under MAM. Of the shares eligible to vote, 57.07% voted “For” the holding companyproposal, 10.19% voted “Against,” and 32.74% abstained or were “broker novotes.”  The reorganization wascompleted by July 1, 2003.  No change inbeneficial ownership resulted from the reorganization, which is described inmore detail in the Form S-4/A of MAM filed with the Commission on April 15, 2003and is incorporated in this section by this reference.  The filing is reviewable on the SEC’swebsite at “http://www.sec.gov/edgar” or on the MAM Investor Relations page athttp://www.maineandmaritimes.com/ corporate/1373T04_CP.PDF.

 

Underthe new holding company corporate structure, MPS became a separate subsidiaryof MAM.  EA, previously MPS’sunregulated competitive electricity supply company also became a directsubsidiary of, MAM.  Me&NB, which isan inactive Canadian company, remained a direct subsidiary of MPS.

 

Followingthe July 1, 2003 completion of the reorganization, shares of MPS common stockwere converted on the books (with no exchange of certificates) into the samenumber of shares of common stock of MAM. The MAM common stock shares are currently traded on the AMEX under theticker symbol “MAM.”

 

**Em****ployees**

 

Atthe end of 2003, the Company and its subsidiaries had the following full-timeemployees:

 

|                                                                  |   | **Employees** |       |
|-----------------------------------------------------------------------|--------|---------------|------------|
|                                                                  |   | **2003**      |       | **2002** |   |
|                                                                  |   |          |       |   |   |
| Maine & Maritimes Corporation                                     |   | 7             |       | 0 |   |
| Maine Public Service Company                                          |   | 126           |       | 146 |   |
| Energy Atlantic, LLC                                                  |   | 5             |       | 9 |   |
| Maine & New Brunswick Electrical Power  Company, Ltd              |   | 0             |       | 0 |   |
| Maricor Ltd                                                           |   | 15            |       | 0 |   |
| Maine & Maritimes Energy Services  Company, dba The Maricor Group |   | 5             |       | 0 |   |
|                                                                  |   |          |       |   |   |
| **Total**                                                             |   | **158**       | ** ** | **155** |   |

 

Sincethe generating asset sale on June 8, 1999, MPS’s Canadian subsidiary, Me&NBhas had no employees.  The Company’sconsolidated payroll costs were $7.1 million for 2003 and $7.3 million for2002.

 

Local1837 of the International Brotherhood of Electrical Workers ratified athree-year contract with MPS, effective October 1, 2002.  The agreement included wage increases of3.25%, 3.35% and 3.5% over the three-year period of the contract.

 

InNovember 2002, a Voluntary Early Retirement Program (“VERP”) was offered to employeesage fifty-nine and over, with sixteen years or more years of service.  Of the thirteen employees eligible for theprogram, ten accepted the program and retired effective January 1, 2003.  In an effort to control medical insurancecosts, employee contributions increased by approximately 45%, effective January1, 2003, and plan deductibles were increased. In addition, all retirees began contributing toward retiree medicalcoverage.

 

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**Maine Yankee**

 

MPSowns 5% of the common stock of Maine Yankee, which operated an 860 MW nuclearpower plant (the “Plant”) in Wiscasset, Maine. On August 6, 1997, the Board of Directors of Maine Yankee voted topermanently cease power operations and to begin decommissioning the Plant.

 

OnSeptember 1, 1997, Maine Yankee estimated the sum of the future payments forthe closing, decommissioning and recovery of the remaining investment in MaineYankee to be approximately $930 million, of which MPS’s 5% share would beapproximately $46.5 million.  On ninedifferent occasions dating back to December 1998, Maine Yankee has updated itsestimate of decommissioning costs based on the Settlement.  Legislation enacted in Maine in 1997 calledfor restructuring the electric utility industry and provided for recovery ofdecommissioning costs, to the extent allowed by federal regulation, through therates charged by the transmission and distribution companies.  Based on the Maine legislation andregulation precedent established by the FERC in its opinion relating to thedecommissioning of the Yankee Atomic nuclear plant, MPS believes that it isentitled to recover substantially all of its share of such costs from itscustomers and, as of December 31, 2003, is carrying on its consolidated balancesheet a regulatory asset and a corresponding liability in the amount of $17.8million, which reflects MPS’s 5% share of Maine Yankee’s September 2003 revisedestimate of the remaining decommissioning costs, less actual decommissioning paymentsmade since then, and discounted by a risk-free interest rate.

 

TheMPUC, on January 27, 2002, approved a Stipulation providing for the recovery ofstranded investment, for a two-year period from March 1, 2002 until February29, 2004, which includes MPS’s share of Maine Yankee decommissioning expenses,Maine Yankee replacement power costs, and the remaining Maine Yankeeinvestment.

 

Asof December 31, 2003, deferred fuel of $20.5 million is reflected as aregulatory asset, which includes the Maine Yankee replacement power costs, aswell as deferred WS fuel costs.

 

Inaccordance with its 1999 FERC rate case settlement, on October 21, 2003, MaineYankee filed a revised formula rate schedule with the FERC, proposing aneffective date of January 1, 2004.  Thefiling contained a revised decommissioning cost estimate and collectionschedule to assure that adequate funds are available to safely and promptlydecommission the Plant and operate and manage the independent spent fuelstorage installation (“ISFSI”). In the filing, Maine Yankee also requested achange in its billing formula and an increase in the level of collection forcertain post-retirement benefits.  Tomeet these needs, Maine Yankee proposed to collect an additional $3.77 millionper year over current decommissioning collection levels through October 2008,exclusive of any income-tax liability, for the decommissioning and spent-fuelmanagement expense, and to collect from November 2008 through October 2010, theamounts needed to replenish its Spent Fuel Trust for funds previously used forISFSI construction.  On December 19,2003, the FERC issued an order accepting the new rates effective January 1,2004, subject to refund pending a hearing. Maine Yankee believes it is entitled to recover the costs underlying theproposed new rates, but cannot predict the outcome of the rate proceeding.

 

Aspreviously reported, in May 2000, Maine Yankee terminated its decommissioningoperations contract with Stone & Webster Engineering Corp. (“Stone &Webster”) pursuant to the terms of the contract.  Stone & Webster disputed Maine Yankee’s grounds for thetermination.  In June 2000, Stone &Webster filed a voluntary petition under Chapter 11 of the United StatesBankruptcy Code with the United States Bankruptcy Court for the District ofDelaware (see Part 1, Item 3, “Legal Proceedings,” Item 3(iii)(e)).  Since the contract termination, Maine Yankeehas managed the decommissioning project itself.

 

InDecember 2001, Maine Yankee and Federal Insurance Company (“Federal”) enteredinto a settlement agreement resolving litigation between the parties, pursuantto which Federal paid Maine Yankee $44 million.  That amount represented full payment under the performance bondprovided by Federal, plus an additional amount under its payment bondreflecting certain payments previously made by Maine Yankee to subcontractorsand suppliers who had not been fully paid by Stone & Webster.  Maine Yankee deposited the payment in itsdecommissioning trust fund to offset past and future expenses resulting fromthe failures of Stone & Webster.

 

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Inaddition, Maine Yankee continued to pursue its claim for damages that wasoriginally filed against Stone & Webster and its then parent corporationsin August 2000, in the Bankruptcy Court in Delaware.  After recognizing the payment from Federal, Maine Yankee asserteda right to recover an additional $21 million in that court from the bankruptcyestates.  After extensive interim proceedings andnegotiations, in the third quarter of 2003, the major parties agreed to a jointplan of reorganization under which Maine Yankee would have an allowed claim of$20.3 million against the principal bankrupt estate, subject to certaincontingencies.  Under the plan, MaineYankee would also have a first lien on any distributions from a relatedbankrupt estate in the proceeding on any amount needed to increase its actualcash recovery to $18.5 million.  OnJanuary 13, 2004, Maine Yankee received an initial distribution of $8.4million, which it deposited in its decommissioning trust fund.  The amount of cash that Maine Yankee willactually recover on the balance of its claim remains contingent on a number offactors beyond Maine Yankee’s control that affect the amount of bankrupt estateassets ultimately available to pay the claim. Maine Yankee has settled its litigation claims against Stone &Webster’s bankruptcy estate and Envirocare in connection with Stone &Webster’s bankruptcy proceeding (see Part 1, Item 3, “Legal Proceedings,” Item3(iii)(e)).

 

Federallegislation enacted in 1987 directed the Department of Energy (“DOE”) toproceed with the studies necessary to develop and operate a permanenthigh-level waste (spent fuel) repository at Yucca Mountain, Nevada. The projecthas encountered delays, and the DOE has indicated that the permanent disposalsite is not expected to open before 2010, although originally scheduled to openin 1998.

 

Inaccordance with the process set forth in the legislation, in February 2002, theSecretary of Energy recommended the Yucca Mountain site to the President forthe development of a nuclear waste repository, and the President thenrecommended development of the site to Congress. As provided in the statutoryprocedure, the state of Nevada formally objected to the site in April 2002, andin July 2002, Congress overrode the objection. Construction of the repositoryrequires the approval of the Nuclear Regulatory Commission (“NRC”), uponapplication of the DOE, and after a public adjudicatory hearing, as well as asecond NRC approval after completion of construction to operate the facility.Maine Yankee cannot predict the timing or results of those proceedings.

 

InNovember 1997, the U.S. Court of Appeals for the District of Columbia Circuitconfirmed the obligation of the DOE under the Nuclear Waste Policy Act of 1982to take responsibility for spent nuclear fuel from commercial reactors inJanuary 1998. After an unsuccessful effort by Maine Yankee in the same court tocompel the DOE to take Maine Yankee’s spent fuel, in June 1998, Maine Yankeefiled a claim for money damages in the U.S. Court of Federal Claims for thecosts associated with the DOE’s default. In November 1998, the Court grantedsummary judgment in favor of Maine Yankee, ruling the DOE had violated itscontractual obligations, but leaving the amount of damages incurred by MaineYankee for later determination by the Court.  Since then the parties havebeen engaged in extensive discovery and resolution of pre-trial issues in thedamages phase of the proceeding.  On June 26, 2003, the Court denied threemotions for summary judgment filed by the DOE and indicated in its order thatfinal pretrial submissions were to be due at the end of September 2003, with atrial to follow shortly thereafter. However, at the end of September, the DOE requested an extension of timeto complete its discovery, which was later granted, extending the discoveryperiod to February 12, 2004.  MaineYankee is pursuing its claim for determination of damages vigorously, butcannot predict the outcome or timing of the determination.

 

Atthe same time, as an interim measure until the DOE meets its contractualobligation to dispose of Maine Yankee’s spent fuel at Yucca Mountain orelsewhere, Maine Yankee constructed an ISFSI, utilizing dry-cask storage, onthe Plant site and has completed the process of transferring the spent fuelfrom the spent-fuel pool to the individual casks and the casks to the ISFSI. Maine Yankee’s total cost of maintaining the ISFSI will be substantiallyaffected by heightened security costs and by the length of time it is requiredto operate the ISFSI before the DOE honors its contractual obligation to takethe fuel from the site.  Maine Yankee’s current decommissioning costsestimate is based on an assumption that its operation of the ISFSI will end in2023, but the actual period of operation and cost may vary.

 

OnJanuary 15, 2003, Maine Yankee notified NAC International (“NAC”), thecontractor responsible for providing for the fabrication of the spent-fuelcasks and transferring the fuel to the casks and the casks to the ISFSI, thatMaine Yankee was terminating its contract with NAC pursuant to the terms of thecontract. NAC had been experiencing financial difficulties and had requestedrelief from the terms of the contract. Maine Yankee believes that NAC had alsofailed to perform its contractual obligations in accordance with the terms ofthe contract and provide adequate assurance of its ability to do so in thefuture. NAC disputed Maine Yankee’s basis for terminating the contract andserved Maine Yankee with a demand to arbitrate the dispute and a request fordamages.  Maine Yankee, in turn, filed

 

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suitin the U.S. District Court for the District of Maine against NAC, its bondingcompany, and its parent guarantor, wherein Maine Yankee sought, among otherthings, damages due to NAC’s failure to perform.  Maine Yankee alsoentered into contracts with the major subcontractors and resumed the transferof fuel to the ISFSI under its own management.

 

InApril 2003, after extensive negotiations, the parties entered into acomprehensive settlement agreement resolving all the disputed issues andproviding for Maine Yankee to replace NAC in managing the completion of thefuel-transfer work.  The settlement included a payment for $10.4 millionto Maine Yankee to compensate Maine Yankee for higher costs incurred or to beincurred as a result of NAC’s failure to perform its contractual obligations. The payment was reflected in Maine Yankee’s second quarter 2003 results. Although the NAC dispute contributed to a slowdown in the progress of thefuel transfer work in the first quarter of 2003, since then Maine Yankee hasimplemented additional efficiencies and the pace of work has improved to apoint where it has been consistently exceeding the pre-2003 pace.  Thetransfer of spent fuel to the ISFSI was completed in the first quarter of 2004.

 

TheFederal Low-Level Radioactive Waste Policy Amendments Act, enacted in 1986,required states, either alone or in multi-state compacts, to provide for thedisposal of low-level radioactive waste generated within their borders. The states of Maine, Texas and Vermont entered into a compact for the disposalof low-level waste over a 30 year period at a then-planned facility in westTexas.

 

Theterms of the compact provided that the state of Maine would contribute $25million, payable (1) in two equal installments, the first after ratification byCongress and the second upon commencement of operation of the Texas facility,or (2) alternatively, if agreed by the three states, in accordance with theschedule for repayment of bonds issued for the development or operation of thefacility.  By statute, those costs were to be initially assessed againstMaine Yankee, as the operator of a nuclear power plant in Maine.  As required by the 1986 Act, the UnitedStates Congress ratified the compact in September 1998.  However, inOctober 1998, the Texas Natural Resource Conservation Commission denied apermit for the proposed west Texas site, and efforts to site such a facility inTexas were suspended.  Maine Yankee is shipping its low-level waste toother facilities licensed to accept such material.

 

Atits 2002 session, the Maine legislature enacted legislation providing for thewithdrawal of the state of Maine from the Texas compact pursuant to the termsof the compact.  The legislation cited the 1997 closure of the MaineYankee plant and the inability of the state of Texas to cause a disposalfacility to be built in a timely manner under the compact as the reasons forinitiating the withdrawal process.  However, in its 2003 session, theTexas legislature enacted a bill that reactivated the process of siting adisposal facility in Texas and provides for Texas to seek payment from Maine of$12.5 million under the compact.  Byletter dated September 10, 2003, the Attorney General of Texas requestedpayment of $12.5 million from the state of Maine, to which the state of Maineresponded by denying liability.  Maine Yankee believes that withdrawalfrom the compact by the state of Maine is legally justified, but cannot predictthe results of the Texas legislation on the state of Maine or Maine Yankee orof any attempt by any party to challenge the state of Maine’s withdrawal fromthe compact or to assess Maine Yankee for any payments under the compact.

 

OnFebruary 28, 2003, the Nuclear Regulatory Commission approved Maine Yankee’sLicense Termination Plan (“LTP”).  TheLTP was approved without any unexpected conditions.  In accordance with the plan accepted by the SEC, Maine Yankee hasstarted the redemption of its common stock periodically through 2008.

 

**New Accounting Pronouncements**

 

InJune 2001, the FASB issued Statement of Financial Accounting Standards No. 143,“Accounting for Asset Retirement Obligations” (“Statement 143”). Statement 143requires an entity to record the fair value of a liability for an assetretirement obligation in the period in which it is incurred and to capitalizethe cost by increasing the carrying amount of the related long-lived asset. Theliability is adjusted to its present value periodically over time, and thecapitalized cost is depreciated over the useful life of the related asset. Uponsettlement the entity either settles the obligation at its recorded amount orincurs a gain or a loss. For rate-regulated entities, any timing differencesbetween rate recovery and book expense would be deferred as either a regulatoryasset or a regulatory liability.  TheCompany’s adoption of Statement 143 as of January 1, 2003 did not have amaterial effect on its financial position or results of operations. There wasno effect on net income.  Statement 143provides that if the requirements of Statement 71 are met, a regulatoryliability should be recognized for the difference between removal costscollected in rates and actual costs incurred. As of December 31, 2003, and 2002accrued removal obligations totaling approximately $4.0 million

 

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and$3.8 million, respectively, which had previously been embedded withinaccumulated depreciation were reclassified as a regulatory liability.

 

InDecember 2003, the FASB issued FASB Interpretation No. 46R, “Consolidation ofVariable Interest Entities, an interpretation of ARB 51” (“FIN 46R”).  FIN46R provides guidance on the identification of entities for which control isachieved through means other than through voting rights (“variable interest entities”)and on the determination of when such entities are required to be included inthe consolidated financial statements of the business enterprise that holds aninterest in the variable interest entity.  This new model forconsolidation applies to an entity in which either (1) the equity investors donot have a controlling financial interest or (2) the equity investment at riskis insufficient to finance that entity’s activities without receivingadditional subordinated financial support from other parties. In addition, FIN46R requires additional related disclosures. Certain disclosure provisions ofFIN 46R apply to all financial statements issued after January 31, 2003, theconsolidation provisions apply to variable interest entities created after January31, 2003 and to variable interest entities in which an enterprise obtains aninterest after that date, and the remaining provisions, with the exception ofinterest in special purpose entities, apply at the end of the first fiscal yearor interim period ending after March 15, 2004 to variable interest entities inwhich an enterprise holds a variable interest that it acquired before February1, 2003.  Application for interest in special purpose entities is requiredfor periods after December 15, 2003.  The adoption of the requiredprovisions of FIN 46R as of December 31, 2003 did not have a material impact onthe consolidated financial statements.  The adoption of the remainingprovisions of FIN 46R is not expected to have a material impact on the consolidatedfinancial statements.

 

OnApril 30, 2003, the FASB issued Financial Accounting Standards No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“FAS 149”).  FAS 149 amends andclarifies the accounting guidance on (1) derivative instruments (includingcertain derivative instruments embedded in other contracts) and (2) hedgingactivities that fall within the scope of Financial Accounting Standards No.133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS133”).  FAS 149 amends FAS 133 toreflect decisions that were made:  aspart of the process undertaken by the Derivatives Implementation Group (“DIG”),which necessitated amending FAS 133; in connection with other projects dealingwith financial instruments; and regarding implementation issues related to theapplication of the definition of a derivative. FAS 149 also amends certain other existing pronouncements, which willresult in more consistent reporting of contracts that are derivatives in theirentirety or that contain embedded derivatives that warrant separateaccounting.  FAS 149 is effective (1)for contracts entered into or modified after September 30, 2003, with certainexceptions, and (2) for hedging relationships designated after June 30. Theguidance is to be applied prospectively. The adoption of this statement did not have a material impact on theCompany’s financial position or results of operations.

 

OnMay 15, 2003, the FASB issued Financial Accounting Standards No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity” (“FAS 150”). FAS 150 changes the accounting for certain financial instruments that,under previous guidance, could be classified as equity or “mezzanine” equity,by now requiring those instruments to be classified as liabilities (or assetsin some circumstances) in the statement of financial position.  FAS 150 requires disclosure regarding theterms of those instruments and settlement alternatives.  FAS 150 affects an entity’s classificationof the following freestanding instruments: mandatorily redeemable instruments;financial instruments to repurchase an entity’s own equity instruments;financial instruments embodying obligations that the issuer must or couldchoose to settle by issuing a variable number of its shares or other equityinstruments based solely on (a) a fixed monetary amount known at inception or(b) something other than changes in its own equity instruments.  FAS 150 does not apply to features embeddedin a financial instrument that is not a derivative in its entirety.  The guidance in FAS 150 is generallyeffective for all financial instruments entered into or modified after May 31,2003, and is otherwise effective at the beginning of the first interim periodbeginning after June 15, 2003.  Theadoption of this statement did not have a material impact on the Company.

 

**Regulatory Proceedings**

 

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

 

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**PART II**

 

**Item 7a****.****   Quantitative andQualitative Disclosures about Market Risk**

 

(a)                    The Company had material interest rate risk until MPS fixed interestrates on three variable rate debt issues on September 9, 2003 with a derivativeinterest rate swap transaction.  Asdiscussed in previous Form 8-K and 10-Q quarterly filings, MPS had partiallymitigated its risk by purchasing a 6% interest rate cap on its two tax-exemptbonds, the 1996 Series and the 2000 Series, issued on MPS’s behalf by the MainePublic Utility Financing Bank.  Theinterest rate cap on the 1996 and 2000 Series expired in November 2003.  MPS also purchased a 7% interest rate cap,which expires in 2008, for MPS’s Taxable Electric Rate Stabilization RevenueNotes issued in 1998 on its behalf by the Finance Authority of Maine(“FAME”).  Further discussion on thesedebt issues and the associated interest rate caps is contained in Item 16(a) ofthis Form 10-K, Note 8 to the Consolidated Financial Statements, “Long-TermDebt,” and is hereby incorporated by this reference.  Upon execution of the interest rate swaps on September 9, 2003,MPS effectively fixed through maturity the rates on the 1996 Series due in 2021and the 2000 Series due in 2025 at 4.57% and 4.68%, respectively.  The rate on the 1998 Notes due in 2008 wasalso fixed at 2.79% through maturity. As of December 31, 2003, the 1996 and 2000 Series and the 1998 FAMENotes had outstanding balances of $13.9 million, $9.0 million and $8.08million, respectively.  The fixed ratesare higher than the previous floating rates and continue to be as of the dateof this filing.  Although incurring noup-front cost to execute the swaps, MPS is currently incurring increased interestexpenses.  However, Management believesthat the fixing of interest rates over the terms of the debt will serve toprotect both shareholders and consumers from what it believes to be inevitableupward variable interest rate pressures. See Item 16(a) of this Form 10-K, Note 7 to the Consolidated FinancialStatements, “Accumulated Other Comprehensive Income (Loss),” which is herebyincorporated by this reference, for a discussion on the impact on MPS’sfinancial statements and further description of the interest rate swaps.

 

(b)                   The Company’s unregulated marketing subsidiary, EA was previouslyengaged in retail and wholesale energy transactions for purposes other thantrading.  This activity exposed EA to anumber of risks such as market liquidity, deliverability and credit risk.  Prior to withdrawing from retail marketingactivities EA sought to assure that risks were identified, evaluated andactively managed.  These risks aresummarized above under the section “Energy Atlantic Activities.”

 

**Item 8****.****   FinancialStatements and Supplementary Data**

 

(a)                    The following financial statements and supplementary data are includedin Item 16(a), the Company’s Consolidated Financial Statements, and areincorporated herein by this reference:

 
| Report of Independent  Auditors.                                                                                    |
|---------------------------------------------------------------------------------------------------------------------|
|                                                                                                                |
| Statements of  Consolidated Income for the years ended December 31, 2003, 2002 and 2001.                            |
|                                                                                                                |
| Statements of  Consolidated Cash Flows for the years ended December 31, 2003, 2002 and 2001.                        |
|                                                                                                                |
| Consolidated Balance Sheets  as of December 31, 2003 and 2002.                                                      |
|                                                                                                                |
| Statements  of Consolidated Common Shareholders’ Equity for the years ended December 31,  2003, 2002 and 2001. |
|                                                                                                                |
| Consolidated Statements of  Long-Term Debt as of December 31, 2003 and 2002.                                        |
|                                                                                                                |
| Notes to Consolidated Financial  Statements.                                                                        |

 

**Item 9****.****   Changes In AndDisagreements With Accountants On Accounting and Financial Disclosure**

 

None.

 

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**PART III**

 

**Item 10****.****   Directors andExecutive Officers of the Registrant**

 

Informationwith regard to the Directors of the registrant is set forth in the proxystatement of the registrant relating to its 2004 Annual Meeting ofStockholders, which information is incorporated herein by this reference.  Certain information regarding executiveofficers is set forth below and also in the proxy statement of the registrantrelating to the 2004 Annual Meeting of Stockholders, under “Compliance withSection 16(a) of the Securities and Exchange Act of 1934,” which information isincorporated by this reference.

 

**ExecutiveOfficers**

 

Theexecutive officers of the registrant are as follows:

 
| **Name**           |   |                                                                                                       |   | **Age** |   | **Office  Continuously  Held Since** |
|--------------------|--------|------------------------------------------------------------------------------------------------------------|--------|---------|--------|--------------------------------------|
|               |   |                                                                                                       |   |    |   |                                 |
| J.  Nicholas Bayne |   | President  and Chief Executive Officer                                                                     |   | 50      |   | 9/01/02                              |
|               |   |                                                                                                       |   |    |   |                                 |
| Kurt  A. Tornquist |   | Senior  Vice President and Chief Financial Officer, Treasurer                                              |   | 44      |   | 7/11/03                              |
|               |   |                                                                                                       |   |    |   |                                 |
| Larry  E. LaPlante |   | Vice  President, Chief Accounting Officer, Controller, Clerk, Assistant Treasurer  and Assistant Secretary |   | 52      |   | 7/11/03                              |
|               |   |                                                                                                       |   |    |   |                                 |
| John  P. Havrilla  |   | Vice  President, Business Development And Unregulated Businesses                                           |   | 45      |   | 11/15/02                             |
|               |   |                                                                                                       |   |    |   |                                 |
| Scott  L. Sells    |   | General  Counsel, Secretary and Assistant Clerk                                                            |   | 46      |   | 7/11/03                              |

** **

**JamesNicholas Bayne**waselected to the position of President and Chief Executive Officer of MPSeffective September 1, 2002.  He joinedMPS as President-Elect on March 18, 2002, and became President on May 15,2002.  Prior to joining MPS, Mr. Bayneserved as an executive consultant to the energy, utilities and energy-softwareindustries.  During 2001, he served asthe Chief Executive Officer and as a member of the board of directors for Aspect,LP, a Houston, Texas-based energy risk management and FASB 133 ASP softwarefirm, wholly-owned by Koch Ventures/Koch Industries.  From 2000 to 2001, he served as Senior Vice President forStrategic Advisory Services for Energy E-Comm.com, providing consultingservices to the energy and utilities industries.  From 1997 to 2000 he served as a member of executive managementand as a member of the board of directors of DukeSolutions, Inc., Duke Energy’sunregulated retail energy services company, serving as Senior Vice Presidentfor Energy Sales and Operations.  Priorto joining DukeSolutions, Mr. Bayne served as a member of executive managementand Vice President of Marketing, Economic Development and Participant Servicesfor MEAG Power, the nation’s largest electric generation and transmission jointaction agency headquartered in Atlanta, Georgia.  He also served as a member of management of Carolina Power &Light Company in Raleigh, North Carolina and began his electric utility careerwith Central Electric Power Cooperative, Inc. in Columbia, South Carolina.

 

**Kurt A.Tornquist**was electedto the position of Senior Vice President and Chief Financial Officer,Treasurer, effective July 11, 2003.  Hehas been an employee of the Company since July 1, 1992, joining MPS asAssistant Controller.  On June 1, 1994,Mr. Tornquist was appointed Controller and Assistant Treasurer.  On September 2, 2002, Mr. Tornquist wasappointed to the position of Vice President, Corporate Performance andDevelopment.  Prior to joining MPS, Mr.Tornquist held the position of Manager of Financial Accounting for a majorinternational paper corporation.  Mr.Tornquist is a graduate of the University of Maine and of Wharton’s AdvancedManagement Program and is a Certified Public Accountant.

 

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**Larry E.LaPlante**was electedto the position of Vice President, Chief Accounting Officer, Controller, Clerk,Assistant Treasurer and Assistant Secretary effective July 11, 2003.  On June 1, 1999, Mr. LaPlante was elected tothe position of Vice President, Treasurer and Chief Financial Officer and onFebruary 15, 2002, appointed Secretary and Clerk of the Company.  He has been an employee of the Company sinceNovember 4, 1983, starting as Controller.  In May 1984, he was also appointed AssistantSecretary and Assistant Treasurer until his election as Vice President,Finance, Administration and Treasurer. Mr. LaPlante is a graduate of the University of Maine and a CertifiedPublic Accountant.  Prior to joining theCompany, Mr. LaPlante spent ten years in public accounting.

 

**John P.Havrilla**was electedto the position of Vice President, Business Development and UnregulatedBusinesses, effective November 15, 2002. Mr. Havrilla also holds the position of Chief Operating Officer of TheMaricor Group, the company’s unregulated subsidiary, as well as Chief OperatingOfficer of Maricor Ltd, The Maricor Group’s unregulated Canadiansubsidiary.  Mr. Havrilla has overtwenty-three years of regulated and unregulated energy experience having servedas Vice President of Strategic and Financial Systems for Duke Energy’sunregulated retail energy services company. Prior to joining Duke Power (ultimately Duke Energy) in their mergersand acquisitions area, he spent sixteen years in positions of increasingresponsibility with New York State Electric & Gas (NYSEG).  During his career he has led the successfulacquisition and integration of nine U.S. and Canadian firms.  He is a professional engineer licensed inthe states of Maine and New York and graduated from Pennsylvania StateUniversity with a B.S. degree in electrical engineering technology.

 

**Scott L.Sells,**Esquire, ofthe law firm of Curtis Thaxter Stevens Broder & Micoleau, LLC, was electedto the position of General Counsel, Secretary and Assistant Clerk on July 11,2003.  On July 12, 2002 Mr. Sells waselected as General Counsel.  Mr. Sellshas been with Curtis Thaxter for three years, and has been a member for theentire period.  Mr. Sells entered thepractice of law in 1991 as Assistant Attorney General for the state ofColorado.  He then entered privatepractice, where his practice emphasized energy, environmental and utilitymatters.  Mr. Sells then joined DukeEnergy Corporation, in 1998, as Assistant General Counsel.  Prior to practicing law, Mr. Sells served asa geophysicist with Mobil Oil Corporation and the Amoco Production Company,where he was involved in both domestic and international oil and gas explorationand development projects.  Mr. Sellsreceived a Bachelor of Science degree in Geology from the University of RhodeIsland and received a Juris Doctorate degree and a Master’s in BusinessAdministration degree from the University of Denver, where he was an AmericanJurisprudence Award recipient.

 

Withthe exception of Mr. Sells, each executive office is a full-time position andhas been the principal occupation of each officer since first elected.  All officers were elected to serve until thenext annual election of officers and until their successors shall have beenduly chosen and qualified.  The nextannual election of officers will be on May 11, 2004.

 

Thereare no family relationships among executive officers.

 

**Item 11****.****   ExecutiveCompensation**

 

Informationfor this item is set forth in the proxy statement of the registrant relating toits 2004 Annual Meeting of Stockholders, which information is incorporatedherein by this reference.

 

**Item 12.****   SecurityOwnership of Certain Beneficial Owners and Management**

 

Informationfor this item is set forth in the proxy statement of the registrant relating toits 2004 Annual Meeting of Stockholders, which information is incorporatedherein by this reference.

 

**Item 13.********  Certain Relationships and RelatedTransactions**

 

Notapplicable.

 

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**Item 14****.****   Controls andProcedures**

 

1.                                       Evaluationof disclosure controls and procedures.

 

Based on reviews by the Company’s President and Chief Executive Officerand Senior Vice President and Chief Financial Officer of the Company’sdisclosure controls and procedures, conducted within 90 days of the filing ofthis Form 10-K, as evidenced by the certifications appearing at the end of thisForm 10-K, the aforementioned officers have concluded that the controls areworking effectively.

 

2.                                       Changesin Internal Controls

 

There have not been any significant changes in the Company’s internalcontrols or in other factors that could significantly offset these controlssubsequent to the date of their evaluation; there were also no correctiveactions with regard to significant deficiencies and material weaknesses.

 

**PART IV**

 

**Item 15****.*****  *****PrincipalAccountant Services and Fees.**

 

Informationfor this item is set forth in the proxy statement of the registrant relating toits 2004 Annual Meeting of Stockholders, which information is incorporatedherein by this reference.

 

**Item 16****.*****  *****Exhibits,Financial Statement Schedules and Reports on Form 8-K**

 

(a)                                  (1)                                  Financial Statements

 
| Report of Independent  Auditors                                                                                    |   |
|--------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                               |   |
| Statements of  Consolidated Income for years ended December 31, 2003, 2002 and 2001                                |   |
|                                                                                                               |   |
| Statements of  Consolidated Cash Flows for the years ended December 31, 2003, 2002 and 2001                        |   |
|                                                                                                               |   |
| Consolidated Balance Sheets  as of December 31, 2003 and 2002                                                      |   |
|                                                                                                               |   |
| Statements  of Consolidated Common Shareholders’ Equity for the years ended December 31,  2003, 2002 and 2001 |   |
|                                                                                                               |   |
| Consolidated Statements of  Long-Term Debt as of December 31, 2003 and 2002                                        |   |
|                                                                                                               |   |
| Notes to Consolidated Financial  Statements                                                                        |   |

 

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### **Report of Independent Auditors**

### ** **

ToThe Directors and Shareholders of

Maine& Maritimes Corporation:

 

In our opinion, the consolidated financial statementslisted in the index appearing under Item 16(a)(1) on Page 50 present fairly, inall material respects, the financial position of Maine & MaritimesCorporation and its subsidiaries at December 31, 2003 and 2002, and the resultsof their operations and their cash flows for each of the three years in theperiod ended December 31, 2003 in conformity with accounting principles generallyaccepted in the United States of America. In addition, in our opinion, the financial statement schedule listed inthe index appearing under Item 16(a)(2) on Page 82, presents fairly, in allmaterial respects, the information set forth therein when read in conjunctionwith the related consolidated financial statements.  These financial statements and financial statement schedule arethe responsibility of the Company’s management; our responsibility is toexpress an opinion on these financial statements and financial statementschedule based on our audits.  Weconducted our audits of these statements in accordance with auditing standardsgenerally accepted in the United States of America, which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

 

**PricewaterhouseCoopers LLP**

Boston, MA

February 28, 2004

 

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIES**

**Statementsof Consolidated Income**

 
|                                                        |   | **Year Ended  December 31,** |       |
|-------------------------------------------------------------|--------|------------------------------|------------|
|                                                        |   | **2003**                     |       | **2002** |   | **2001** |   |
| **Operating Revenues**                                      |   |                         |       |   |   |   |   |
| Regulated                                                   |   | $                            | 31,739,240 |   | $ | 31,401,082 |   | $ | 31,780,147 |   |
| Unregulated                                                 |   | 6,121,269                    |       | 6,901,381 |   | 15,771,033 |   |
| Unregulated SOS Margin                                      |   | 0                            |       | 5,801,670 |   | 2,146,860 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Total Revenues**                                          |   | 37,860,509                   |       | 44,104,133 |   | 49,698,040 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Operating Expenses**                                      |   |                         |       |   |   |   |   |
| Unregulated Energy Supply                                   |   | 5,219,787                    |       | 5,532,679 |   | 14,983,899 |   |
| Regulated Operation & Maintenance                       |   | 12,422,538                   |       | 13,044,531 |   | 10,411,460 |   |
| Unregulated Operation & Maintenance                     |   | 2,353,200                    |       | 1,654,264 |   | 1,226,418 |   |
| Depreciation                                                |   | 2,654,616                    |       | 2,420,215 |   | 2,502,034 |   |
| Amortization of Stranded Costs                              |   | 8,761,217                    |       | 8,761,233 |   | 9,259,657 |   |
| Amortization                                                |   | 205,846                      |       | 236,444 |   | 216,842 |   |
| Taxes Other Than Income                                     |   | 1,499,109                    |       | 1,431,245 |   | 1,344,299 |   |
| Provision for Income Taxes - Regulated                      |   | 1,929,743                    |       | 1,908,213 |   | 2,743,193 |   |
| Provision for (Benefit of) Income Taxes -  Unregulated      |   | (345,350                     | )          | 2,250,789 |   | 649,813 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Total Operating  Expenses**                               |   | 34,700,706                   |       | 37,239,613 |   | 43,337,615 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Operating Income**                                        |   | 3,159,803                    |       | 6,864,520 |   | 6,360,425 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Other Income  (Deductions)**                              |   |                         |       |   |   |   |   |
| Equity in Income of Associated Companies                    |   | 258,384                      |       | 279,514 |   | 299,299 |   |
| Interest and Dividend Income                                |   | 48,709                       |       | 157,163 |   | 167,684 |   |
| Allowance for Equity Funds Used During  Construction        |   | 45,819                       |       | 3,463 |   | 85,963 |   |
| Benefit of (Provision for) Income Taxes                     |   | (42,597                      | )          | 19,366 |   | 46,702 |   |
| Other - Net                                                 |   | (362,684                     | )          | (304,328 | ) | (432,208 | ) |
| **Total**                                                   |   | (52,369                      | )          | 155,178 |   | 167,440 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Income Before  Interest Charges**                         |   | 3,107,434                    |       | 7,019,698 |   | 6,527,865 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Interest Charges**                                        |   |                         |       |   |   |   |   |
| Long-Term Debt and Notes Payable                            |   | 1,638,098                    |       | 1,626,145 |   | 2,285,711 |   |
| Less Stranded Costs Carrying Charge                         |   | (1,322,881                   | )          | (1,076,369 | ) | (962,579 | ) |
| Less Allowance for Borrowed Funds Used  During Construction |   | (13,384                      | )          | (73,499 | ) | (31,794 | ) |
| **Total**                                                   |   | 301,833                      |       | 476,277 |   | 1,291,338 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Net Income  Available for Common Stock**                  |   | $                            | 2,805,601  |   | $ | 6,543,421 |   | $ | 5,236,527 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Basic and Diluted  Earnings Per Share of Common Stock**   |   | $                            | 1.78       |   | $ | 4.16 |   | $ | 3.33 |   |
|                                                        |   |                         |       |   |   |   |   |
| **Average Shares  Outstanding**                             |   | 1,575,066                    |       | 1,573,865 |   | 1,573,294 |   |

 

SeeNotes to Consolidated Financial Statements

 

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIES**

**Statementsof Consolidated Cash Flows**

 
|                                                                                |   | **Year Ended  December 31,** |      |
|-------------------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                                |   | **2003**                     |      | **2002** |   | **2001** |   |
| **Cash Flow From  Operating Activities**                                            |   |                         |      |   |   |   |   |
| Net Income                                                                          |   | $                            | 2,805,601 |   | $ | 6,543,421 |   | $ | 5,236,527 |   |
| Adjustments to Reconcile Net Income to Net  Cash Provided by (Used For) Operations: |   |                         |      |   |   |   |   |
| Depreciation                                                                        |   | 2,654,616                    |      | 2,420,215 |   | 2,502,034 |   |
| Amortization                                                                        |   | 205,846                      |      | 236,443 |   | 252,434 |   |
| Amortization of Seabrook Costs                                                      |   | 1,110,000                    |      | 1,110,000 |   | 1,110,000 |   |
| Amortization of Deferred Gain from Asset  Sale                                      |   | (442,777                     | )         | (2,987,500 | ) | (4,863,027 | ) |
| Deferred Income Taxes – Net                                                    |   | 3,633,737                    |      | 641,044 |   | 872,815 |   |
| Deferred Investment Tax Credits and Excess  Deferred Income Taxes                   |   | (29,728                      | )         | (30,521 | ) | (32,580 | ) |
| Allowance for Funds Used During  Construction                                       |   | (59,203                      | )         | (76,962 | ) | (117,757 | ) |
| Income on Tax-Exempt Bonds-Restricted Funds                                         |   | (8,200                       | )         | (51,277 | ) | (249,928 | ) |
| Change in Deferred Regulatory and Debt  Issuance Costs                              |   | (6,829,088                   | )         | (1,883,614 | ) | (548,257 | ) |
| Amortization of W/S Upfront Payment                                                 |   | 1,451,000                    |      | 1,451,000 |   | 1,451,000 |   |
| Change in Benefit Obligations                                                       |   | 464,236                      |      | 1,263,629 |   | (173,944 | ) |
| Change in Current Assets and Liabilities:                                           |   |                         |      |   |   |   |   |
| Accounts Receivable and Unbilled Revenue                                            |   | (276,782                     | )         | (85,518 | ) | 5,860,682 |   |
| Other Current Assets                                                                |   | (161,260                     | )         | 109,589 |   | 255,210 |   |
| Accounts Payable                                                                    |   | (145,170                     | )         | (1,503,760 | ) | (1,414,457 | ) |
| Accrued Taxes and Interest                                                          |   | (268,872                     | )         | (407,622 | ) | (342,082 | ) |
| Other Current Liabilities                                                           |   | (8,259                       | )         | 4,992 |   | 2,537 |   |
| Other - Net                                                                         |   | (226,666                     | )         | 102,689 |   | 289,079 |   |
|                                                                                |   |                         |      |   |   |   |   |
| **Net Cash Flow  Provided By Operating Activities**                                 |   | 3,869,031                    |      | 6,856,248 |   | 10,090,286 |   |
| **Cash Flow From  Financing Activities**                                            |   |                         |      |   |   |   |   |
| Dividend Payments                                                                   |   | (2,930,788                   | )         | (2,234,678 | ) | (2,060,821 | ) |
| Retirements of Long-Term Debt                                                       |   | (3,085,000                   | )         | (1,175,000 | ) | (1,050,000 | ) |
|                                                                                |   |                         |      |   |   |   |   |
| Short-Term Borrowings, Net                                                          |   | 3,349,019                    |      | (1,150,000 | ) | (950,000 | ) |
| **Net Cash Flow Used  For Financing Activities**                                    |   | (2,666,769                   | )         | (4,559,678 | ) | (4,060,821 | ) |
| **Cash Flow From  Investing Activities**                                            |   |                         |      |   |   |   |   |
| Drawdown from Tax-Exempt Bond Trust                                                 |   | 2,064,224                    |      | 3,717,467 |   | 2,012,353 |   |
| Additional Proceeds from Sale of Generating  Assets in 1999                         |   | —                       |      | — |   | 1,050,679 |   |
| Stock Redemption from Associated Company                                            |   | 524,724                      |      | 375,277 |   | 499,484 |   |
| Acquisition, Net of Cash Acquired                                                   |   | (526,502                     | )         | — |   | — |   |
| Investment in Electric Plant                                                        |   | (4,876,945                   | )         | (5,928,431 | ) | (4,707,152 | ) |
| **Net Cash Flow Used  For Investing Activities**                                    |   | (2,814,499                   | )         | (1,835,687 | ) | (1,144,636 | ) |
| **Increase (Decrease)  in Cash and Cash Equivalents**                               |   | (1,612,237                   | )         | 460,883 |   | 4,884,829 |   |
| **Cash and Cash  Equivalents at Beginning of Period**                               |   | 5,956,422                    |      | 5,495,539 |   | 610,710 |   |
| **Cash and Cash  Equivalents at End of Period**                                     |   | $                            | 4,344,185 |   | $ | 5,956,422 |   | $ | 5,495,539 |   |
| Supplemental Disclosure of Cash Flow  Information:                                  |   |                         |      |   |   |   |   |
| Cash Paid During the Period For:                                                    |   |                         |      |   |   |   |   |
| Interest                                                                            |   | $                            | 1,253,496 |   | $ | 1,119,239 |   | $ | 2,499,080 |   |
|                                                                                |   |                         |      |   |   |   |   |
| Income Taxes (2001 is net of tax refunds of  $200,000)                              |   | $                            | 785,088   |   | $ | 4,028,408 |   | $ | 1,499,654 |   |
| Non-Cash Investing Activities:                                                      |   |                         |      |   |   |   |   |
|                                                                                |   |                         |      |   |   |   |   |
| Value of stock issued for acquisition                                               |   | $                            | 193,570   |   | — |   | — |   |

* *

SeeNotes to Consolidated Financial Statements

 

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**MAINE & MARITIMES CORPORATION AND SUBSIDIARIES**

**ConsolidatedBalance Sheets**

 
|                                                                                                                   |   | **December  31,** |        |
|------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                                                                   |   | **2003**          |        | **2002** |   |
| **ASSETS**                                                                                                             |   |              |        |   |   |
| **Utility Plant**                                                                                                      |   |              |        |   |   |
| Electric Plant in Service                                                                                              |   | $                 | 92,055,256  |   | $ | 88,072,501 |   |
| Less Accumulated Depreciation                                                                                          |   | 37,618,250        |        | 35,583,430 |   |
| Net Electric Plant in Service                                                                                          |   | 54,437,006        |        | 52,489,071 |   |
| Construction Work-in-Progress                                                                                          |   | 7,752             |        | 95,921 |   |
| Total                                                                                                                  |   | 54,444,758        |        | 52,584,992 |   |
|                                                                                                                   |   |              |        |   |   |
| **Investment in  Associated Companies**                                                                                |   | 2,729,137         |        | 3,397,544 |   |
|                                                                                                                   |   |              |        |   |   |
| **Net Utility Plant  and Investments in Associated Companies**                                                         |   | 57,173,895        |        | 55,982,536 |   |
|                                                                                                                   |   |              |        |   |   |
| **Current Assets:**                                                                                                    |   |              |        |   |   |
| Cash and Cash Equivalents                                                                                              |   | 4,344,185         |        | 5,956,422 |   |
| Accounts Receivable (less allowance for  uncollectible accounts of $235,682 in 2003 and $213,882 in 2002)              |   | 6,032,244         |        | 5,429,383 |   |
| Unbilled Revenue                                                                                                       |   | 1,198,470         |        | 1,293,953 |   |
| Inventory                                                                                                              |   | 694,698           |        | 561,829 |   |
| Income Tax Refund Receivable                                                                                           |   | 229,258           |        | 216,810 |   |
| Prepayments                                                                                                            |   | 361,180           |        | 261,614 |   |
| Total                                                                                                                  |   | 12,860,035        |        | 13,720,011 |   |
|                                                                                                                   |   |              |        |   |   |
| **Regulatory Assets:**                                                                                                 |   |              |        |   |   |
| Uncollected Maine Yankee Decommissioning  Costs                                                                        |   | 17,771,344        |        | 22,153,501 |   |
| Recoverable Seabrook Costs (less  accumulated amortization and write-offs in 2003, $39,298,399 and 2002,  $38,188,399) |   | 13,888,611        |        | 14,998,611 |   |
| Regulatory Assets - SFAS 109 & 106                                                                                 |   | 6,648,074         |        | 7,161,604 |   |
| Deferred Fuel and Purchased Energy Costs                                                                               |   | 20,495,481        |        | 13,132,485 |   |
| Regulatory Asset - Power Purchase Agreement  Restructuring                                                             |   | 4,352,750         |        | 5,803,750 |   |
| Unamortized Premium on Early Retirement of  Debt                                                                       |   | 1,497,741         |        | 1,709,493 |   |
| Deferred Regulatory Costs, less accumulated  amortization                                                              |   | 1,392,118         |        | 1,409,092 |   |
|                                                                                                                   |   |              |        |   |   |
| Total                                                                                                                  |   | 66,046,119        |        | 66,368,536 |   |
|                                                                                                                   |   |              |        |   |   |
| **Other Assets**                                                                                                       |   |              |        |   |   |
| Intangible Assets                                                                                                      |   | 137,648           |        | — |   |
| Goodwill                                                                                                               |   | 404,125           |        | — |   |
| Unamortized Debt Issuance Costs                                                                                        |   | 625,075           |        | 823,213 |   |
| Restricted Investment (at cost, which  approximates market)                                                            |   | 2,378,492         |        | 4,436,879 |   |
| Miscellaneous                                                                                                          |   | 1,643,376         |        | 654,981 |   |
|                                                                                                                   |   |              |        |   |   |
| Total                                                                                                                  |   | 5,188,716         |        | 5,915,073 |   |
|                                                                                                                   |   |              |        |   |   |
| **Total Assets**                                                                                                       |   | $                 | 141,268,765 |   | $ | 141,986,156 |   |

** **

SeeNotes to Consolidated Financial Statements

 

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**MAINE & MARITIMES CORPORATION AND SUBSIDIARIES**

**Capitalizationand Liabilities**

* *
|                                                             |   | **December  31,** |        |
|------------------------------------------------------------------|--------|-------------------|-------------|
|                                                             |   | **2003**          |        | **2002** |   |
| **Capitalization (see  accompanying statements):**               |   |              |        |   |   |
| Common Shareholders’ Equity                                 |   | $                 | 46,984,490  |   | $ | 47,029,071 |   |
| Long-Term Debt                                                   |   | 29,230,000        |        | 30,680,000 |   |
| Total                                                            |   | 76,214,490        |        | 77,709,071 |   |
|                                                             |   |              |        |   |   |
| **Current  Liabilities:**                                        |   |              |        |   |   |
| Long-Term Debt Due Within One Year                               |   | 1,450,000         |        | 3,085,000 |   |
| Notes Payable to Banks                                           |   | 6,200,000         |        | 2,800,000 |   |
| Accounts Payable                                                 |   | 3,928,235         |        | 3,523,506 |   |
| Accounts Payable - Associated Companies                          |   | 27,589            |        | 248,224 |   |
| Accrued Employee Benefits                                        |   | 1,013,342         |        | 1,336,087 |   |
| Dividends Declared                                               |   | —            |        | 582,423 |   |
| Customer Deposits                                                |   | 18,944            |        | 27,202 |   |
| Taxes Accrued                                                    |   | 20,290            |        | 18,349 |   |
| Interest Accrued                                                 |   | 34,931            |        | 179,745 |   |
| Total                                                            |   | 12,693,331        |        | 11,800,536 |   |
|                                                             |   |              |        |   |   |
| **Deferred Credits  and Other Liabilities:**                     |   |              |        |   |   |
| Accrued Removal Obligations                                      |   | 4,015,121         |        | 3,848,594 |   |
| Carrying Value of Interest Rate Hedge                            |   | 1,185,000         |        | — |   |
| Uncollected Maine Yankee Decommissioning  Costs                  |   | 17,771,344        |        | 22,153,501 |   |
| Income Taxes                                                     |   | 25,044,348        |        | 22,270,998 |   |
| Accrued Post-retirement Benefits and  Pension Costs              |   | 3,461,572         |        | 3,122,030 |   |
| Investment Tax Credits                                           |   | 159,345           |        | 189,073 |   |
| Deferred Gain & Related  Accounts-Generating Asset Sale      |   | 0                 |        | 468,440 |   |
| Miscellaneous                                                    |   | 724,214           |        | 423,913 |   |
| Total                                                            |   | 52,360,944        |        | 52,476,549 |   |
|                                                             |   |              |        |   |   |
| **Commitments,  Contingencies and Regulatory Matters (Note 12)** |   |              |        |   |   |
|                                                             |   |              |        |   |   |
| **Total  Capitalization and Liabilities**                        |   | $                 | 141,268,765 |   | $ | 141,986,156 |   |

 

See Notes to Consolidated Financial Statements

 

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIES**

**Statementof Consolidated Common Shareholders’ Equity**

 
|                                                          |   | **Number of  Shares** |   | **Par Value  Issued** |   | **Paid-In  Capital** |       | **Retained  Earnings** |   | **Treasury  Stock** |   | **Accumulated  Other  Comprehensive  Income (Loss)** |       | **Total** |   |
|---------------------------------------------------------------|--------|-----------------------|--------|-----------------------|--------|----------------------|------------|------------------------|--------|---------------------|--------|------------------------------------------------------|------------|-----------|--------|
|                                                          |   |                  |   |                  |   |                 |       |                   |
|                                                          |   |                  |   |                  |   |                 |       |                   |
|                                                          |   | **Issued**            |   | **Treasury**          |   |                 |       |                   |   |                |   |
|                                                          |   |                  |   |                  |   |                 |       |                   |   |                |   |                                                 |       |      |   |   |   |
| **Balance, December 31, 2000**                                |   | 1,867,250             |   | (294,352              | )      | $                    | 13,070,750 |                   | $      | 39,668              |   | $                                                    | 33,097,712 |      | $      | (6,622,179 | ) | — |   | $ | 39,585,951 |   |
| Net Income                                                    |   |                  |   |                  |   |                 |       |                   |   | 5,236,527           |   |                                                 |       |      |   | 5,236,527 |   |
| Dividend ($1.34 per share)                                    |   |                  |   |                  |   |                 |       |                   |   | (2,108,222          | )      |                                                 |       |      |   | (2,108,222 | ) |
| Treasury Stock Reissued                                       |   |                  |   | 612                   |   | —               |       | 3,794                  |   |                |   | 13,099                                               |       | —    |   | 16,893 |   |
|                                                          |   |                  |   |                  |   |                 |       |                   |   |                |   |                                                 |       |      |   |   |   |
| **Balance, December 31, 2001**                                |   | 1,867,250             |   | (293,740              | )      | 13,070,750           |       | 43,462                 |   | 36,226,017          |   | (6,609,080                                           | )          | —    |   | 42,731,149 |   |
| Net Income                                                    |   |                  |   |                  |   |                 |       |                   |   | 6,543,421           |   |                                                 |       |      |   | 6,543,421 |   |
| Dividend ($1.44 per share)                                    |   |                  |   |                  |   |                 |       |                   |   | (2,266,372          | )      |                                                 |       |      |   | (2,266,372 | ) |
| Treasury Stock Reissued                                       |   |                  |   | 605                   |   | —               |       | 7,869                  |   |                |   | 13,004                                               |       |      |   | 20,873 |   |
|                                                          |   |                  |   |                  |   |                 |       |                   |   |                |   |                                                 |       |      |   |   |   |
| **Balance, December 31, 2002**                                |   | 1,867,250             |   | (293,135              | )      | 13,070,750           |       | 51,331                 |   | 40,503,066          |   | (6,596,076                                           | )          | —    |   | 47,029,071 |   |
| Formation of MAM June 30, 2003                                |   | (292,668              | )      | 292,668               |   | (2,048,676           | )          | (52,891                | )      | (4,484,305          | )      | 6,585,872                                            |       | —    |   | — |   |
| New Stock Issued                                              |   | 5,930                 |   | 467                   |   | 41,510               |       | 167,285                |   |                |   | 10,204                                               |       |      |   | 218,999 |   |
| Net Income                                                    |   |                  |   |                  |   |                 |       |                   |   | 2,805,601           |   |                                                 |       |      |   | 2,805,601 |   |
| Other Comprehensive Income (Loss):                            |   |                  |   |                  |   |                 |       |                   |   |                |   |                                                 |       |      |   |   |   |
| Changes in Value of Foreign Exchange Translation  Gain (Loss) |   |                  |   |                  |   |                 |       |                   |   |                |   |                                                 |       | (8,815    | )      | (8,815 | ) |
| Interest Rate Hedge, Net of Tax Benefit of  $473,000          |   |                  |   |                  |   |                 |       |                   |   |                |   |                                                 |       | (712,000  | )      | (712,000 | ) |
| Dividend ($1.49 per share)                                    |   |                  |   |                  |   |                 |       |                   |   | (2,348,366          | )      |                                                 |       |      |   | (2,348,366 | ) |
|                                                          |   |                  |   |                  |   |                 |       |                   |   |                |   |                                                 |       |      |   |   |   |
| **Balance, December 31, 2003**                                |   | 1,580,512             |   | —                |   | $                    | 11,063,584 |                   | $      | 165,725             |   | $                                                    | 36,475,996 |      | $      | — |   | $ | (720,815 | ) | $ | 46,984,490 |   |
|                                                               |        |                       |        |                       |        |                      |            |                        |        |                     |        |                                                      |            |           |        |  |  |  |  |  |  |  |  |

 

SeeNotes to Consolidated Financial Statements.

 

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIES**

**Statementof Long-Term Debt**

 
| **(Maine Public Service Company)**                                                                          |   | **2003**   |       | **2002**   |   |
|-------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| First Mortgage and Collateral Trust Bonds:                                                                  |   |       |       |       |   |
| 7.95% Due Serially through 2003-Interest  Payable, March 1 and September 1                                  |   | $          | —     |       | $      | 1,800,000 |   |
|                                                                                                        |   |       |       |       |   |
| Maine Public Utility Financing Bank, Public  Utility Revenue Bonds:                                         |   |       |       |       |   |
| Refunding Series 1996:  Due 2021 - Variable Interest Payable  Monthly  (1.20% as of December 31, 2003) |   | 13,600,000 |       | 13,600,000 |   |
| Series 2000:  Due 2025 - Variable Interest Payable Monthly  (1.20% as of December 31, 2003)            |   | 9,000,000  |       | 9,000,000  |   |
|                                                                                                        |   |       |       |       |   |
| Finance Authority of Maine:                                                                                 |   |       |       |       |   |
| 1998 Taxable Electric Rate Stabilization                                                                    |   |       |       |       |   |
| Revenue Notes: Due 2008 - Variable Interest  Payable Monthly  (1.15% as of December 31, 2003)               |   | 8,080,000  |       | 9,365,000  |   |
|                                                                                                        |   |       |       |       |   |
| Total Outstanding                                                                                           |   | 30,680,000 |       | 33,765,000 |   |
|                                                                                                        |   |       |       |       |   |
| Less - Amount Due Within One Year                                                                           |   | 1,450,000  |       | 3,085,000  |   |
|                                                                                                        |   |       |       |       |   |
| **Total**                                                                                                   |   | $          | 29,230,000 |       | $      | 30,680,000 |   |

 

CurrentMaturities and Redemption Requirements for the Succeeding Five Years andThereafter Are as Follows:

 
| Long-Term Debt: |   |   |       |
|-----------------|--------|--------|------------|
|            |   |   |       |
| 2004            |   | $      | 1,450,000  |   |
| 2005            |   | $      | 1,625,000  |   |
| 2006            |   | $      | 1,830,000  |   |
| 2007            |   | $      | 2,055,000  |   |
| 2008            |   | $      | 1,120,000  |   |
|            |   |   |       |
| Thereafter      |   | $      | 22,600,000 |   |

 

SeeNotes to Consolidated Financial Statements.

 

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**NOTES TOCONSOLIDATED**

**FINANCIAL STATEMENTS**

 

1.  ACCOUNTING POLICIES

 

### **Consolidation and Basis of Presentation**

Theaccompanying consolidated financial statements include the accounts of Maine& Maritimes Corporation (the “Company” or “MAM”) and the followingwholly-owned active subsidiaries and affiliates:

•                  Maine Public Service Company (“MPS”),regulated transmission and distribution company and its wholly-owned inactiveCanadian subsidiary, Maine and New Brunswick Electrical Power Company, Limited,(“Me&NB”);

•                  Energy Atlantic, LLC (“EA”), unregulatedcompetitive electricity marketing subsidiary, which was owned by MPS until June30, 2003;

•                  Maine & Maritimes Energy Services Company(“MAMES”) dba “The Maricor Group” and its wholly-owned Canadian subsidiary,Maricor, Ltd, (“Maricor”) providing energy management and engineering services.

 

MAM,a holding company organized effective June 30, 2003, owns all of the commonstock of MPS.  All of the shares of MPScommon stock were converted into an equal number of shares of MAM common stock,which are listed on the American Stock Exchange under the symbol MAM.  The reorganization was approved by MPS’s shareholdersat the annual meeting on May 30, 2003. The U.S. Securities and Exchange Commission (“SEC”) had previouslyaccepted MAM’s S-4A Registration Statement for registration and otherappropriate state and federal regulatory agencies issued the necessaryapprovals on various dates in 2003. Amounts shown for 2002 and 2001 were reported by MPS.  MPS also reported amounts in the first threemonths of 2003.

 

MAMESand Maricor were organized on November 6, 2003, and November 12, 2003,respectively.  On December 1, 2003,Maricor acquired a mechanical and electrical engineering firm located in NewBrunswick, Canada.

 

Allinter-company transactions between MAM and it subsidiaries have been eliminatedin consolidation.

 

Thefinancial statements of the Company were prepared in accordance with accountingprinciples generally accepted in the United States of America.

 

**Regulations**

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

 

**Estimates**

Thepreparation of financial statements in conformity with generally acceptedaccounting principles asserted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

 

**Foreign Currency Translation**

Thefunctional currency of Me&NB and Maricor is the U.S. dollar.  Accordingly, translation gains and lossesare included in other income.  Incomeand expenses are translated at rates of exchange prevailing at the time theincome is earned or the expenses are incurred. Assets and liabilities are translated at year-end exchange rates.

 

**Deferred Fuel and Purchased Energy Costs**

CertainWheelabrator-Sherman (“WS”) fuel costs and the sharing provisions for MaineYankee replacement power costs were deferred for future recovery as defined inMPS’s rate plan until March 1, 2000. All other fuel and purchased power costs were expensed as incurred.  These costs are currently being recovered inrates and the related deferred asset is being amortized, accordingly.  Beginning March 1, 2002, the excess of thecost over the sales price of WS fuel is being deferred.  The resulting deferred asset is expected tobe collected in future rates as approved by the MPUC.  See Note 12, “Commitments, Contingencies and Regulatory Matters,”regarding MPUC rate orders on the recovery of stranded costs.

 

**Regulatory Assets and Liabilities**

Pursuantto Statement of Financial Accounting Standards No. 71, Accounting for theEffects of Certain Types of Regulation, the Company capitalizes, as regulatoryassets, incurred and accrued costs that are probable of recovery in futureelectric rates. It also records, as regulatory liabilities, obligations torefund previously collected revenue or to spend revenue collected fromcustomers on future costs.

 

Unfundedfuture income taxes and deferred income taxes are amortized as the relatedtemporary differences reverse. Unamortized loss on debt re-acquisitions isamortized over the lives of the related debt issues. Nuclear plant obligations,demand-side management program 

 

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costs,gain on sale of generation assets, other regulatory assets and other regulatoryliabilities are amortized over various periods in accordance with MPS’s currentrate plans. MPS earns a return on substantially all regulatory assets for whichfunds have been spent.

 

TheCompany believes that MPS’s electric transmission and distribution operationscontinue to meet the requirements of SFAS 71, and that regulatory assetsassociated with those operations, as well as any generation-related costs thatthe MPUC has determined to be recoverable from ratepayers, also meet thecriteria.  At December 31, 2003, $66.0million of regulatory assets remained on MPS’s books.  These assets will be amortized over various periods in accordancewith MPUC approved rate orders.

 

**Revenue Recognition**

Operatingrevenues include MPS’s sales billed on a cycle billing basis and estimatedunbilled revenues for electric service rendered prior to the normal billingcycle.  Operating revenues also includeEA’s Competitive Electricity Supply (“CES”) sales, since CES activity isrecorded on a gross basis to include the related revenues and purchased powerexpenses.  CES sales are recorded inthis manner because EA negotiated the price directly with the customer,maintains customer service responsibility and has collection risk.  For Standard Offer Service (“SOS”), revenueswere received and expenses were paid directly by an escrow agent which wascontrolled by Engage Energy America, LLC (“Engage”).  EA received a percentage of the net profit from the sale ofenergy.  The utilities bore SOS accountcollection risk, as they were required to remit the amounts billed 26 daysafter the billing date to the escrow account mentioned above and maintain thebilling and customer service relationship. EA recorded the accrued net margin of the SOS activity as revenue in thefinancial statements.  Additionally,EA’s activity has been accounted for as non-trading since management hasdetermined it does not meet the definition of a trader as defined in EITF98-10, as modified by EITF 02-03.

 

InJuly, 2000, MPS began recording the difference between the approved tariff ratefor two large industrial customers and their current special discount rates,under contracts approved by the MPUC, as accrued revenue.  The resulting deferred asset will besubsequently collected in rates as approved by the MPUC, and during 2003 and2002, $280,000 and $233,000 were recognized as stranded costs.  During 2002 and 2001, $200,000 and $961,000,respectively, were recognized as revenue as flexible pricing adjustments, asdescribed in Note 12, “Commitments, Contingencies and Regulatory Matters — MPUCApproves Elements of Rates Effective March 1, 2000, and MPUC Approves StrandedCost Revenue Requirements Effective March 1, 2002.”

 

**Utility Plant**

Utilityplant for MPS is stated at original cost of contracted services, direct laborand materials, as well as related indirect construction costs including generalengineering, supervision, and similar overhead items and allowances for thecost of equity and borrowed funds used during construction (“AFUDC”).  The cost of utility plant which is retiredis charged to accumulated depreciation. The cost of removal less salvage is charged to Accrued RemovalObligations.  The cost of maintenanceand repairs, including replacement of minor items of property, are charged tomaintenance expense as incurred.  MPS’sproperty, with minor exceptions, is subject to first and second mortgage liens.

 

Costswhich are disallowed or are expected to be disallowed for recovery throughrates are charged to expense at the time such disallowance is probable.

 

**Depreciation and Amortization**

Utilityplant depreciation is provided on composite basis using the straight-linemethod, based on rates approved by the MPUC and the FERC.  The composite depreciation rate, expressedas a percentage of average depreciable plant in service, was approximately3.20%, 3.10% and 3.37% for 2003, 2002, and 2001, respectively.

 

Bondissuance costs and premiums paid upon early retirements are amortized over theterms of the related debt.  RecoverableSeabrook costs and deferred regulatory expenses are amortized over the periodallowed by regulatory authorities in the related rate orders.  Recoverable Seabrook costs are being amortizedprincipally over thirty years (See Note 12, “Commitments, Contingencies andRegulatory Matters – Seabrook Nuclear Power Project”).

 

**Income Taxes**

Statementof Financial Accounting Standards No. 109 (“SFAS 109”), “Accounting for IncomeTaxes,” requires an asset and liability approach to accounting and reportingincome taxes.  SFAS No. 109 prohibitsnet-of-tax accounting and requires the establishment of deferred taxes on alldifferences between the tax basis of assets or liabilities and their basis forfinancial reporting.

 

MPShas deferred investment tax credits and amortizes the credits over theremaining estimated useful life of the related utility plant.

 

MPSrecords regulatory assets or liabilities related to certain deferred taxliabilities or assets, representing its expectation that, consistent withcurrent and expected ratemaking, these taxes will be recovered from or returnedto customers through future rates.

 

**Investments in Associated Companies**

MPSrecords its investments in Associated Companies (see Note 5, “Investments inAssociated Companies”) using the equity method.

 

**Pledged Assets**

Thecommon stock of Me&NB is pledged as additional collateral for the first andsecond mortgage and collateral trust bonds of MPS.

 

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**Inventory**

Inventoryfor MPS is stated at average cost.

 

**Cash and Cash Equivalents**

Forpurposes of the Statements of Consolidated Cash Flows, the Company considersall highly liquid securities with a maturity, when purchased, of three monthsor less to be cash equivalents.

 

**Goodwill**

Theexcess of the cost over fair value of net assets of purchased businesses isrecorded as goodwill.  The Companyevaluates the carrying value of goodwill for impairment at least annually and onan interim basis if there are indications that goodwill might be impaired. Anyimpairments would be recognized when the fair value of goodwill is less thanits carrying value.

 

**Financial Instruments**

MPShas certain financial instruments, interest rate caps and swaps, on threevariable rate long-term debt issues that qualify as derivatives.  Interest rate caps involve the exchange ofcash for a cap on the interest rate MPS can be charged.  Interest rate swaps involve the exchange ofcash and the exchange of a variable rate payment for a fixed rate payment.  On January 1, 2001, the Company adoptedStatement of Financial Accounting Standards No. 133, “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS 133”), as amended by SFAS 137, 138and 149, which establishes accounting and reporting standards for derivativeinstruments and for hedging activities. SFAS 133 requires that an entity recognize derivatives as either assetsor liabilities on the balance sheet and measure those instruments at fairvalue.  The accounting for changes inthe fair value of the derivative depends on the intended use of the derivativeand the resulting designation.  See Note7, “Accumulated Other Comprehensive Income (Loss)” for additional disclosureregarding the treatment of these interest rate instruments.

 

## **Stock Option Plan**

At December 31, 2003, the Company had one stock-based employeecompensation plan, which is described more fully in Note 9, “Stock CompensationPlan.”  The Company accounts for thisplan in accordance with the expense provisions of Statement of FinancialAccounting Standards (“SFAS”) No. 123 “Accounting for Stock BasedCompensation.”

 

**Reclassifications**

Certainreclassifications have been made to the 2002 and 2001 financial statementamounts in order to conform to the 2003 presentation.

 

**Earnings Per Share**

Basicearnings per share (“EPS”) is determined by dividing net income by theweighted-average number of shares of common stock outstanding during theperiod.  The weighted-average commonshares outstanding for diluted EPS include the incremental effect of stockoptions issued.  There was no differencebetween basic and diluted earnings per share for the three years in the periodended December 31, 2003.  Options topurchase shares of common stock of 5,250 shares at $30.45 per share grantedJune 1, 2002 and 5,250 shares at $32.51 per share granted June 1, 2003.  These options to purchase shares were notincluded in the computation of diluted EPS because the options’ exercise pricewas approximately equal to the market price of the common shares and,therefore, the effect would be anti-dilutive. The options, which expire on May 30, 2012 and May 30, 2013,respectively, were still outstanding at the end of year 2003.

 

**Accounting Pronouncements**

InJune 2001, the FASB issued Statement of Financial Accounting Standards No. 143,“Accounting for Asset Retirement Obligations” (“Statement 143”).  Statement 143 requires an entity to recordthe fair value of a liability for an asset retirement obligation in the periodin which it is incurred and to capitalize the cost by increasing the carryingamount of the related long-lived asset. The liability is adjusted to itspresent value periodically over time, and the capitalized cost is depreciatedover the useful life of the related asset. Upon settlement the entity eithersettles the obligation at its recorded amount or incurs a gain or a loss. Forrate-regulated entities, any timing differences between rate recovery and bookexpense would be deferred as either a regulatory asset or a regulatoryliability.  The Company’s adoption ofStatement 143 as of January 1, 2003 did not have a material effect on itsfinancial position or results of operations. There was no effect on net income.  Statement 143 provides that if the requirementsof Statement 71 are met, a regulatory liability should be recognized for thedifference between removal costs collected in rates and actual costs incurred.As of December 31, 2003 and 2002, accrued removal obligations totalingapproximately $4.0 million and $3.8 million, respectively, which had previouslybeen embedded within accumulated depreciation were reclassified as a regulatoryliability.

 

In December 2003, the FASB issued FASB Interpretation No. 46R,“Consolidation of Variable Interest Entities, an interpretation of ARB 51”(“FIN 46R”).  FIN 46R provides guidance on the identification of entitiesfor which control is achieved through means other than through voting rights(“variable interest entities”) and on the determination of when such entitiesare required to be included in the consolidated financial statements of thebusiness enterprise that holds an interest in the variable interest entity. This new model for consolidation applies to an entity in which either (1)the equity investors do not have a controlling financial interest or (2) theequity investment at risk is insufficient to finance that entity’s activitieswithout receiving additional subordinated financial support from other parties.In addition, FIN 46R requires additional related disclosures. Certaindisclosure provisions of FIN 46R apply to all financial statements issued afterJanuary 31, 2003, the consolidation provisions apply to variable interestentities created after January 31, 2003 and to variable interest entities inwhich an enterprise obtains an interest after that date, and the remainingprovisions, with the exception of interest in special purpose entities, applyat the end of the first fiscal year or interim period ending after March 15,2004 to variable interest entities in which an 

 

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enterprise holds a variable interest that it acquired before February1, 2003.  Application for interest in special purpose entities is requiredfor periods after December 15, 2003.  The adoption of the requiredprovisions of FIN 46R as of December 31, 2003 did not have a material impact onthe consolidated financial statements.  The adoption of the remainingprovisions of FIN 46R is not expected to have a material impact on theconsolidated financial statements.

 

OnApril 30, 2003, the FASB issued Financial Accounting Standards No. 149,“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“FAS 149”).  FAS 149 amends andclarifies the accounting guidance on (1) derivative instruments (includingcertain derivative instruments embedded in other contracts) and (2) hedgingactivities that fall within the scope of Financial Accounting Standards No.133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS133”).  FAS 149 amends FAS 133 toreflect decisions that were made:  aspart of the process undertaken by the Derivatives Implementation Group (“DIG”),which necessitated amending FAS 133; in connection with other projects dealingwith financial instruments; and regarding implementation issues related to theapplication of the definition of a derivative. FAS 149 also amends certain other existing pronouncements, which willresult in more consistent reporting of contracts that are derivatives in theirentirety or that contain embedded derivatives that warrant separateaccounting.  FAS 149 is effective (1)for contracts entered into or modified after September 30, 2003, with certainexceptions, and (2) for hedging relationships designated after June 30. Theguidance is to be applied prospectively. The adoption of this statement did not have a material impact on theCompany’s financial position or results of operations.

 

OnMay 15, 2003, the FASB issued Financial Accounting Standards No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity” (“FAS 150”). FAS 150 changes the accounting for certain financial instruments that,under previous guidance, could be classified as equity or “mezzanine” equity,by now requiring those instruments to be classified as liabilities (or assetsin some circumstances) in the statement of financial position.  FAS 150 requires disclosure regarding theterms of those instruments and settlement alternatives.  FAS 150 affects an entity’s classificationof the following freestanding instruments: mandatorily redeemable instruments;financial instruments to repurchase an entity’s own equity instruments;financial instruments embodying obligations that the issuer must or couldchoose to settle by issuing a variable number of its shares or other equityinstruments based solely on (a) a fixed monetary amount known at inception or(b) something other than changes in its own equity instruments.  FAS 150 does not apply to features embeddedin a financial instrument that is not a derivative in its entirety.  The guidance in FAS 150 is generallyeffective for all financial instruments entered into or modified after May 31,2003, and is otherwise effective at the beginning of the first interim periodbeginning after June 15, 2003.  Theadoption of this statement did not have a material impact on the Company.

 

2.  INCOME TAXES

Asummary of Federal, Canadian and State income taxes charged (credited) toincome is presented below.  Foraccounting and ratemaking purposes, income tax provisions included in“Operating Expenses” reflect taxes applicable to revenues and expensesallowable for ratemaking purposes on MPS regulated activities and unregulatedactivities for MAM, MAMES, Me&NB and Maricor.  The tax effect of items not included in rate base or normaloperating activities is allocated as “Other Income (Deductions).”

 
|                          |   | **2003**  |      | **2002**  |   | **2001**  |   |
|-------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| Current income taxes          |   | $         | 760,532   |      | $      | 3,473,150 |   | $ | 2,489,429 |   |
| Deferred income taxes         |   | 896,186   |      | 697,007   |   | 889,455   |   |
| Investment credits, net       |   | (29,728   | )         | (30,521   | )      | (32,580   | )      |
| Total income taxes            |   | $         | 1,626,990 |      | $      | 4,139,636 |   | $ | 3,346,304 |   |
| Allocated to:                 |   |      |      |      |   |      |   |
| Operating income              |   |      |      |      |   |      |   |
| •  Regulated   |   | $         | 1,929,743 |      | $      | 1,908,213 |   | $ | 2,743,193 |   |
| •  Unregulated |   | (345,350  | )         | 2,250,789 |   | 649,813   |   |
| Total                         |   | 1,584,393 |      | 4,159,002 |   | 3,393,006 |   |
| Other income                  |   | 42,597    |      | (19,366   | )      | (46,702   | )      |
| Total                         |   | $         | 1,626,990 |      | $      | 4,139,636 |   | $ | 3,346,304 |   |

 

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

 
|                                       |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Statutory rate                             |   | 34.0     | %      | 34.0     | %      | 34.0     | %      |
| Holding Company Formation                  |   | 2.2      |   | —   |   | —-  |   |
| Amortization of recoverable Seabrook costs |   | 4.9      |   | 2.1      |   | 2.6      |   |
| State income taxes                         |   | 5.2      |   | 5.6      |   | 5.6      |   |
| Carrying Charge                            |   | (10.2    | )      | (3.4     | )      | (3.8     | )      |
| Other                                      |   | .6       |   | .5       |   | .6       |   |
| Effective rate                             |   | 36.7     | %      | 38.8     | %      | 39.0     | %      |

 

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Theelements of deferred income tax expense (credit) are as follows (dollars inthousands):

 
|                                               |   | **2003**   |       | **2002**   |   | **2001** |   |
|----------------------------------------------------|--------|------------|------------|------------|--------|----------|--------|
| Temporary Differences at Statutory Rates:          |   |       | ** ** |       |   |     |   |
| Seabrook – costs                              |   | **$**      | **(186**   | **)**      | $      | (186     | )      | $ | (186 | ) |
| Liberalized depreciation                           |   | **467**    | ** ** | 289        |   | 118      |   |
| Deferred fuel                                      |   | **1,420**  | ** ** | 22         |   | (332     | )      |
| Deferred regulatory expense                        |   | **239**    | ** ** | (25        | )      | (27      | )      |
| Flexible pricing revenue                           |   | **(104**   | **)**      | 32         |   | 383      |   |
| Accrued pension and post-retirement  benefits      |   | **(132**   | **)**      | (404       | )      | 101      |   |
| Wheelabrator-Sherman power purchase  restructuring |   | **(579**   | **)**      | (579       | )      | (579     | )      |
| Generating Asset Sale                              |   | **178**    | ** ** | 1,187      |   | 1,538    |   |
| Reacquired debt                                    |   | **(85**    | **)**      | (85        | )      | (101     | )      |
| Maine Yankee NEIL Refund                           |   | **—** | ** ** | 401        |   | —   |   |
| Other                                              |   | **(322**   | **)**      | 45         |   | (26      | )      |
| Total temporary differences - statutory  rates     |   | **$**      | **896**    | ** ** | $      | 697      |   | $ | 889 |   |

 

TheCompany has not accrued U.S. income taxes on the undistributed earnings ofMe&NB, as the withholding taxes due on the distribution of any remainingamount would be principally offset by foreign tax credits.  No dividends were received from Me&NB in2003, 2002 or 2001.

 

Thefollowing summarizes accumulated deferred income tax (assets) and liabilitiesestablished on temporary differences under SFAS 109 as of December 31, 2003 and2002:

 

|                                  |   | **(Dollars  in Thousands)** |   |
|---------------------------------------|--------|-----------------------------|--------|
|                                  |   | **2003**                    |   | **2002** |   |
|                                  |   |                        |   |   |   |
| Seabrook                              |   | $                           | 7,577  |   | $ | 8,428 |   |
| Property                              |   | 7,784                       |   | 7,084 |   |
| Flexible pricing revenue              |   | 608                         |   | 567 |   |
| Deferred fuel                         |   | 8,176                       |   | 4,162 |   |
| Generating asset sale                 |   | —                      |   | (178 | ) |
| Wheelabrator-Sherman up-front payment |   | 1,736                       |   | 2,315 |   |
| Pension and post-retirement benefits  |   | (610)                       |   | (478 | ) |
| OCI-Interest Rate Hedge               |   | (473                        | )      | — |   |
| Other                                 |   | 246                         |   | 371 |   |
| Net accumulated deferred income taxes |   | $                           | 25,044 |   | $ | 22,271 |   |

 

3.  ENERGY ATLANTIC

 

EA’s net loss for 2003 was $116,000 compared to netincome of $3,444,000 and $897,000 for 2002 and 2001, respectively.  EA’s loss in 2003 reflects the gradualtermination of service as contracts expire in northern Maine.  The current standard offer pricing in Maine,the lack of wholesale choices and liquidity within northern Maine, and theincreased credit requirements associated with acquiring wholesale electricitysupply have hampered EA in competing for sales.  The Company maintains a conservative risk management philosophyand has limited the transactions that EA can undertake as a buyer or seller inorder to limit and mitigate potential transaction risk exposures.  EA earnings for 2002 and 2001 were impactedby settlements with its energy provider.

 

EnergyAtlantic’s historical energy sales can be classified into two generalcategories:  Standard Offer Service (“SOS”) in CMP’s service territorywhich expired February 28, 2002, and Competitive Energy Supply (“CES”) sales toindividual retail customers within the state of Maine.  Effective February 27, 2004, EA no longerserves CES or SOS retail customers and has discontinued service.  Originally, EA obtained power for the salesin CMP’s territory under an exclusive wholesale power sales agreement withEngage Energy America, LLC.

 

Duringthe third quarter 2002, EA and Engage concluded their business relationshippursuant to the terms of their agreement. Following completion of the final scheduled audit, the final escrowdisbursements were made to EA and Engage on September 30, 2002.  As a result of the final account settlement,EA recognized the $4.8 million of additional standard offer service SOS revenueduring the third quarter of 2002 with an after-tax impact of $2.9 million, or$1.84 per share.

 

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EApreviously entered into a contract for 40% of the output of the WS energyfacility for the two years beginning March 1, 2002 and expiring on February 29,2004.  The output from this take-or-pay contract amounted to approximately55,000 MWH annually and was used to provide electricity for additional CESsales within MPS’s service territory.  This contract was a take-or-paycontract, which carried more counterparty risk than others entered into by EA. To mitigate this risk, EA entered into a contract with NB Power, whereby NBPower committed to buy WS output in excess of load requirements in MPS’sservice territory at a rate indexed to the price of 3% Sulphur Max No. 6residential oil into New York Harbor, which was intended to reflect NB Power’savoided cost, subject to a floor and ceiling.  All output was sold to CEScustomers, therefore limiting the risk that energy would be sold to NBPower.  In addition, NB Power committed to sell electricity to EA whenload exceeded WS output at a fixed on and off-peak rate.

 

Inaddition, EA had a power supply relationship with Duke Energy Trading andMarketing (“DETM”) for electricity in CMP’s service area.  In connectionwith this relationship, and certain transactions between EA and DETM, MPSprovided a contractual guarantee on behalf of EA in an aggregate amount of onemillion dollars ($1,000,000).  This guarantee was related specifically tothe delivery and/or receipt of electric power between EA and DETM.  Thisguarantee was renewed in September of 2002 for an additional year.  Effective March 21, 2003, DETM agreed towaive this credit requirement in lieu of EA’s commitment to maintain a $1million ($1,000,000) minimum bank account balance.  On January 27, 2004, EA notified DETM in writing of the impendingexpiration of the Master Service Agreement between EA and DETM on March 1,2004.  This correspondence was to notifyDETM of EA’s expiration of its commitment to maintain a $1 million ($1,000,000)minimum account balance as credit coverage.

 

Thefollowing illustrates the types of risk EA was exposed to in connection withthe contracts for supply and sales:

 

•                  Counterparty risk, including the possibilityof the other parties’ failure to fulfill their contractual obligations to EAsuch as:

 

a)              Deliverability risk, referring to EA not beingable to serve contracted load due to the supplier’s failure to provide energy.

 

b)             Transmission risk, indicating EA’s reliance onutilities, such as the Company, Central Maine Power and Bangor Hydro-Electric,to physically transport energy to EA’s customers.

 

c)              Credit risk exposure, depending on EA’scustomers’ ability to pay, which may deteriorate during a general economicdownturn or when a commercial customer experiences financial difficulty.

 

•                  Market liquidity risk encompasses the risk ofbeing forced to buy or sell energy on the open market.  This would haveoccurred (1) if energy had not been available from WS, NB Power or other energysupply arrangements, while the contracted customer load must still be satisfiedor (2) if the existing customer load deteriorated and NB Power could not buythe excess power from WS, as contracted.

 

•                  Forecasting risk exposure includes possibleinaccuracy in the estimation of energy supply requirements.  One of EA’ssuppliers required a 24-month forecast of load for each commitment to a 1 MWblock of energy.  Although there was no penalty for not using all of theenergy, EA could have been assessed a penalty for using more than the amountcontracted.

 

•                  Market-based cost risk is exposure totransactions tied to market indexes, such as the arrangement to sell excess WSpower to NB Power at a current market-indexed rate.

 

Withthe expiration of the SOS arrangement in CMP’s service territory, EA has beenadversely impacted by the decrease in revenues and correspondingly,earnings.  In 2002, EA realized SOSmargin in CMP’s service territory of approximately $5.8 million, which includedthe final account settlement discussed above.  EA had no SOS activity in2003.  On February 24, 2003, EAannounced its intent to withdraw from the northern Maine market due to the lackof profitability in that market, the lack of price differentiated electricproducts within the Maritimes and Northern Maine Independent System Administratormarkets, and the overall illiquidity of the wholesale power market, as well asother risk factors.  EA continued toserve its existing contracts in northern Maine through their expiration onFebruary 27, 2004.  CES sales, primarilyin northern Maine, were approximately $6.1 million in 2003.

 

EA’sdecision to withdraw from the northern Maine market not only minimized its riskprofile, but EA believed this action would substantially relieve any underlyingconcerns that could exist in connection with the issue of employee sharing andEA’s energy marketing activities within MPS’s service territory.  On February 21, 2003 MPS filed with the MPUCan “Application for Exemption of Chapter 304” to exempt the Company and EA fromcertain management restrictions that have arisen due to this aspect of thecorporate relationship.  (MPUC DocketNo. 2003-122).  In connection with itsannounced intent to withdraw from the retail electricity markets in northernMaine, EA has ceased all of its energy marketing activities in MPS’s serviceterritory, as well as the balance of the state, effective March 1, 2003.

 

Currently,EA is an inactive subsidiary and management has ceased all active retail CESactivity on behalf of EA within the state of Maine until market conditions, theavailability of supply, the mandate for stringent credit requirements and riskenvironment improve.  Management willcontinue to monitor both U.S. and Canadian deregulated markets to determine theappropriate timing for possible re-entry into the deregulated retail market.

 

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4.  SEGMENT INFORMATION

 

For2003, the Company operated in three segments, with MPS providing regulatedtransmission and distribution services, EA performing unregulated powermarketing services and MAM providing corporate oversight functions.  The “Other” column consists primarily ofelimination activity.  The table belowsummarizes segment activity for 2003, 2002 and 2001.

 

TheCompany’s reportable segments include the electric utility portion of thebusiness---MPS and its inactive wholly-owned Canadian subsidiary, Me&NB;the energy marketing portion of the business---EA; and the holding company —MAM with its other subsidiaries, MAMES and Maricor formed in late 2003.  The accounting policies of the segments arethe same as those described in Note 1, “Summary of Significant AccountingPolicies.”  MAM did not have anymaterial assets or operations until it became a holding company on June 30,2003; however, MPS incurred expenses associated with the formation of MAM,which totaled $639,000 in 2003, and were classified as unregulated operationsand maintenance expenses.  MAM providescertain administrative support services to MPS and EA, and MPS provides certainsupport services to MAM and EA, which are billed to the respective entities atcost, based on a combination of direct charges and allocations.  The Company is organized based on productsand services.

 
|                                   |   | **(Dollars  in Thousands)**               |   |
|----------------------------------------|--------|-------------------------------------------|--------|
|                                   |   | **Twelve Months Ended December 31, 2003** |   |
|                                   |   | **MAM**                                   |   | **EA** |   | **MPS** |   | **Other** |   | **Total** |   |
| Operating Revenues                     |   | $                                         | 57     |   | $ | 6,064 |   | $ | 31,748 |   | $ | (8 | ) | $ | 37,861 |   |
| EA Standard Offer Service Margin       |   | —                                    |   | — |   | — |   | — |   | 0 |   |
| Total Revenues                         |   | 57                                        |   | 6,064 |   | 31,748 |   | (8 | ) | 37,861 |   |
| Unregulated Energy Supply              |   | —                                    |   | 5,229 |   | — |   | (9 | ) | 5,220 |   |
| Operations & Maintenance (O&M) |   |                                      |   |   |   |   |   |   |   |   |   |
| Regulated                              |   | —                                    |   | — |   | 12,466 |   | (43 | ) | 12,423 |   |
| Unregulated                            |   | 730                                       |   | 1,019 |   | 638 |   | (34 | ) | 2,353 |   |
| Amortization – Stranded Cost      |   | —                                    |   | — |   | 8,761 |   | — |   | 8,761 |   |
| Amortization – Other              |   | —                                    |   | — |   | 206 |   | — |   | 206 |   |
| Depreciation                           |   | —                                    |   | 8 |   | 2,647 |   | — |   | 2,655 |   |
| Other O&M                          |   | —                                    |   | 39 |   | 1,460 |   | — |   | 1,499 |   |
| Income Taxes                           |   | (257                                      | )      | (89 | ) | 1,930 |   | — |   | 1,584 |   |
| Total Operating Expenses               |   | 473                                       |   | 6,206 |   | 28,108 |   | (86 | ) | 34,701 |   |
| Operating Income (Loss)                |   | (416                                      | )      | (142 | ) | 3,640 |   | 78 |   | 3,160 |   |
| Interest Income (Loss)                 |   | —                                    |   | 53 |   | 21 |   | (26 | ) | 48 |   |
| Equity in Net Income of JV’s      |   | —                                    |   | — |   | 298 |   | (40 | ) | 258 |   |
| Other Income & Deductions          |   | —                                    |   | (22 | ) | (258 | ) | (78 | ) | (358 | ) |
| Income (Loss) Before Interest Charges  |   | (416                                      | )      | (111 | ) | 3,701 |   | (66 | ) | 3,108 |   |
| Interest Charges                       |   | —                                    |   | 5 |   | 323 |   | (26 | ) | 302 |   |
| Net Income (Loss)                      |   | $                                         | (416   | ) | $ | (116 | ) | $ | 3,378 |   | $ | (40 | ) | $ | 2,806 |   |
| Total Assets as of December 31, 2003   |   | $                                         | 3,375  |   | $ | 2,024 |   | $ | 135,870 |   |   |   | $ | 141,269 |   |

 

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|                                   |   | **(Dollars  in Thousands)**               |   |
|----------------------------------------|--------|-------------------------------------------|--------|
|                                   |   | **Twelve Months Ended December 31, 2002** |   |
|                                   |   | **MAM**                                   |   | **EA** |   | **MPS** |   | **Other** |   | **Total** |   |
| Operating Revenues                     |   | $                                         | — |   | $ | 6,901 |   | $ | 31,410 |   | $ | (9 | ) | $ | 38,302 |   |
| EA Standard Offer Service Margin       |   | —                                    |   | 5,802 |   | — |   | — |   | 5,802 |   |
| Total Revenues                         |   | —                                    |   | 12,703 |   | 31,410 |   | (9 | ) | 44,104 |   |
| Unregulated Energy Supply              |   | —                                    |   | 5,542 |   | — |   | (9 | ) | 5,533 |   |
| Operations & Maintenance (O&M) |   |                                      |   |   |   |   |   |   |   |   |   |
| Regulated                              |   | —                                    |   | — |   | 13,093 |   | (48 | ) | 13,045 |   |
| Unregulated                            |   | —                                    |   | 1,444 |   | 210 |   | — |   | 1,654 |   |
| Amortization – Stranded Cost      |   | —                                    |   | — |   | 8,761 |   | — |   | 8,761 |   |
| Amortization – Other              |   | —                                    |   | — |   | 236 |   | — |   | 236 |   |
| Depreciation                           |   | —                                    |   | 8 |   | 2,412 |   | — |   | 2,420 |   |
| Other O&M                          |   | —                                    |   | 52 |   | 1,379 |   | — |   | 1,431 |   |
| Income Taxes                           |   | —                                    |   | 2,251 |   | 1,908 |   | — |   | 4,159 |   |
| Total Operating Expenses               |   | —                                    |   | 9,297 |   | 27,999 |   | (57 | ) | 37,239 |   |
| Operating Income                       |   | —                                    |   | 3,406 |   | 3,411 |   | 48 |   | 6,865 |   |
| Interest Income                        |   | —                                    |   | 101 |   | 57 |   | — |   | 158 |   |
| Equity in Net Income of JV’s      |   | —                                    |   | — |   | 280 |   | — |   | 280 |   |
| Other Income & Deductions          |   | —                                    |   | (57 | ) | (179 | ) | (48 | ) | (284 | ) |
| Income Before Interest Charges         |   | 0                                         |   | 3,450 |   | 3,569 |   | 0 |   | 7,019 |   |
| Interest Charges                       |   | —                                    |   | 6 |   | 470 |   | — |   | 476 |   |
| Net Income                             |   | $                                         | 0      |   | $ | 3,444 |   | $ | 3,099 |   | $ | 0 |   | $ | 6,543 |   |
| Total Assets as of December 31, 2002   |   | $                                         | 0      |   | $ | 6,324 |   | $ | 135,662 |   |   |   | $ | 141,986 |   |

 

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|                                   |   | **(Dollars  in Thousands)**               |   |
|----------------------------------------|--------|-------------------------------------------|--------|
|                                   |   | **Twelve Months Ended December 31, 2001** |   |
|                                   |   | **MAM**                                   |   | **EA** |   | **MPS** |   | **Other** |   | **Total** |   |
| Operating Revenues                     |   | $                                         | — |   | $ | 15,771 |   | 31,783 |   | (3 | ) | 47,551 |   |
| EA Standard Offer Service Margin       |   | —                                    |   | 2,147 |   | — |   | — |   | 2,147 |   |
| Total Revenues                         |   | —                                    |   | 17,918 |   | 31,783 |   | (3 | ) | 49,698 |   |
| Unregulated Energy Supply              |   | —                                    |   | 14,987 |   | — |   | (3 | ) | 14,984 |   |
| Operations & Maintenance (O&M) |   |                                      |   |   |   |   |   |   |   |   |   |
| Regulated                              |   | —                                    |   | — |   | 10,541 |   | (130 | ) | 10,411 |   |
| Unregulated                            |   | —                                    |   | 1,226 |   | — |   | — |   | 1,226 |   |
| Amortization – Stranded Cost      |   | —                                    |   | — |   | 9,260 |   | — |   | 9,260 |   |
| Amortization – Other              |   | —                                    |   | — |   | 217 |   | — |   | 217 |   |
| Depreciation                           |   | —                                    |   | 6 |   | 2,496 |   | — |   | 2,502 |   |
| Other O&M                          |   | —                                    |   | 59 |   | 1,285 |   | — |   | 1,344 |   |
| Income Taxes                           |   | —                                    |   | 650 |   | 2,743 |   | — |   | 3,393 |   |
| Total Operating Expenses               |   | —                                    |   | 16,928 |   | 26,542 |   | (133 | ) | 43,337 |   |
| Operating Income                       |   | —                                    |   | 990 |   | 5,241 |   | 130 |   | 6,361 |   |
| Interest Income (Loss)                 |   | —                                    |   | (103 | ) | 271 |   | — |   | 168 |   |
| Equity in Net Income of JV’s      |   | —                                    |   | — |   | 299 |   | — |   | 299 |   |
| Other Income & Deductions          |   | —                                    |   | 16 |   | (186 | ) | (130 | ) | (300 | ) |
| Income Before Interest Charges         |   | 0                                         |   | 903 |   | 5,625 |   | 0 |   | 6,528 |   |
| Interest Charges                       |   | —                                    |   | 6 |   | 1,285 |   | — |   | 1,291 |   |
| Net Income                             |   | $                                         | 0      |   | $ | 897 |   | $ | 4,340 |   | $ | 0 |   | $ | 5,237 |   |
| Total Assets as of December 31, 2001   |   | $                                         | 0      |   | $ | 5,632 |   | $ | 137,703 |   |   |   | $ | 143,335 |   |
|                                        |        |                                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

For2003 and 2002, total assets reflect the reclassification of accrued removalobligations as a liability from accumulated depreciation.

 

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5.  INVESTMENTS IN ASSOCIATED COMPANIES

 

MPSowns 5% of the common stock of Maine Yankee Atomic Power Company (“MaineYankee”), a jointly-owned nuclear electric power company, and 7.49% of thecommon stock of the MEPCO, a jointly-owned electric transmission company.  MPS records its investment in MEPCO andMaine Yankee using the equity method. For additional information, see Note 12, “Commitments, Contingencies andRegulatory Matters — Capacity Arrangements – Maine Yankee” regarding theclosing and decommissioning of Maine Yankee.

 

Dividendsreceived during 2003, 2002, and 2001 from Maine Yankee were $301,050, $99,828and $206,000, respectively, and from MEPCO $99,205, $7,249 and $7,249,respectively.  In 2003, 2002 and 2001,MPS also received Maine Yankee stock redemptions of $524,724, $375,277 and$499,484 respectively.  Substantiallyall earnings of Maine Yankee and MEPCO are distributed to investorcompanies.  Condensed financialinformation (unaudited) for Maine Yankee and MEPCO is as follows:

 
|                                        |   | **Maine Yankee** |    | **MEPCO** |   |
|---------------------------------------------|--------|------------------|---------|-----------|--------|
| **(Dollars  in Thousands)**                 |   | **2003**         |    | **2002**  |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| **Earnings**                                |   |             |    |      |   |   |   |   |   |   |   |   |   |
| Operating revenues                          |   | $                | 53,222  |      | $      | 58,924 |   | $ | 61,994 |   | $ | 3,792 |   | $ | 4,365 |   | $ | 4,514 |   |
| Earnings applicable to Common Stock         |   | $                | 3,217   |      | $      | 3,947 |   | $ | 4,371 |   | $ | 1,258 |   | $ | 1,068 |   | $ | 1,152 |   |
| Company’s equity share of net earnings |   | $                | 161     |      | $      | 197 |   | $ | 219 |   | $ | 94 |   | $ | 80 |   | $ | 86 |   |
| **Investment**                              |   |             |    |      |   |   |   |   |   |   |   |   |   |
| Total assets                                |   | $                | 561,523 |      | $      | 679,975 |   | $ | 802,118 |   | $ | 8,100 |   | $ | 8,260 |   | $ | 7,396 |   |
| Less:                                       |   |             |    |      |   |   |   |   |   |   |   |   |   |
| Long-term debt                              |   | 2,680            |    | 21,600    |   | 31,200 |   | — |   | — |   | — |   |
| Other liabilities and deferred credits      |   | 514,423          |    | 600,656   |   | 707,643 |   | 1,142 |   | 1,214 |   | 1,320 |   |
| Net assets                                  |   | $                | 44,420  |      | $      | 57,719 |   | $ | 63,275 |   | $ | 6,958 |   | $ | 7,046 |   | $ | 6,076 |   |
| MPS’s equity in net assets             |   | $                | 2,221   |      | $      | 2,886 |   | $ | 3,164 |   | $ | 521 |   | $ | 528 |   | $ | 455 |   |

 

Inaccordance with a plan approved by the Securities and Exchange Commission,Maine Yankee has started the redemption of its common stock periodicallythrough 2008.

 
| **Maine Yankee****Board Meeting** |   | **Total Shares****Redeemed** |   | **MPS****Shares** |   | **Amounts****Received** |      | **Date****Received** |            |
|-----------------------------------|--------|------------------------------|--------|-------------------|--------|-------------------------|-----------|----------------------|-----------------|
|                              |   |                         |   |              |   |                    |      |                 |            |
| September 27, 2001                |   | 75,200                       |   | 3,760             |   | $                       | 499,484   |                 | October 4, 2001 |   |
| June 27, 2002                     |   | 22,600                       |   | 1,130             |   | 150,110                 |      | July 11, 2002        |            |
| September 26, 2002                |   | 33,900                       |   | 1,695             |   | 225,166                 |      | October 4, 2002      |            |
| December 18, 2002                 |   | 33,800                       |   | 1,690             |   | 224,502                 |      | January 9, 2003      |            |
| September 25, 2003                |   | 45,200                       |   | 2,260             |   | 300,222                 |      | October 14, 2003     |            |
| December 17, 2003                 |   | 30,100                       |   | 1,505             |   | 199,926                 |      | January 7, 2004      |            |
|                              |   | 240,800                      |   | 12,040            |   | $                       | 1,599,410 |                 |            |   |

 

6.  SHORT-TERM CREDIT ARRANGEMENTS

 

MPShas a revolving credit arrangement with two banks for borrowings up to $6million.  The revolving credit agreementis subject to extension with the consent of the participating banks and hasbeen extended through June 8, 2004.  MPSis currently seeking an extension of this facility and management believesthese efforts will be successful.  Theseagreements contain certain restrictive covenants including interest coveragetests and debt-to-equity ratios.  As ofDecember 31, 2003, MPS was in compliance with those covenants.  MPS can utilize, at its discretion, twotypes of loan options:  A Loans, whichare provided on a pro rata basis in accordance with each participating bank’sshare of the commitment amount, and B Loans, which are provided as arrangedbetween MPS and each of the participating banks.  The A Loans, at MPS’s option, bear interest equal to either theagent bank’s prime rate or LIBOR-based pricing.  MPS also pays a quarterly commitment fee of .50% of the unusedportion of the A Loans.  The B Loansbear interest as arranged between MPS and the participating bank.  As of December 31, 2003, A Loans for $5.0million were outstanding under the revolving credit arrangement at an interestrate of 2.5625%, as well as a B Loan of $200,000 of 2.76%.  An A Loan for $2.0 million and a B Loan for$800,000 were outstanding as of December 31, 2002 under the revolving creditarrangement at interest rates of 2.875% and 3.02%, respectively.

 

OnOctober 1, 2003, MPS executed an additional $3 million line of credit with theBank of New York.  This new facility isunsecured and will expire on March 29, 2004. MPS is currently seeking an extension of this facility and managementbelieves these efforts will be successful. Interest rates on the new facility are comparable to the rates on theexisting revolving credit agreement. The additional facility provides an additional source of short-termborrowings in the event required borrowings exceed the existing revolvingcredit agreement.  As of December 31,2003, $1 million was outstanding on the facility at 2.8125%.

 

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EAhas a revolving line of credit with a bank, for $1.2 million.  In May of 2003, the line was extended untilMarch 29, 2004.  Interest is based onthe bank’s prime lending rate.  As ofDecember 31, 2003, EA was in compliance with the covenants set forth by theline of credit agreement.  The line wasnot used during 2003 and 2002 and had no balance outstanding as of December 31,2003 or December 31, 2002.

 

7.   ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

MPShas three issues of long-term debt with variable interest rates.  Pursuant to its rate order in MPUC Docket2003-85, as more fully explained in Note 12, “Commitments, Contingencies andRegulatory Matters, MPUC Approves Rate Increase,” MPS agreed to fix itsinterest rates and the MPUC allowed recovery of the fixed interest costs inrates.  On September 9, 2003, MPS executedswap agreements for the three variable rate issues, locking in the rates overthe remaining terms of the issues.  Forthe Finance Authority of Maine (“FAME”) 1998 Taxable Elective RateStabilization Revenue Notes due 2008, the effective fixed interest rate hasbeen set at 2.79%.  For the two seriesof tax-exempt bonds issued by the Maine Public Utilities Financing Bank(“MPUFB”), the effective fixed interest rates for the 1996 Series due 2021 andthe 2000 Series due 2025 are 4.57% and 4.68% respectively.

 

Atthe end of 2003, the fair value of these qualified cash flow hedges was($1,185,000), reflecting a drop in swap rates since the execution date.  Since September 9, 2003, the differencebetween the fixed rates and the underlying variable rates on the issues ofapproximately $294,000 was charged to operating income in 2003.  The fixed rates are higher than the previous floating rates andcontinue to be as of the date of this filing. Although the fixed interest rates were higher than the underlyingvariable rates, a portion of a MPUC approved rate increase effective November1, 2003, was to cover this difference. Management believes that the fixing of interest rates over the terms ofMPS’s debt will serve to protect both shareholders and consumers from what itbelieves to be inevitable rising interest rates.  The loss in fair value on the interest rate swaps noted aboveless the deferred tax of $473,000 has been recorded as Other ComprehensiveIncome (Loss), in accordance with SFAS 133, “Accounting for DerivativeInstruments and Hedging Activities.” Gains or losses in the fair market value of the interest rate swaps donot impact net income or the revenues of MPS, unless shareholder’s commonequity falls below the minimum allowable 48 percent as set by the MPUC.

 

OnNovember 20, 2000, MPS purchased an interest cap of 6% that applied to the 2000and 1996 Series of Maine Public Utilities Financing Bank’s (“MPUFB”) bondsissued on behalf of MPS with outstanding balances of $9 million and $13.6million, respectively.  The interest capexpired in November, 2003.

 

OnJune 1, 1998, MPS purchased an interest rate cap of 7% at a cost of $172,000,to expire June 8, 2008 on $11,540,000 of FAME’s Taxable Electric RateStabilization Notes, Series 1998A, issued on behalf of MPS.  In accordance with the rate treatmentprescribed by the MPUC, the original cost of the interest rate cap has beenamortized along with other issuance costs with $96,000 and $79,000 remaining atthe end of 2003 and 2002, respectively, as a regulatory asset.  The provider of the cap estimated its valueat the end of 2003 as approximately $27,000.

 

8.  LONG-TERM DEBT

 

OnOctober 19, 2000, the Maine Public Utilities Financing Bank (“MPUFB”) issued $9million of its tax-exempt bonds due October 1, 2025 (“2000 Series”) on behalfof MPS.  The proceeds were placed intrust to be drawn down for the reimbursement of issuance costs and for theconstruction of qualifying distribution property.  As of December 31, 2002, the proceeds in the trust account were$2.1 million. On October 17, 2003, MPS received the final distribution from thetrust.   Pursuant to the long-term noteissued under a loan agreement between MPS and the MPUFB, MPS has agreed to makepayments to the MPUFB for the principal and interest on the bonds.  Concurrently, pursuant to a letter of creditand reimbursement agreement, MPS caused a Direct Pay Letter of Credit for aninitial term of nineteen months, subsequently extended until June, 2004, to beissued by The Bank of New York for the benefit of the holders of such bonds.   MPS is currently seeking an extension ofthe Direct Pay Letter of Credit and management believes these efforts will besuccessful.  To secure MPS’s obligationsunder the letter of credit and reimbursement agreement, MPS issued first andsecond mortgage bonds, in the amounts of $5.0 million and $4.525 million,respectively.  MPS has the option ofselecting weekly, monthly, annual or term interest rate periods for the 2000Series, and, at issuance, selected the weekly interest period, with an initialinterest rate of 4.35%.  On November 20,2000, MPS purchased an interest rate cap of 6% at a cost of $36,000 thatexpired in November 2003, that applied to the 2000 and 1996 Series, asdescribed below.  At the end of 2003,the cumulative effective interest rate of the 2000 Series, including theeffective fixed swap rate of 4.68%, issuance costs and credit enhancement feessince issuance was 7.14%.

 

Asimilarly structured series of Bonds was issued on behalf of MPS by the MPUFBin 1996 (“1996 Series”), with $13.6 million outstanding due in 2021.  A Direct Pay Letter of Credit was issued byThe Bank of New York, which has been extended to June 2004, and is secured by$14.4 million of second mortgage bonds. At the end of 2003, the cumulative effective interest rate of the 1996series, including the effective fixed swap rate of 4.57%, issuance costs andcredit enhancement fees was 6.13%.

 

On May 29, 1998, FAME issued $11,540,000 of its Taxable Electric RateStabilization Revenue Notes, Series 1998A (MPS) (“Notes”) on behalf ofMPS.  The Notes were issued pursuant to, and are secured under, a TrustIndenture by and between FAME and Peoples Heritage Bank, Portland, Maine, asTrustee (“the Trustee”), for the purpose of:  (i) financing the up-frontpayment to Wheelabrator-Sherman of approximately $8.7 million, as requiredunder an amended purchase power agreement; (ii) for the Capital Reserve Fund,as required by 

 

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FAME under their Electric Rate Stabilization Program; and (iii) forissuance costs.  The Notes are limited obligations of FAME, payable solelyout of the trust estate available under the Indenture, principally the LoanNote and Loan Agreement with MPS and the Capital Reserve Fund held by theTrustee, which was approximately $2.4 million at the end of 2003 and 2002.  MPS has issued $4.0 million of its firstmortgage bonds and $7.54 million of its second mortgage bonds as collateral forits performance under the Loan Note issue pursuant to the Loan Agreement. The Notes will bear interest at a Floating Interest Rate and will be adjustedweekly.  On June 1, 1998, MPS purchased an interest rate cap of 7% at acost of $172,000, to expire June, 2008, to limit its interest rate exposure toquarterly U.S. LIBOR rates.  At the end of 2003, the cumulative effectiveinterest rate, including the fixed swap rate of 2.79%, issuance costs andcredit enhancement fees for the Notes was 3.81%.

 

TheMPUFB tax-exempt issues are subject to the same restrictive covenants as thosediscussed for MPS’s revolving credit arrangement in Note 6, “Short-Term CreditArrangements.”

 

9.  STOCK COMPENSATION PLAN

 

Uponapproval by MPS’s shareholders in June of 2002, MPS adopted the 2002 StockOption Plan (the “Plan”).  The Plan wassubsequently adopted by the Company after its formation.  The Plan provides designated employees ofthe Company and its Subsidiaries with stock ownership opportunities andadditional incentives to contribute to the success of the Company, and toattract, reward and retain employees 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 options to its employees for up to 150,000shares of common stock, provided that the maximum aggregate number of shareswhich may be issued under the plan pursuant to incentive stock options shall be120,000 shares.  The exercise price forshares to be issued under any incentive stock option shall not be less than onehundred percent (100%) of the fair market value of such shares on the date theoption is granted.  An option’s maximumterm is 10 years.  Prior to the issuanceof options to the Company’s President and Chief Executive Officer, the Board,based on a recommendation of the Performance and Compensation Committee,modified the grant agreement to lessen the economic liability to theCompany.  As modified, the change ofcontrol provisions were eliminated and the three-year vesting schedule will befollowed.

 

TheCompany accounts for the fair value of its grants under the plan in accordancewith the expense provisions of Statement of Financial Accounting Standards No.123, “Accounting for Stock-Based Compensation.”  The effect of the grants on compensation expense for the yearended December 31, 2003 was immaterial.

 

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-averageassumptions used for grants: dividend yield of 4.34 percent; expectedvolatility of 20 percent, risk-free interest rate of 3.64%; and expected livesof 7 years.

 

Asummary of the status of the Company’s stock option plan as of December 31,2003, and changes during the year then ended is presented below:

 
| **Options**                                     |   | **Shares** |   | **Exercise  Price** |   |
|-------------------------------------------------|--------|------------|--------|---------------------|--------|
| Outstanding at January 1, 2003                  |   | 5,250      |   | $                   | 30.45  |   |
| Granted                                         |   | 5,250      |   | $                   | 32.51  |   |
| Exercised                                       |   | —     |   | —              |   |
| Forfeited                                       |   | —     |   | —              |   |
| Outstanding at December 31, 2003                |   | 10,500     |   | $                   | 31.48  |   |
| Options exercisable at December 31, 2003        |   | 0          |   |                |   |
| Weighted-average fair value of options  granted |   | $          | 6.03   |                |   |   |
|                                                 |        |            |        |                     |        |  |  |

 

The following table summarizes information about fixed stock optionsoutstanding at December 31, 2003:

 

| **Options  Outstanding**      |   | **Options  Exercisable**             |   |
|-------------------------------|--------|--------------------------------------|--------|
| **Range of Exercise  Prices** |   | **Number  Outstanding at  12/31/03** |   | **Weighted-  Average  Remaining  Contractual Life** |   | **Weighted-  Average  Exercise  Price** |   | **Number  Exercisable  at 12/31/03** |   | **Weighted-  Average Exercise  Price** |   |
| $30.45 - $32.51               |   | 10,500                               |   | 9.0 years |   | 31.48 |   | — |   | — |   |

 

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10.  BENEFIT PLANS

 

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

TheCompany has an insured non-contributory defined benefit pension plan coveringsubstantially all employees.  Benefitsunder the plan are based on employees’ years of service and compensation priorto retirement.

TheCompany’s policy has been to fund pension costs accrued.  The Company made tax-deductiblecontributions of $409,000 for the 2003 plan year in December, 2003 and $276,570for the 2002 plan year in January, 2003.

 

### **Health Care Benefits**

Inaddition to providing pension benefits, the Company provides certain healthcare benefits to eligible employees and retirees.  All employees and retirees share in the cost of their medicalbenefits, in addition to plan deductibles and coinsurance payments, totalingapproximately 12.2% and 11.26% of medical insurance premiums in 2003 and 2002,respectively.  In 2002, certainamendments were made to the plan, including the following.  Effective with retirements after January 1,1995 and employees hired before January 1, 2003, retirees will be eligible forretiree medical coverage after completing twenty years of service, subject to acontribution schedule.  Employees hiredafter January 1, 2003 will be eligible for retiree medical coverage aftercompleting twenty-five years of service; however, their spouse will not beeligible for coverage.  For employeeshired after December 31, 1999 and prior to January 1, 2003, spousal retireemedical coverage ceases upon the spouse’s attainment of age 65.  Retirees who were hired before January 1,2003 will contribute to the cost of their coverage starting at 60% for retireeswith twenty years of service with the contribution declining to $69.33 permonth until age 65 and $21.62 per month thereafter for thirty or more years ofservice.  Retirees who were hired afterJanuary 1, 2003 will contribute to the cost of their coverage starting at 70%for retirees with twenty-five years of service and declining to theabove-mentioned monthly amounts for thirty or more years of service.  The above amendments in plan provisions havebeen incorporated into the calculation of the related actuarial benefitobligation.

 

Basedon prior MPUC accounting orders, the Company established a regulatory asset ofapproximately $1,061,000, representing deferred post-retirement benefits.  As an element of its four-year rate plan,the Company began recovering these deferred expenses over a ten-year period,along with the annual expenses in excess of pay-as-you-go expenses, starting in1996.  The Company made a payment of$354,000 to fund the 401(h) sub-account of the Pension Trust for non-unionretiree medical payments on September 14, 2000 and $92,190 on June 19,2003.  On December 28, 1999and December 27, 2001, the Company made payments of $2.1 million and $641,000,respectively, to a Voluntary Employee Benefit Association (“VEBA”) trust fund,an independent external trust fund for union retiree medical payments.  These payments provide funding for futurepost-retirement health care costs at such time as customers are paying forthese costs in their rates.  Forpurposes of determining the accrued post-retirement benefit cost as of December31, 2003 the health care cost trend rate used was 8% in 2004 and graded down to4% in 2013, remaining at that level thereafter.  These rates have a significant effect on the amounts reported forthe health care plan.  Aone-percentage-point change in the trend rates would have the followingeffects:

 

|                                                          |   | **One-Percentage-Point** |   |
|---------------------------------------------------------------|--------|--------------------------|--------|
| **(Dollars  in Thousands)**                                   |   | **Increase**             |   | **Decrease** |   |
|                                                          |   |                     |   |   |   |
| Effect on total cost of service and  interest cost components |   | $                        | 135    |   | $ | (107 | ) |
|                                                          |   |                     |   |   |   |
| Effect on post-retirement benefit  obligation                 |   | $                        | 1,408  |   | $ | (1,146 | ) |

 

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Thefollowing table sets forth the plans’ change in benefit obligation, change inplan assets, funded status and assumptions as of December 31, 2003 and 2002:

 
|                                                                |   | **Pension  Benefits** |       | **Health  Care  Benefits** |       |
|---------------------------------------------------------------------|--------|-----------------------|------------|----------------------------|------------|
| **(Dollars in Thousands)**                                          |   | **2003**              | ** ** | **2002**                   | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Changes in benefit  obligation**                                  |   |                  |       |                       |       |   |   |   |   |
| Benefit obligation at beginning of year                             |   | $                     | 17,839     |                       | $          | 16,604 |   | $ | 8,924 |   | $ | 7,930 |   |
| Service cost                                                        |   | 430                   |       | 411                        |       | 193 |   | 175 |   |
| Interest cost                                                       |   | 1,144                 |       | 1,132                      |       | 539 |   | 577 |   |
| Amendments                                                          |   | —                |       | —                     |       | — |   | (699 | ) |
| Termination benefits                                                |   | —                |       | 231                        |       | — |   | 171 |   |
| Actuarial loss                                                      |   | 992                   |       | 640                        |       | 488 |   | 1,233 |   |
| Employee’s contributions                                       |   | —                |       | —                     |       | 31 |   | 1 |   |
| Benefits paid                                                       |   | (1,219                | )          | (1,051                     | )          | (549 | ) | (460 | ) |
| Administrative expenses                                             |   | (114                  | )          | (128                       | )          | — |   | (3 | ) |
| Benefit obligation at End of year                                   |   | 19,072                |       | 17,839                     |       | 9,626 |   | 8,925 |   |
|                                                                |   |                  |       |                       |       |   |   |   |   |
| **Change in plan  assets**                                          |   |                  |       |                       |       |   |   |   |   |
| Fair value of plan assets at Beginning of  year                     |   | 13,330                |       | 14,731                     |       | 2,336 |   | 2,644 |   |
| Actual return on plan assets                                        |   | 2,213                 |       | (222                       | )          | 393 |   | (143 | ) |
| Employee contributions                                              |   | —                |       | —                     |       | 31 |   | 1 |   |
| Employer contribution                                               |   | 686                   |       | —                     |       | 423 |   | 298 |   |
| Benefits paid                                                       |   | (1,219                | )          | (1,051                     | )          | (549 | ) | (460 | ) |
| Administrative expenses                                             |   | (114                  | )          | (128                       | )          | — |   | (3 | ) |
| Fair value of plan assets at end of year                            |   | 14,896                |       | 13,330                     |       | 2,634 |   | 2,337 |   |
| **Funded Status**  (Benefit Obligation - Fair Value at end of year) |   | (4,176                | )          | (4,509                     | )          | (6,992 | ) | (6,588 | ) |
| Unrecognized transition (asset) obligation                          |   | —                |       | (16                        | )          | 1,272 |   | 1,415 |   |
| Unrecognized prior service costs                                    |   | 569                   |       | 658                        |       | (467 | ) | (527 | ) |
| Unrecognized net actuarial (gain)/loss                              |   | 1,651                 |       | 1,634                      |       | 4,807 |   | 4,708 |   |
| **Accrued benefit  cost**                                           |   | $                     | (1,956     | )                          | $          | (2,233 | ) | $ | (1,380 | ) | $ | (992 | ) |
| Weighted-average assumptions as of December  31 (measurement date)  |   |                  |       |                       |       |   |   |   |   |
| Discount rate                                                       |   | 6.25                  | %          | 6.50                       | %          | 6.25 | % | 6.50 | % |
| Expected return on plan assets                                      |   | 8.50                  | %          | 8.50                       | %          | 8.50 | % | 8.50 | % |
| Rate of compensation increase                                       |   | 4.00                  | %          | 4.00                       | %          | N/A |   | N/A |   |

 

TheCompany uses a December 31 measurement date for its pension and post-retirementbenefit plans.  The Company’saccumulated benefit obligation for all defined benefit pensions plans was $16.2million and $15.4 million at December 31, 2003 and 2002, respectively.

 
|                      |   |                   |   | **Percentage  of Plan Assets at  December 31** |   |
|---------------------------|--------|------------------------|--------|------------------------------------------------|--------|
|                      |   | **Target  Allocation** |   |                                           |
|                      |   | **2004**               |   | **2003**                                       |   | **2002** |   |
| **Plan Assets**           |   |                   |   |                                           |   |   |   |
| **Pension Plan**          |   |                   |   |                                           |   |   |   |
| **Asset Category**        |   |                   |   |                                           |   |   |   |
| Equity Securities         |   | 50-60                  | %      | 52                                             | %      | 46 | % |
| Debt Securities           |   | 40-50                  | %      | 36                                             | %      | 44 | % |
| Real Estate               |   | 0                      | %      | 0                                              | %      | 0 | % |
| Other                     |   | 5-15                   | %      | 12                                             | %      | 10 | % |
| Total                     |   |                   |   | 100                                            | %      | 100 | % |
|                      |   |                   |   |                                           |   |   |   |
| **Health Care  Benefits** |   |                   |   |                                           |   |   |   |
| **Asset Category**        |   |                   |   |                                           |   |   |   |
| Equity Securities         |   | 52-63                  | %      | 61                                             | %      | 53 | % |
| Debt Securities           |   | 37-48                  | %      | 39                                             | %      | 47 | % |
| Real Estate               |   | 0                      | %      | 0                                              | %      | 0 | % |
| Other                     |   | 0-5                    | %      | 0                                              | %      | 0 | % |
| Total                     |   |                   |   | 100                                            | %      | 100 | % |

 

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Theinvestment objective is to achieve long-term growth of capital, with exposureto risk set at an appropriate level. This objective shall be accomplished through the utilization of adiversified asset mix consisting of equities (domestic and international) andtaxable fixed income securities.  Theaccount is to be managed on a fully discretionary basis to obtain the highesttotal rate of return in keeping with a moderate level of risk.  The target rate of return for the portfoliowill be 8.5% with the goal of exceeding returns of the S&P 500 on theequity side and the Lehman Brothers Aggregate Bond Index on the fixed incomeside.

 

Thefollowing table sets forth the plans’ net periodic benefit cost for 2003, 2002and 2001:

 
|                                  |   | **Pension  Benefits** |   | **Health  Care Benefits** |   |
|---------------------------------------|--------|-----------------------|--------|---------------------------|--------|
| **(Dollars  in Thousands)**           |   | **2003**              |   | **2002**                  |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
| Service cost                          |   | $                     | 430    |                      | $      | 411 |   | $ | 342 |   | $ | 193 |   | $ | 175 |   | $ | 108 |   |
| Interest cost                         |   | 1,144                 |   | 1,132                     |   | 1,105 |   | 539 |   | 577 |   | 431 |   |
| Expected return on plan assets        |   | (1,239                | )      | (1,279                    | )      | (1,277 | ) | (195 | ) | (218 | ) | (192 | ) |
| Amortization of transition obligation |   | (16                   | )      | (77                       | )      | (77 | ) | 142 |   | 213 |   | 213 |   |
| Amortization of prior service cost    |   | 90                    |   | 90                        |   | 90 |   | (60 | ) | (60 | ) | (60 | ) |
| Recognized net actuarial (gain)       |   | —                |   | —                    |   | (65 | ) | 192 |   | 176 |   | 29 |   |
| Net periodic benefit cost             |   | $                     | 409    |                      | $      | 277 |   | $ | 118 |   | $ | 811 |   | $ | 863 |   | $ | 529 |   |
|                                  |   |                  |   |                      |   |   |   |   |   |   |   |   |   |
| Additional FAS 88 Termination Benefit |   | —                |   | $                         | 231    |   | — |   | — |   | $ | 171 |   | — |   |

 

InNovember, 2002, a Voluntary Early Retirement Program (VERP) was offered toemployees age 59 and over with 16 years of service.  Of the 13 employees eligible for the program, 10 accepted theprogram and retired effective January 1, 2003. The impact of the VERP is included in “Additional FAS 88 TerminationBenefit,” above.

 
|                              |   | **Pension  Benefits** |       | **Health  Care Benefits** |       |
|-----------------------------------|--------|-----------------------|------------|---------------------------|------------|
| **Cash Flows**                    |   | **Employer**          | ** ** | **Employee**              | ** ** | **Participants** | ** ** |
| Contributions                     |   |                  |       |                      |       |   |   |
| 2002                              |   | $                     | 0          |                      | $          | 297,797 |   | $ | 1,032 |   |
| 2003                              |   | $                     | 685,570    |                      | $          | 422,804 |   | $ | 30,707 |   |
| Expected 2004                     |   | $                     | 400,000    |                      | $          | 505,869 |   | $ | 30,665 |   |
|                              |   |                  |       |                      |       |   |   |
| Benefit Payments                  |   |                  |       |                      |       |   |   |
| 2002                              |   | $                     | 1,051,107  |                      | $          | 460,391 |   |   |   |
| 2003                              |   | $                     | 1,219,266  |                      | $          | 549,089 |   |   |   |
|                              |   |                  |       |                      |       |   |   |
| Estimated Future Benefit Payments |   |                  |       |                      |       |   |   |
| 2004                              |   | $                     | 1,106,582  |                      | $          | 582,180 |   |   |   |
| 2005                              |   | $                     | 1,089,107  |                      | $          | 580,407 |   |   |   |
| 2006                              |   | $                     | 1,072,849  |                      | $          | 591,450 |   |   |   |
| 2007                              |   | $                     | 1,062,763  |                      | $          | 600,287 |   |   |   |
| 2008                              |   | $                     | 1,055,360  |                      | $          | 615,462 |   |   |   |
| Years 2009 – 2013            |   | $                     | 5,738,340  |                      | $          | 3,625,219 |   |   |   |

 

OnDecember 8, 2003, President Bush signed into law the Medicare PrescriptionDrug, Improvement and Modernization Act of 2003 (“the Act”). The Act introducesa federal subsidy to sponsors of retiree health care benefit plans that providea benefit that is at least actuarially equivalent to Medicare Part D.

 

Inaccordance with FASB Staff Position No. FAS 106-1, any measures of theaccumulated pension benefit obligation (“APBO”) or net periodic post-retirementbenefit cost in the Company’s financial statements or accompanying notes do notreflect the effects of the Act on its plan. Specific authoritative guidance on the accounting for the federalsubsidy is pending and that guidance, when issued, could require a sponsor tochange previously reported information. Moreover, the issues of how and whenthe federal subsidy should be accounted for are not yet resolved by the FASB.The Company has not yet determined the potential effects of the Act on itsfuture post-retirement costs, including the participation rates in its benefitplans, nor whether any amendments to its benefit plans are appropriate giventhe provisions of the Act.

 

**Retirement Savings Plan**

TheCompany has adopted a defined contribution plan (under Section 401(k) of theInternal Revenue Code) covering substantially all of the Company’semployees.  Participants may elect todefer from 1% to 15% of current compensation, and the Company contributes suchamounts to the plan.  The Company alsomatches contributions, with a maximum matching contribution of 2% of currentcompensation.  Participants are 100%vested at all times in contributions made on their behalf.  The Company’s matching contributions to theplan were approximately $112,000, $117,000 and $114,000 in 2003, 2002, and2001, respectively.

 

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11.   FAIR VALUE OF FINANCIAL INSTRUMENTS

 

TheCompany’s financial instruments consist primarily of cash in banks,receivables, and debt.  The carryingamounts for cash, receivables, and short-term debt approximate their fair valuedue to the short-term nature of these items. At December 31, 2003, the Company’s long term debt had a carrying valueand a fair value of approximately $30.7 million.

 

12.   COMMITMENTS, CONTINGENCIES AND REGULATORY MATTERS

 

**MPUC Approves Elements of Rates EffectiveMarch 1, 2000**

OnOctober 14, 1998, and subsequently amended on February 9, 1999, August 11,1999, and December 15, 1999, MPS filed its determination of stranded costs,transmission and distribution costs, and rate design with the MPUC.  MPS’s amended testimony supported its $95.7million estimate of stranded costs, net of available value from the sale of thegenerating assets, when deregulation occurred on March 1, 2000.  The major components include the remaininginvestment in Seabrook, the above-market costs of the amended power purchaseagreement and recovery of fuel expense deferrals related to WS, the obligationfor remaining operating expenses and recovery of MPS’s remaining investment inMaine Yankee, and the recovery of several other regulatory assets.

 

OnOctober 15, 1999, MPS filed with the MPUC a Stipulation resolving the revenuerequirement and rate design issues for MPS’s transmission and distribution(“T&D”) utility.  This Stipulationwas signed by the Office of Public Advocate and approval was recommended by theMPUC Staff.  Under the Stipulation,MPS’s total annual T&D revenue requirement of $16,640,000, went into effecton March 1, 2000.  This revenuerequirement includes a 10.7% return on equity with a capital structure based on51% common equity.  The Stipulationfurther provided that the precise level of stranded cost recovery could not bedetermined until final determination of all costs associated with the sale ofMPS’s generating assets, but did set forth some general principles concerningMPS’s ultimate stranded costs recovery, including agreement that the majorcomponents of MPS’s stranded costs are legitimate, verifiable and unmitigable,and therefore subject to recovery in rates.

 

OnJanuary 27, 2000, the MPUC approved a Stipulation in Phase II of Docket No.98-577 that provided for the recovery in rates of MPS’s strandedinvestment.  The major element of thePhase II Stipulation was the $12.5 million of stranded investment recoverableannually beginning March 1, 2000, with that level of recovery set for twoyears.  This revenue requirementincludes a return on un-recovered stranded investment based on the capitalstructure approved by the MPUC in its December 1, 1999 Order.  The approved capital structure consists of51% common equity with an authorized return on equity of 10.7%.  The Phase II Stipulation also allowed MPS tooffset its un-recovered stranded investment in Seabrook by approximately $7million, (details provided in chart in “CapacityArrangements — Generating Asset Sale,” below) representing an amountequal to 35% of the available value from the sale of the generationassets.  The parties to the Phase IIStipulation also resolved several rate design issues, principally theelimination of the inclining block rate for residential customers.  In addition, MPS was granted severalaccounting orders incorporating certain accounting methodologies used indetermining the elements of stranded costs. On August 4, 2000, the MPUC authorized MPS to record the differencebetween the approved contracts for two large industrial customers and theircurrent special discount rates, designed for customer retention, as revenue anda regulatory asset.  This flexiblepricing adjustment resulted in recognition of $200,000 and $961,000 of revenuesand a corresponding regulatory asset in 2002 and 2001, respectively.  The annual revenue requirement associatedwith the recovery of stranded costs will be reviewed at least every threeyears, and was reviewed in late 2001 and late 2003.  See “MPUC Approves Stranded Cost Revenue Requirements EffectiveMarch 1, 2002,” and “MPUC Approves Stranded Cost Revenue Requirements EffectiveMarch 1, 2004” below, for additional information.

 

**MPUC Approves Stranded Cost Revenue Requirements EffectiveMarch 1, 2002**

OnMay 8, 2001, the MPUC issued a notice of investigation to determine whetherMPS’s annual recovery of $12.5 million in stranded investment must be changed,effective March 1, 2002, to reflect any changes in its stranded costs.  On July 12, 2001, MPS filed its proposal inwhich it advocated continuing the $12.5 million annual recovery of strandedcosts and also proposed to begin the recovery of deferred amounts associatedwith the discounted rates it had made available to certain industrialcustomers.  Also at issue in theproceeding was an insurance refund associated with Maine Yankee, of which MPS’sshare is $1,005,000.  As of December 31,2001, MPS reflected the refund as a miscellaneous deferred credit.  In February, 2002, $854,000 of the refundwas applied to stranded costs and $151,000 of the refund was applied to othernon-operating revenue.  A Stipulationplaced before the MPUC in January, 2002 included annual stranded cost recoveryof $11,540,000 and a 15% sharing of the Maine Yankee insurance refund withMPS’s shareholders, thereby leaving the rates charged to retail customers thesame.  This Stipulation was approved bythe MPUC on January 7, 2002, and the appropriate order was issued on February27, 2002.

 

**MPUC Approves Stranded Cost Revenue Requirements EffectiveMarch 1, 2004**

Inan Order dated February 27, 2004, MPS received final approval from the MPUC forthe stranded cost revenue component of its electric delivery rates, effectiveMarch 1, 2004. Under Title 35-A of the Maine Revised Statutes Annotated,Section 3208, the MPUC is required to periodically investigate and adjust thestranded cost charges reflected in the rates of a transmission and distributionutility.  In accordance with this provision, on September 16, 2003, inDocket No. 2003-666, the MPUC issued a notice of investigation in order todetermine whether MPS’s rates must be changed effective March 1, 2004 toreflect any changes in MPS’s stranded costs.  On February 27, 2004, the MPUCissued an order approving a stipulation under which MPS is allowed to recover$11,785,339 per year to satisfy its approved stranded cost revenue requirementsfor the “rate effective period” beginning March 1, 2004 and ending on December31, 2006.  The approved revenuerequirement for the rate effective period ended February 29, 2004 was$11,540,000.  Under the approvedstipulation MPS’s stranded

 

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costrates approved in Docket No. 2003-85 will remain in effect during the rateeffective period**.**  The stipulation approved by the MPUC inDocket 2003-666 also approved and reaffirmed each of the elements andassociated balances of MPS’s recoverable stranded costs.

 

Asexplained more fully below, during the course of Docket 2003-666 the partiesreviewed the manner in which MPS was recovering and accounting for its carryingcharges associated with the deferred fuel element of its stranded cost.  As a result of the stipulation approved inDocket No. 2003-666, MPS will record deferred income tax expense associatedwith deferred fuel carrying charges during the rate effective period from March1, 2004 through December 31, 2006, as compared to past treatment where suchexpense was deferred for future recovery. Because the deferred fuel carrying charge component of MPS’s strandedcosts is not expected to fully amortize until 2012, the Company anticipatesthat deferred income tax expense will be incurred through 2012, subject tofuture stranded cost filings with the MPUC. In Dockets 98-577 and 2001-240, the parties stipulated that MPS wouldaccrue carrying costs on its unrecovered fuel balance (the “deferred fuelaccount”) during the respective rate effective period at its net of tax cost ofcapital rate.  Consistent with the stipulation in Docket No. 2001-240, MPSaccrued a carrying charge using the net of tax rate of 7.98% through October31, 2003 applied against its unrecovered deferred fuel balance.  FromNovember 1, 2003 to December 31, 2003 MPS accrued its carrying charge using anet of tax rate of 7.06%, based on the cost of capital approved in Docket No.2003-85 (described in Docket 2003-85 Partial Stipulation filed on September 2,2003).

 

Duringthe course of the Docket 2003-666 proceeding, MPS determined that it had notpreviously recognized accumulated deferred income taxes with respect to thecarrying charges on the deferred fuel account and that the recording of adeferred tax liability to its balance sheet pursuant to FAS 109 in the amountof $2.896 million was required, of this, $2.739 million was recorded as ofDecember 31, 2003. The deferred fuel balance as of March 1, 2004 prior to anyadjustment is projected to be $18,838,000. Under the stipulation MPS is allowed to adjust its accumulated deferred incometax account and the deferred fuel balance by $2,896,000, as of March 1, 2004,resulting in a total projected deferred balance as of March 1, 2004 of$21,734,000.  Under the approved stipulation the parties also agreed thatthe return component on the deferred fuel balance should be reduced in such amanner that ratepayers were held harmless on a net present value basis as aresult of the March 1, 2004 adjustment to the deferred fuel balance. During the rate effective period ending on December 31, 2006, the overallpre-tax return component on the deferred fuel balance will be 8.28%, reflectinga 6.17% return on equity.  The return on the deferred fuel balance will bereviewed in future stranded cost rate setting proceedings and will be adjustedas necessary in order that the present value of the revenue requirements of thedeferred fuel account without the adjustments described above equals thepresent value of the revenue requirements of the deferred fuel account with theadjustments.  MPS concludes that as a result of this stipulation and theforegoing described adjustment to the deferred fuel balance and the accumulateddeferred income tax liability that no further adjustment is necessary under FAS109 in order to reflect prior unrecorded deferred income taxes.

 

Thedecreased cost of capital rate beginning on March 1, 2004 will have an impacton future stranded cost earnings and cash flow, but will not impact futuredistribution or transmission earnings.  In the year 2004, the Companyanticipates that it will record deferred income tax expense of approximately$412,000 associated with the deferred fuel carrying charges.  The amount of deferred income tax expenserecorded in future years will vary depending upon the amount of the accruedcarrying charge in any year, and the tax rates then in effect.  The Company anticipates that earnings fromcarrying charges on its stranded costs in 2004 will be approximately $267,000lower than the amount that would have been recorded had the Company continuedto use the original cost of capital on its deferred fuel balance, for a totalearnings impact of $679,000 in 2004. The impact on future earnings resulting from the agreed upon lower costof capital, when compared against the cost of capital used in prior strandedcost filings, will vary.  Schedules filed bythe Company as part of thestipulation in Docket No. 2003-666 reflect the deferred fuel balance as ofMarch 1, 2003, certain additions to relating to the Wheelabrator-Shermanabove-market contract through December, 2006 and the amortization of thedeferred fuel balance though 2012. Applying these assumptions, current tax rates and the agreed upon costof capital, the Company anticipates that the impact on future earningsresulting from recording deferred income taxes on accrued carrying charges andapplying a lower cost of capital to the deferred fuel balance could range from$1.0 million in 2005, increasing to $1.2 million in 2007, then graduallydecreasing to $17,000 in 2012.  Theseamounts may vary with changes in the deferred fuel balance and other variableswhich the Company cannot predict with certainty at this time.  Management is analyzing means to mitigatethe impact of this stipulation on future net income and cash flows.

 

Inaddition to the return allowed on its deferred fuel account as set forth above,under the approved stipulation MPS shall be allowed to recover the followingpre-tax returns on the applicable stranded cost rate base components during therate effective period: (i) the pre-tax return on unrecovered balance of theWheelabrator-Sherman Contract Buydown shall be 2.79% plus its FAME issuancecosts; (ii) the pre-tax return on the unrecovered Seabrook Investment andapproved special rate contract costs shall be 11.74%; and, (iii) the pre-taxreturn on the Maine Yankee decommissioning related costs shall be 8.56%.

 

**MPUC Request for Approval ofAlternative Rate Plan**

OnMarch 6, 2003, MPS submitted its formal “Request for Approval of Alternate RatePlan” (“ARP”) (MPUC Docket 2003-85). The proposal was a seven-year rate planfor its distribution delivery services and had a target implementation date onor before July 1, 2003. The ARP is an alternative form of regulating MPS’sdistribution assets, similar to the performance rate plans the MPUC has adoptedfor Central Maine Power Company and Bangor Hydro-Electric Company. Inaccordance with a recently enacted state statute, Maine utilities requesting anARP must now also file cost of service financial information as part of the ARPproceeding.  In connection with thisaspect of the ARP review and analysis, MPS has been authorized by, and hasreceived final approval from the MPUC to increase its electric deliveryrates.  Following the entry of aprocedural order, discovery, and a public conference, by an Order dated October29, 2003, the MPUC approved a final Supplemental Stipulation in connection withthis rate increase.  As a result,effective November 1, 2003, MPS increased its total electric delivery rate by 3.78%,or a total revenue increase not to exceed $1,126,552.  This increase includes $685,037 in distribution revenues and$441,515 in transmission revenues. Following the entry of the order approving the Supplemental Stipulation,the ARP proceeding was 

 

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bifurcatedand MPS had until December 31, 2003 to notify the MPUC of its intention toproceed with the remaining elements of the ARP or withdraw the ARP docket.  On December 29, 2003, MPS withdrew itsrequest for approval for its ARP from the proceedings.

 

**FERC Approves Increase in Retail Transmission Rates**

TheFERC approved wholesale transmission rates effective June 1, 2002, in FERCDocket No. ER00-1053, a proceeding related to MPS’s Open Access TransmissionTariff (“OATT”).  On August 6, 2002, MPSnotified the MPUC of its intention to implement the associated transmissioncomponent of its retail T&D rates, with the new rates effective October 1,2002.  The FERC maintains jurisdictionover all transmission rates.  Thisimplementation increased overall delivery rates by approximately 2%.  MPS increased its transmission rates subjectto refund and issuance of a final order by FERC, which was issued in March,2003.

 

**FERC Open Access Transmission Tariff (“OATT”) Filing**

Pursuantto Section 2.4 of the Settlement Agreement filed on September 30, 2000, inDocket No. ER00-1053-000, and accepted by the FERC on September 15, 2000, MPSprovided parties and FERC staff on June 10, 2003, the OATT Formula Rate chargesthat MPS proposed to apply on June 1, 2003, together with back-up materials. OnJune 1, 2003, the Formula Rate charges became effective subject to a refundthat may occur in connection with a settlement stipulation negotiated by theparties to the proceeding.  In general,MPS is seeking a slight modification to its rate formula under its transmissiontariff, including, among others, changes in certain depreciation rates fortransmission property, and allocations of certain operating expenses andrevenues.  The return on common equityused in determining the rate of return on transmission rate base will remain at11%.  An Order approving the 2003informational filings and OATT revisions is expected during the first quarterof 2004.  MPS is currently engaged indiscussions with the parties and FERC staff to resolve all outstanding issuesin the filing with the objective of reaching a settlement agreement.  In February 2004, the parties executed asettlement which was filed with the FERC on February 11, 2004.

 

**Seabrook Nuclear Power Project**

In1986, MPS sold its 1.46% ownership interest in the Seabrook Nuclear PowerProject with a cost of approximately $92.1 million for $21.4 million.  Both the MPUC and the FERC allowed recoveryof MPS’s remaining investment in Seabrook Units 1 and 2, adjusted by disallowedcosts and sale proceeds, with the costs being amortized over thirty years.

 

RecoverableSeabrook costs at December 31, 2003 and 2002 are as follows:

 
|                                             |   | **(Dollars  in Thousands)** |       |
|--------------------------------------------------|--------|-----------------------------|------------|
|                                             |   | **2003**                    |       | **2002** |   |
|                                             |   |                        | ** ** |   | ** ** |
| Recoverable Seabrook Costs                       |   | $                           | 43,136     |   | $ | 43,136 |   |
| Accumulated Amortization                         |   | (29,247                     | )          | (28,137 | ) |
| Recoverable Seabrook Costs, Net of  Amortization |   | $                           | 13,889     |   | $ | 14,999 |   |

 

InMarch 2000, MPS was allowed to offset $7.0 million of the recoverable Seabrookcosts with the available value from its deferred asset sale gain, as detailedin “Capacity Arrangements-Generating Asset Sale,” below.  The decrease in recoverable Seabrook costsrepresents monthly amortization, recorded as amortization expense in Januaryand February, 2000, and then as stranded costs applied to the deferred assetsale gain beginning in March, 2000, as described in “MPUC Approves Elements ofRates Effective March 1, 2000,” above.

 

**Nuclear Insurance**

In1988, Congress extended the Price-Anderson Act for fifteen years and increasedthe maximum liability for a nuclear-related accident.  In the event of a nuclear accident, coverage for the higherliability now provided for by commercial insurance coverage will be provided bya retrospective premium of up to $88.1 million for each reactor owned, with amaximum assessment of $10 million per reactor for any year.  Maine Yankee is not liable for “events” or“accidents” occurring after January 7, 1999, when exemption was received fromthe Nuclear Regulatory Commission. These limits are also subject to inflation indexing at five-yearintervals as well as an additional 5% surcharge, should total claims exceedfunds available to pay such claims. Based on MPS’s 5% equity ownership in Maine Yankee (see Note 5,“Investments in Associated Companies”), MPS’s share of any retrospectivepremium would not exceed approximately $2.9 million or $.5 million annually,without considering inflation indexing.

 

**Generating Asset Sale**

OnJuly 7, 1998, MPS and WPS Power Development, Inc., (“WPS-PDI”) signed a purchaseand sale agreement for MPS’s electric generating assets.  WPS-PDI agreed to purchase 91.8 megawatts ofgenerating capacity for $37.4 million, which was 3.2 times higher than the netbook value of the assets.  The gain fromthe asset sale reduced stranded cost revenue requirements, as discussed in“MPUC Approves Elements of Rates Effective March 1, 2000,” above.

 

OnJune 8, 1999, after receiving all of the major regulatory approvals, MPScompleted the sale to WPS-PDI for $37.4 million.  MPS’s 5% ownership in Maine Yankee was not part of the sale,since the plant is being decommissioned. After paying Canadian, Federal and State

 

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incometaxes, the remaining proceeds, along with interest in the trust account, wereused to reduce MPS’s debt.  The gainfrom the sale was deferred, and recognized according to the MPUC’s decision onMPS’s determination of stranded costs, transmission and distribution costs, andrate design.  The components of thedeferred gain were as follows:

 

|                                           |   | **(Dollars  in Millions)** |   |
|------------------------------------------------|--------|----------------------------|--------|
| Gross proceeds *                               |   | $                          | 38.6   |   |
| Settlement adjustments                         |   | (.1                        | )      |
| Net proceeds                                   |   | 38.5                       |   |
| Net book value                                 |   | (11.5                      | )      |
| Excess taxes on sale of Canadian Assets        |   | (3.4                       | )      |
| Transition costs, net                          |   | (1.9                       | )      |
| Other                                          |   | .7                         |   |
| Available deferred gain                        |   | 22.4                       |   |
| Utilization of available value per MPUC orders |   | (22.4                      | )      |
| Remaining deferred gain                        |   | $                          | 0      |   |

 

----

*    Gross proceeds were increased by $1.05million before tax in September 2001 due to an MPUC approved settlement betweenCMP and other former owners of Wyman Unit No. 4, including MPS.  The proceeds increased the deferred gain andfurther reduced stranded costs.

 

Withthe sale of MPS’s generating assets in June, 1999, MPS purchased energy fromthe new owners under an agreement that expired February 29, 2000, and thesepurchases are classified as purchased energy.

 

Aspart of the generating asset sale on June 8, 1999, MPS has entered into twoindemnity obligations with the purchaser, WPS-PDI.  First, MPS will be liable, with certain limitations, for certainAroostook River flowage damage.  Thisliability will continue for ten years after the sale and shall not exceed$2,000,000 in the aggregate.  Second,MPS has warranteed the condition of the sites sold to WPS-PDI, with anaggregate limit of $3,000,000 for two years after the date of sale, and fiveyears after the sale for environmental claims. The Company is unaware of any pending claims under either of theseindemnity obligations.

 

**Maine Yankee**

MPSowns 5% of the common stock of Maine Yankee, which operated an 860 MW nuclearpower plant (the “Plant”) in Wiscasset, Maine. On August 6, 1997, the Board of Directors of Maine Yankee voted topermanently cease power operations and to begin decommissioning the Plant.

 

OnSeptember 1, 1997, Maine Yankee estimated the sum of the future payments forthe closing, decommissioning and recovery of the remaining investment in MaineYankee to be approximately $930 million, of which MPS’s 5% share would beapproximately $46.5 million.  On ninedifferent occasions dating back to December 1998, Maine Yankee has updated itsestimate of decommissioning costs based on the Settlement.  Legislation enacted in Maine in 1997 calledfor restructuring the electric utility industry and provided for recovery ofdecommissioning costs, to the extent allowed by federal regulation, through therates charged by the transmission and distribution companies.  Based on the Maine legislation andregulation precedent established by the FERC in its opinion relating to thedecommissioning of the Yankee Atomic nuclear plant, MPS believes that it isentitled to recover substantially all of its share of such costs from itscustomers and, as of December 31, 2003, is carrying on its consolidated balancesheet a regulatory asset and a corresponding liability in the amount of $17.8million, which reflects MPS’s 5% share of Maine Yankee’s September 2003 revisedestimate of the remaining decommissioning costs, less actual decommissioningpayments made since then, and discounted by a risk-free interest rate.

 

TheMPUC, on January 27, 2002, approved a Stipulation providing for the recovery ofstranded investment, for a two-year period from March 1, 2002 until February29, 2004, which includes MPS’s share of Maine Yankee decommissioning expenses,Maine Yankee replacement power costs, and the remaining Maine Yankeeinvestment.

 

Asof December 31, 2003, deferred fuel of $20.5 million is reflected as aregulatory asset, which includes the Maine Yankee replacement power costs, aswell as deferred Wheelabrator-Sherman fuel costs.

 

Inaccordance with its 1999 FERC rate case settlement, on October 21, 2003, MaineYankee filed a revised formula rate schedule with the FERC, proposing aneffective date of January 1, 2004.  Thefiling contained a revised decommissioning cost estimate and collectionschedule to assure that adequate funds are available to safely and promptlydecommission the Plant and operate and manage the independent spent fuelstorage installation (“ISFSI”). In the filing, Maine Yankee also requested achange in its billing formula and an increase in the level of collection forcertain post-retirement benefits.  Tomeet these needs, Maine Yankee proposed to collect an additional $3.77 millionper year over current decommissioning collection levels through October 2008,exclusive of any income-tax liability, for the decommissioning and spent-fuelmanagement expense, and to collect from November 2008 through October 2010, theamounts needed to replenish its Spent Fuel Trust for funds previously used forISFSI construction.  On December 19,2003, the FERC issued an order accepting the new rates effective January 1,2004, subject to refund pending a hearing. Maine Yankee believes it is entitled to recover the costs underlying theproposed new rates, but cannot predict the outcome of the rate proceeding.

 

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Aspreviously reported, in May 2000, Maine Yankee terminated its decommissioningoperations contract with Stone & Webster Engineering Corp. (“Stone &Webster”) pursuant to the terms of the contract.  Stone & Webster disputed Maine Yankee’s grounds for thetermination.  In June 2000, Stone &Webster filed a voluntary petition under Chapter 11 of the United StatesBankruptcy Code with the United States Bankruptcy Court for the District ofDelaware.  Since the contracttermination, Maine Yankee has managed the decommissioning project itself.

 

InDecember 2001, Maine Yankee and Federal Insurance Company (“Federal”) enteredinto a settlement agreement resolving litigation between the parties, pursuantto which Federal paid Maine Yankee $44 million.  That amount represented full payment under the performance bondprovided by Federal, plus an additional amount under its payment bondreflecting certain payments previously made by Maine Yankee to subcontractorsand suppliers who had not been fully paid by Stone & Webster.  Maine Yankee deposited the payment in itsdecommissioning trust fund to offset past and future expenses resulting fromthe failures of Stone & Webster.

 

Inaddition, Maine Yankee continued to pursue its claim for damages that wasoriginally filed against Stone & Webster and its then parent corporationsin August 2000, in the Bankruptcy Court in Delaware.  After recognizing the payment from Federal, Maine Yankee asserteda right to recover an additional $21 million in that court from the bankruptcyestates.  After extensive interimproceedings and negotiations, in the third quarter of 2003, the major partiesagreed to a joint plan of reorganization under which Maine Yankee would have anallowed claim of $20.3 million against the principal bankrupt estate, subjectto certain contingencies.  Under theplan, Maine Yankee would also have a first lien on any distributions from arelated bankrupt estate in the proceeding on any amount needed to increase itsactual cash recovery to $18.5 million. On January 13, 2004, Maine Yankee received an initial distribution of$8.4 million, which it deposited in its decommissioning trust fund.  The amount of cash that Maine Yankee willactually recover on the balance of its claim remains contingent on a number offactors beyond Maine Yankee’s control that affect the amount of bankrupt estateassets ultimately available to pay the claim. Maine Yankee has settled its litigation claims against Stone &Webster’s bankruptcy estate and Envirocare in connection with Stone &Webster’s bankruptcy proceeding.

 

Federallegislation enacted in 1987 directed the Department of Energy (“DOE”) toproceed with the studies necessary to develop and operate a permanenthigh-level waste (spent fuel) repository at Yucca Mountain, Nevada. The projecthas encountered delays, and the DOE has indicated that the permanent disposalsite is not expected to open before 2010, although originally scheduled to openin 1998.

 

Inaccordance with the process set forth in the legislation, in February 2002, theSecretary of Energy recommended the Yucca Mountain site to the President forthe development of a nuclear waste repository, and the President thenrecommended development of the site to Congress. As provided in the statutoryprocedure, the state of Nevada formally objected to the site in April 2002, andin July 2002, Congress overrode the objection. Construction of the repositoryrequires the approval of the Nuclear Regulatory Commission (“NRC”), uponapplication of the DOE, and after a public adjudicatory hearing, as well as asecond NRC approval after completion of construction to operate the facility.Maine Yankee cannot predict the timing or results of those proceedings.

 

InNovember 1997, the U.S. Court of Appeals for the District of Columbia Circuitconfirmed the obligation of theDOE under the Nuclear Waste Policy Act of 1982 to take responsibilityfor spent nuclear fuel from commercial reactors in January 1998. After anunsuccessful effort by Maine Yankee in the same court to compel the DOE to takeMaine Yankee’s spent fuel, in June 1998, Maine Yankee filed a claim for moneydamages in the U.S. Court of Federal Claims for the costs associated with theDOE’s default. In November 1998, the Court granted summary judgment in favor ofMaine Yankee, ruling the DOE had violated its contractual obligations, butleaving the amount of damages incurred by Maine Yankee for later determination bythe Court.  Since then the parties have been engaged in extensivediscovery and resolution of pre-trial issues in the damages phase of theproceeding.  On June 26, 2003, the Court denied three motions for summaryjudgment filed by the DOE and indicated in its order that final pretrialsubmissions were to be due at the end of September 2003, with a trial to followshortly thereafter.  However, at the endof September, the DOE requested an extension of time to complete its discovery,which was later granted, extending the discovery period to February 12,2004.  Maine Yankee is pursuing itsclaim for determination of damages vigorously, but cannot predict the outcomeor timing of the determination.

 

Atthe same time, as an interim measure until the DOE meets its contractualobligation to dispose of Maine Yankee’s spent fuel at Yucca Mountain orelsewhere, Maine Yankee constructed an ISFSI, utilizing dry-cask storage, onthe Plant site and has completed the process of transferring the spent fuelfrom the spent-fuel pool to the individual casks and the casks to the ISFSI. Maine Yankee’s total cost of maintaining the ISFSI will be substantiallyaffected by heightened security costs and by the length of time it is requiredto operate the ISFSI before the DOE honors its contractual obligation to takethe fuel from the site.  Maine Yankee’s current decommissioning costsestimate is based on an assumption that its operation of the ISFSI will end in2023, but the actual period of operation and cost may vary.

 

OnJanuary 15, 2003, Maine Yankee notified NAC International (“NAC”), thecontractor responsible for providing for the fabrication of the spent-fuelcasks and transferring the fuel to the casks and the casks to the ISFSI, thatMaine Yankee was terminating its contract with NAC pursuant to the terms of thecontract. NAC had been experiencing financial difficulties and had requestedrelief from the terms of the contract. Maine Yankee believes that NAC had alsofailed to perform its contractual obligations in accordance with the terms ofthe contract and provide adequate assurance of its ability to do so in thefuture. NAC disputed Maine Yankee’s basis for terminating the contract andserved Maine Yankee with a demand to arbitrate the dispute and a request fordamages.  Maine Yankee, in turn, filed suit in the U.S. District Court forthe District of Maine against NAC, its bonding company, and its parentguarantor, wherein Maine Yankee sought, among other things, damages due toNAC’s failure to perform.  Maine Yankee also entered into contracts withthe major subcontractors and resumed the transfer of fuel to the ISFSI underits own management.

 

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InApril 2003, after extensive negotiations, the parties entered into acomprehensive settlement agreement resolving all the disputed issues andproviding for Maine Yankee to replace NAC in managing the completion of thefuel-transfer work.  The settlement included a payment for $10.4 millionto Maine Yankee to compensate Maine Yankee for higher costs incurred or to beincurred as a result of NAC’s failure to perform its contractual obligations. The payment was reflected in Maine Yankee’s second quarter 2003 results. Although the NAC dispute contributed to a slowdown in the progress of thefuel transfer work in the first quarter of 2003, since then Maine Yankee hasimplemented additional efficiencies and the pace of work has improved to apoint where it has been consistently exceeding the pre-2003 pace.  Thetransfer of spent fuel to the ISFSI was completed in the first quarter of 2004.

 

TheFederal Low-Level Radioactive Waste Policy Amendments Act, enacted in 1986,required states, either alone or in multi-state compacts, to provide for thedisposal of low-level radioactive waste generated within their borders. The States of Maine, Texas and Vermont entered into a compact for the disposalof low-level waste over a 30 year period at a then-planned facility in westTexas.

 

Theterms of the compact provided that the state of Maine would contribute $25million, payable (1) in two equal installments, the first after ratification byCongress and the second upon commencement of operation of the Texas facility,or (2) alternatively, if agreed by the three states, in accordance with theschedule for repayment of bonds issued for the development or operation of thefacility.  By statute, those costs were to be initially assessed againstMaine Yankee, as the operator of a nuclear power plant in Maine.  As required by the 1986 Act, the UnitedStates Congress ratified the compact in September 1998.  However, inOctober 1998, the Texas Natural Resource Conservation Commission denied apermit for the proposed west Texas site, and efforts to site such a facility inTexas were suspended.  Maine Yankee is shipping its low-level waste toother facilities licensed to accept such material.

 

Atits 2002 session, the Maine legislature enacted legislation providing for thewithdrawal of the state of Maine from the Texas compact pursuant to the termsof the compact.  The legislation cited the 1997 closure of the MaineYankee plant and the inability of the state of Texas to cause a disposalfacility to be built in a timely manner under the compact as the reasons forinitiating the withdrawal process.  However, in its 2003 session, theTexas legislature enacted a bill that reactivated the process of siting adisposal facility in Texas and provides for Texas to seek payment from Maine of$12.5 million under the compact.  Byletter dated September 10, 2003, the Attorney General of Texas requestedpayment of $12.5 million from the state of Maine, to which the state of Maineresponded by denying liability.  Maine Yankee believes that withdrawalfrom the compact by the state of Maine is legally justified, but cannot predictthe results of the Texas legislation on the state of Maine or Maine Yankee orof any attempt by any party to challenge the state of Maine’s withdrawal fromthe compact or to assess Maine Yankee for any payments under the compact.

 

OnFebruary 28, 2003, the Nuclear Regulatory Commission approved Maine Yankee’sLicense Termination Plan (“LTP”).  TheLTP was approved without any unexpected conditions.  In accordance with the plan accepted by the SEC, Maine Yankee hasstarted the redemption of its common stock periodically through 2008.

 

**MEPCO**

MPSalso owns 7.49% of the common stock of Maine Electric Power Company, Inc.,(“MEPCO”).  MEPCO owns and operates a345-KV (“kilovolt”) transmission line about 180 miles long which connects theNB Power system with the New England Power Pool.

 

**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 126,582MWH per year) of a 17.6 MW biomass plant through December 31, 2000.  The PPA was subsequently amended in 1997,with WS agreeing to price reductions of $10 million through the end of theoriginal term in exchange for an up-front payment of $8.7 million in May,1998.  The MPUC’s December, 1997approval of the amended PPA included a determination that the up-front paymentwould be treated as stranded cost and, therefore, recovered in rates of thetransmission and distribution company, as discussed in “MPUC Approves Elementsof Rates Effective March 1, 2000,” above. Total stranded cost included as a regulatory asset under the caption“deferred fuel and purchased energy cost” in the accompanying balance sheetrelated to this contract is $20.5 million and $13.1 million at December 31,2003 and 2002, 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 supply purchases under this contractthrough February 29, 2000 were $2.6 million. As described in “MPUC Approves Elements of Rates Effective March 1,2000,” above, purchases from WS after March 1, 2000 are reflected as strandedcosts.

 

MPSestimates its remaining commitment to purchase power under this contract to be$35.7 million from January 1, 2004 through 2006.  MPS has entered a contract whereby WPS-PDI takes delivery of thepower through February 28, 2002 at market prices, and beginning March 1, 2002through February 29, 2004, Energy Atlantic, the Company’s wholly-owned marketingsubsidiary, will be taking delivery of 40% of WS’s output and WPS-PDI will takethe remainder.  MPS estimates that theremaining stranded costs will be $21.6 million through 2006, assumingarrangements similar to the one with WPS-PDI and EA will be in place for thatperiod.

 

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**Construction Program**

Expenditureson additions, replacements and equipment for the years ended December 31, 2003,2002 and 2001, along with 2004 estimated expenditures, and are as follows:

 
|               |   | **2004**                   |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------|--------|----------------------------|--------|----------|--------|----------|--------|----------|--------|
|               |   | **(Unaudited  Estimates)** |   |     |   |     |   |     |   |
| MPS                |   |                       |   |     |   |     |   |     |   |
| Transmission       |   | $                          | 498    |     | $      | 224      |   | $        | 1,007  |   | $ | 759 |   |
| Distribution       |   | 2,650                      |   | 3,520    |   | 4,004    |   | 3,317    |   |
| General            |   | 2,644                      |   | 865      |   | 911      |   | 608      |   |
| Total MPS          |   | 5,792                      |   | 4,609    |   | 5,922    |   | 4,684    |   |
| Other Subsidiaries |   | 0                          |   | 268      |   | 6        |   | 23       |   |
| Total              |   | $                          | 5,792  |     | $      | 4,877    |   | $        | 5,928  |   | $ | 4,707 |   |

 

**Off-Balance Sheet Arrangements**

The Company does not have any variable interestentities as defined by Financial Accounting Standards Board Interpretation No.46, “Consolidation of Variable Interest Entities,” (“FIN 46”) promulgated onJanuary 17, 2003 and discussed in the Company’s reports on Form 10-Q for thequarters ended June 30, 2003 and September 30, 2003.  Except for operating leases used for office and field equipment,vehicles and computer hardware and software, accounted for in accordance withFinancial Accounting Standards No. 13, “Accounting for Leases,” (“FAS 13”) theCompany has no other form of off-balance sheet arrangements.  The following summarizes payments for leasesfor a period in excess of one year for the years ended December 31, 2003 and2002:

 
|                           |   | **(Dollars  in Thousands)** |   |
|--------------------------------|--------|-----------------------------|--------|
|                           |   | **2003**                    |   | **2002** |   |
|                           |   |                        |   |   |   |
| Office Equipment               |   | $                           | 0      |   | $ | 9 |   |
| Vehicles                       |   | 0                           |   | 5 |   |
| Computer Hardware and Software |   | 53                          |   | 112 |   |
| Rights of Way                  |   | 29                          |   | 28 |   |
| Field Equipment                |   | 21                          |   | 30 |   |
|                           |   |                        |   |   |   |
| Total                          |   | $                           | 103    |   | $ | 184 |   |

 

Thefuture minimum lease payments for the items listed above for the next fiveyears are as follows:

 

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

 

| **Years** |   | **Minimum  Lease Payments** |   |
|-----------|--------|-----------------------------|--------|
|      |   | **(Dollars  in Thousands)** |   |
| 2004      |   | $                           | 102    |   |
| 2005      |   | $                           | 64     |   |
| 2006      |   | $                           | 52     |   |
| 2007      |   | $                           | 54     |   |
| 2008      |   | $                           | 55     |   |

 

13.  GUARANTOR ARRANGEMENTS

 

InNovember 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others an interpretation of FASB Statements No. 5, 57, and 107and rescission of FASB Interpretation No. 34,” (“FIN 45”).  FIN 45 requires that a guarantor recognize,at the inception of a guarantee, a liability for the fair value of theobligation undertaken by issuing the guarantee.  FIN 45 also requires additional disclosures to be made by aguarantor in its interim and annual financial statements about its obligationsunder certain guarantees it has issued. The accounting requirements for the initial recognition of guaranteesare applicable on a prospective basis for guarantees issued or modified afterDecember 31, 2002.  The disclosurerequirements are effective for all guarantees outstanding, regardless of whenthey were issued or modified for financial statements for interim or annualperiods ending after December 15, 2002. The adoption of the recognition provisions of FIN 45 are not expected tohave a material effect on the Company’s consolidated financial statements.  The following is a summary of our agreementsthat management has determined are within the scope of FIN 45.

 

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Aspermitted under Maine law, we have agreements whereby we indemnify our officersand directors for certain events or occurrences while the officer or directoris, or was serving, at our request in such capacity.  The term of the indemnification period is for the officer’s ordirector’s lifetime.  The maximum potentialamount of future payments we could be required to make under theseindemnification agreements is unlimited; however, we have a Director andOfficer insurance policy that limits our exposure and enables us to recover aportion of any future amounts paid.  Asa result of our insurance policy coverage, we believe the estimated fair valueof these indemnification agreements is minimal.  All of these indemnification agreements were grandfathered underthe provisions of FIN 45 as they were in effect prior to December 31,2002.  Accordingly, we have noliabilities recorded for these agreements as of December 31, 2003.

 

14.  ACQUISITIONS

 

OnDecember 1, 2003, the Company’s Canadian subsidiary, Maricor acquired all ofthe outstanding common shares of Eastcan Consultants, Inc., a closely heldCanadian corporation.  The results ofEastcan’s operations have been included in the consolidated financialstatements since that date.  Eastcan isa mechanical and electrical engineering service firm headquartered in Moncton,NB, Canada. The acquisition is the Company’s first step towards achieving itsstated strategy of gaining entry to the engineering services sector in theMaritime provinces of Canada.  TheCompany expects to increase Eastcan’s revenues by increasing marketing andbusiness development more than Eastcan would have been able to do by itself.

 

Theaggregate purchase price was $718,000, consisting of 5,529 shares of MAM commonstock valued at $194,000, $397,000 of cash, $5,000 in unrealized foreignexchange gain from the date of stock valuation to the closing date, and$122,000 in external costs for the acquisition.  The value of the 5,529 common shares issued was determined basedon the average market price of the Company’s common shares over the 10–day periodending five day before the acquisition and was $35.01 per share.

 

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of acquisition.  The Company valued the intangible assets as of the date ofacquisition and no further refinement is expected.

 

****At December 1, 2003******($000s)**

 

| Current assets                 |   | $     | 315     |       |
|--------------------------------|--------|-------|---------|------------|
| Property, plant, and equipment |   | 40    |    |
| Intangible assets              |   | 138   |    |
| Goodwill                       |   | 415   |    |
| Total assets acquired          |   | 908   |    |
| Current liabilities            |   | (190  | )       |
| Long-term debt                 |   | (0    | )       |
| Total liabilities assumed      |   | (190  | )       |
| Net assets acquired            |   | **$** | **718** | ** ** |

 

Ofthe $138,000 of acquired intangible assets, the Company assigned $30,000 to theexpected profits in the firm contract backlog which is subject to amortizationas the contracts are completed, and should be fully amortized during 2004.  The Company assigned $108,000 to the valueof the client list and relationships established by Eastcan.  The client list amortization is over athree-year life.

 

TheCompany assigned the entire goodwill of $415,000 to the unregulatedsegment.  The goodwill is not deductiblefor tax purposes under Canadian tax rules.

 

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15.  QUARTERLY INFORMATION (unaudited)

 

Quarterlyfinancial data for the two years ended December 31, 2003, reflecting thebeginning of MAM activity in the third quarter and MAMES in the fourth quarter,are as follows:

 
|                          |   | **(Dollars  in Thousands Except Per Share Amounts)** |   |
|-------------------------------|--------|------------------------------------------------------|--------|
|                          |   | **2003 by Quarter**                                  |   |
|                          |   | **1st**                                              |   | **2nd** |   | **3rd** |   | **4th** |   |
| Operating Revenues            |   |                                                 |   |   |   |   |   |   |   |
| MAM / MAMES                   |   | $                                                    | — |   | $ | — |   | $ | — |   | $ | 58 |   |
| Maine Public Service          |   | 9,580                                                |   | 6,322 |   | 6,823 |   | 9,014 |   |
| Energy Atlantic               |   | 1,788                                                |   | 1,699 |   | 1,288 |   | 1,289 |   |
| Total Revenues                |   | 11,368                                               |   | 8,021 |   | 8,111 |   | 10,361 |   |
|                          |   |                                                 |   |   |   |   |   |   |   |
| Operating expenses            |   | 9,167                                                |   | 8,291 |   | 7,786 |   | 9,457 |   |
| Operating income (loss)       |   | 2,201                                                |   | (270 | ) | 325 |   | 904 |   |
| Interest charges              |   | 56                                                   |   | (1 | ) | 19 |   | 228 |   |
| Other income (deductions)-net |   | (205                                                 | )      | 33 |   | (41 | ) | 161 |   |
| Net income (loss)             |   | $                                                    | 1,940  |   | $ | (236 | ) | $ | 265 |   | $ | 837 |   |
|                          |   |                                                 |   |   |   |   |   |   |   |
| Earnings per common share     |   | $                                                    | 1.23   |   | $ | (.15 | ) | $ | .17 |   | $ | .53 |   |

 
|                          |   | **2002 by Quarter** | ** ** |
|-------------------------------|--------|---------------------|------------|
|                          |   | **1st**             |       | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| Operating Revenues            |   |                |       |   |   |   |   |   |   |
| Maine Public Service          |   | $                   | 9,599      |   | $ | 6,401 |   | $ | 6,583 |   | $ | 8,818 |   |
| Energy Atlantic               |   | 1,807               |       | 1,652 |   | 7,553 |   | 1,691 |   |
| Total Revenues                |   | 11,406              |       | 8,053 |   | 14,136 |   | 10,509 |   |
|                          |   |                |       |   |   |   |   |   |   |
| Operating expenses            |   | 9,272               |       | 7,568 |   | 10,533 |   | 9,657 |   |
| Operating income              |   | 2,134               |       | 485 |   | 3,603 |   | 852 |   |
| Interest charges              |   | 144                 |       | 138 |   | 125 |   | 69 |   |
| Other income (deductions)-net |   | 115                 |       | 51 |   | 44 |   | (265 | ) |
| Net income                    |   | $                   | 2,105      |   | $ | 398 |   | $ | 3,522 |   | $ | 518 |   |
|                          |   |                |       |   |   |   |   |   |   |
| Earnings per common share     |   | $                   | 1.34       |   | $ | .25 |   | $ | 2.24 |   | $ | .33 |   |

 

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**Item 16.*****  *****Exhibits,Financial****Statement Schedules andReports on Form 8-K**

 

(2)                                  Financial Statement Schedules

 

Includedin Part IV of this report:

 

Schedule II - Valuation of Qualifying Accounts andReserves

 

Schedulesother than those listed above are omitted for the reason that they are notrequired or are not applicable, or the required information is shown in thefinancial statements or notes thereto.

 

(3)                                  Exhibits

 

Exhibitsfor Maine Public Service Company are listed in the Index to Exhibits, pages 88to 94.

 

Certificationof Financial Reports dated March 29, 2004, for the Form 10-K for the year endedDecember 31, 2003.

 

(b)                                 The following Forms 8-K were filed for MPS:

 

•                  January23, 2003 - Reporting the election of David N. Felch as a Director, describedunder Item 5, Other Events.

 

•                  February14, 2003 - Press release dated February 14, 2003 reporting the Company’sfinancial results for the fourth quarter of 2002 and for the year 2002, underItem 7, Financial Statements and Exhibits.

 

•                  February28, 2003, - Reporting the filing of a new alternative rate plan and performancebased rate structure and Energy Atlantic’s focus on Southern Maine markets andthe cessation of marketing in northern Maine, under Item 5, Other Events.

 

•                  June2, 2003 – Reporting on the votes at the Annual Meeting of Stockholders held onMay 30, 2003, approving the reorganization into a holding company and theelection of four directors, as described in Part II, Item 4 above; thedeclaration of the quarterly dividend payable July 1, 2003; the election ofofficers; the resignation of J. Gregory Freeman and the retirement of J. PaulLevesque from the Board of Directors.

 

•                  July2, 2003 – Reporting on the reorganization of MPS into a holding company, Maine& Maritimes Corporation and providing the Interim Report to Stockholders ofMaine & Maritimes Corporation dated July 1, 2003.

 

Thefollowing Forms 8-K were filed for Maine & Maritimes Corporation:

 

•                  June4, 2003 – Reporting the vote at the MPS Stockholders’ Annual Meeting held onMay 30, 2003, approving the reorganization into a holding company.

 

•                  July1, 2003 – Reporting on the reorganization of MPS into a holding company, Maine& Maritimes Corporation and providing the Interim Report to Stockholders.

 

•                  August14, 2003 – Press release titled “Maine & Maritimes Corporation AnnouncesSecond Quarter Results.”

 

•                  September5, 2003 – Reporting on the declaration of a regular quarterly dividend by theBoard of Directors and the designation of Michael W. Caron as the Company’sAudit Committee Financial Expert.

 

•                  September5, 2003 – Reporting that the Company’s wholly-owned electric transmission anddistribution utility, MPS, has been authorized by the Maine Public UtilitiesCommission to increase its electric delivery rates.

 

•                  September10, 2003 – Reporting on the implementation of a long-term interest rate stabilizationprogram through the execution of interest rate swaps.

 

•                  October1, 2003 – Providing the Interim Report to Stockholders dated October 1, 2003,presenting financial results through August 31, 2003.

 

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•                  October30, 2003 – Reporting Maine & Maritimes Subsidiary, MPS, received finalapproval from the Maine Public Utilities Commission to increase its electricdelivery rates.

 

•                  November13, 2003 – Press release titled “Maine & Maritimes Corporation’s ThirdQuarter Results Exceed Management Expectations.”

 

•                  November17, 2003 – Announcing web cast titled “Maine & Maritimes CorporationUpdates Corporate Progress.”

 

•                  November18, 2003 – Press release titled “Maine & Maritimes Corporation Wins 2003EEI Index Award for Outstanding Five-Year Stock Results for Small CapCompanies.”

 

•                  December1, 2003 – Reporting the formation of two new subsidiaries, Maine &Maritimes Energy Services Company (“MAMES”), a wholly-owned U.S. subsidiary ofthe Company and Maricor Ltd, a wholly-owned Canadian subsidiary of MAMES; theacquisition by Maricor Ltd of Eastcan Consultants, Inc., a New Brunswick,Canada based full service mechanical and electrical engineering company with anoffice in Moncton and Saint John, New Brunswick, Canada.

 

•                  December8, 2003 – Reporting on the declaration of a regular quarterly dividend by theBoard of Directors.

 

•                  January2, 2004 – Providing the Interim Report to Stockholders dated January 1, 2004,presenting financial results through November 30, 2003.

 

•                  March2, 2004 – Reporting on the Approval by the Maine Public Utilities Commission ofthe Stranded Cost Revenue Requirements, effective March 1, 2004.

 

•                  March2, 2004 – Press release titled “Maine & Maritimes Corporation Releases FourthQuarter 2003 Results.”

 

•                  March8, 2004 – Reporting on the declaration of a regular quarterly dividend by theBoard of Directors.

 

•                  March15, 2004 – Amendment to March 2, 2004 Form 8-K for the press release titled“Maine & Maritimes Corporation Releases Fourth Quarter 2003 Results.”

 

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Signatures

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, hereunto duly authorized, on the 29th of March, 2004.

 

MAINE& MARITIMES CORPORATION

 
| By:                                                      | /s/  Larry E. LaPlante |   |
|----------------------------------------------------------|------------------------|--------|
| Larry  E. LaPlante                                       |
| Vice  President, Controller and Chief Accounting Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons in the capacities and on the dateindicated.

 
| **Signature**           |   | **Title** |                                | **Date** |      |
|-------------------------|--------|-----------|-------------------------------------|----------|-----------|
|                    |   |      |                                |     |      |
| /s/  G. Melvin Hovey    |   |      | Chairman  of the Board and Director |     | 3/25/2004 |   |
| (G.  Melvin Hovey)      |   |      |                                |     |      |
|                    |   |      |                                |     |      |
| /s/  J. Nicholas Bayne  |   |      | President  & CEO and Director   |     | 3/26/2004 |   |
| (J.  Nicholas Bayne)    |   |      |                                |     |      |
|                    |   |      |                                |     |      |
| /s/  Robert E. Anderson |   |      | Director                            |     | 3/24/2004 |   |
| (Robert  E. Anderson)   |   |      |                                |     |      |
|                    |   |      |                                |     |      |
| /s/ D. James Daigle     |   |      | Director                            |     | 3/29/2004 |   |
| (D.  James Daigle)      |   |      |                                |     |      |
|                    |   |      |                                |     |      |
| /s/  Richard G. Daigle  |   |      | Director                            |     | 3/24/2004 |   |
| (Richard  G. Daigle)    |   |      |                                |     |      |
|                    |   |      |                                |     |      |
| /s/  David N. Felch     |   |      | Director                            |     | 3/26/2004 |   |
| (David  N. Felch)       |   |      |                                |     |      |
|                    |   |      |                                |     |      |
| /s/Michael  W. Caron    |   |      | Director                            |     | 3/25/2004 |   |
| (Michael  W. Caron)     |   |      |                                |     |      |
|                    |   |      |                                |     |      |
| /s/  Deborah L. Gallant |   |      | Director                            |     | 3/25/2004 |   |
| (Deborah  L. Gallant)   |   |      |                                |     |      |
|                    |   |      |                                |     |      |
| /s/  Nathan L. Grass    |   |      | Director                            |     | 3/24/2004 |   |
| (Nathan  L. Grass)      |   |      |                                |     |      |
|                    |   |      |                                |     |      |
| /s/  Lance A. Smith     |   |      | Director                            |     | 3/25/2004 |   |
| (Lance  A. Smith)       |   |      |                                |     |      |
|                         |        |           |                                     |          |           |  |  |  |  |  |  |  |  |  |

 

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Schedule II

 

**Maine &Maritimes Corporation & Subsidiaries**

**Valuationof Qualifying Accounts & Reserves**

**For theYears Ended December 31, 2003, 2002 and 2001**

 
|                                              |   |                                 |   | **Additions**              |   | **Deductions**                                        |   |                                        |   |
|---------------------------------------------------|--------|--------------------------------------|--------|----------------------------|--------|-------------------------------------------------------|--------|---------------------------------------------|--------|
|                                              |   | **Balance at  Beginning of  Period** |   | **Costs  &  Expenses** |   | **Recoveries  of  Accounts  Previously  Written Off** |   | **Accounts  Written Off As  Uncollectible** |   | **Balance at  End of Period** |   |
|                                              |   |                                 |   |                       |   |                                                  |   |                                        |   |   |   |
| Reserve Deducted From Asset To Which It  Applies: |   |                                 |   |                       |   |                                                  |   |                                        |   |   |   |
|                                              |   |                                 |   |                       |   |                                                  |   |                                        |   |   |   |
| Allowance for Uncollectible Accounts              |   |                                 |   |                       |   |                                                  |   |                                        |   |   |   |
|                                              |   |                                 |   |                       |   |                                                  |   |                                        |   |   |   |
| 2003                                              |   | 213,882                              |   | 297,342                    |   | 157,224                                               |   | 432,766                                     |   | 235,682 |   |
|                                              |   |                                 |   |                       |   |                                                  |   |                                        |   |   |   |
| 2002                                              |   | 216,500                              |   | 377,774                    |   | 123,082                                               |   | 503,474                                     |   | 213,882 |   |
|                                              |   |                                 |   |                       |   |                                                  |   |                                        |   |   |   |
| 2001                                              |   | 334,690                              |   | 78,820                     |   | 108,598                                               |   | 305,608                                     |   | 216,500 |   |

 

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**CERTIFICATIONS**

 

Exhibit31 Rule 13a-14(a)/15d-14(a) Certifications

 

I,J. Nicholas Bayne, certify that:

 

1.               I have reviewed this annual report on Form10-K of Maine & Maritimes Corporation (the registrant);

 

2.               Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.               The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

c)              presented in this annual report conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors:

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b)             any fraud, whether or not material, thatinvolves management or other employees who have significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officersand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
|   | Dated:                                 | March 29, 2004 |   |
|--------|----------------------------------------|----------------|--------|
|   |                                   |           |   |
|   | /s/  J. Nicholas Bayne                 |           |
|   | J.  Nicholas Bayne                     |
|   | President  and Chief Executive Officer |
|        |                                        |                |        |  |

 

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I,Kurt A. Tornquist, certify that:

 

1.               I have reviewed this annual report on Form10-K of Maine & Maritimes Corporation (the registrant);

 

2.               Based on my knowledge, this annual reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this annual report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this annual report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this annual report;

 

4.               The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the “Evaluation Date”); and

c)              presented in this annual report conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.               The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of the registrant’s board of directors:

a)              all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

b)             any fraud, whether or not material, thatinvolves management or other employees who have significant role in theregistrant’s internal controls; and

 

6.               The registrant’s other certifying officersand I have indicated in this annual report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
|   | Dated:                                                        | March 29, 2004 |   |
|--------|---------------------------------------------------------------|----------------|--------|
|   |                                                          |           |   |
|   |                                                          |           |   |
|   | /s/  Kurt A. Tornquist                                        |           |
|   | Kurt  A. Tornquist                                            |
|   | Senior  Vice President, Chief Financial Officer and Treasurer |
|        |                                                               |                |        |  |

 

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INDEX TO EXHIBITS

 

Certain of the following exhibits are filedherewith.  Certain other of thefollowing exhibits have heretofore been filed with the Commission and areincorporated herein by reference.  (*indicates filed herewith)

 
| 3(a)   |   | Articles  of Incorporation with all amendments through March 22, 2004.  (Appendix B to 2003 Form S-4/A)                                                 |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                         |
| 3(b)   |   | By-laws  of the Company, as amended through March 22, 2004.  (Appendix C to 2003 Form S-4/A)                                                            |
|   |   |                                                                                                                                                         |
| 4(a)   |   | Indenture  of Mortgage and Deed of Trust defining the rights of the holders of MPS’s  First Mortgage Bonds.  (Exhibit 4(a)  to 1980 MPS Form 10-K) |
|   |   |                                                                                                                                                         |
| 4(b)   |   | First  Supplemental Indenture.  (Exhibit 4(b)  to 1980 MPS Form 10-K)                                                                                   |
|   |   |                                                                                                                                                         |
| 4(c)   |   | Second  Supplemental Indenture.  (Exhibit 4(c)  to 1980 MPS Form 10-K)                                                                                  |
|   |   |                                                                                                                                                         |
| 4(d)   |   | Third  Supplemental Indenture.  (Exhibit 4(d)  to 1980 MPS Form 10-K)                                                                                   |
|   |   |                                                                                                                                                         |
| 4(e)   |   | Fourth  Supplemental Indenture.  (Exhibit 4(e)  to 1980 MPS Form 10-K)                                                                                  |
|   |   |                                                                                                                                                         |
| 4(f)   |   | Fifth  Supplemental Indenture.  (Exhibit A to  MPS Form 8-K dated May 10, 1968)                                                                         |
|   |   |                                                                                                                                                         |
| 4(g)   |   | Sixth  Supplemental Indenture.  (Exhibit A to  MPS Form 8-K dated April 10, 1973)                                                                       |
|   |   |                                                                                                                                                         |
| 4(h)   |   | Seventh  Supplemental Indenture.  (Exhibit A to  MPS Form 8-K dated November 7, 1975)                                                                   |
|   |   |                                                                                                                                                         |
| 4(i)   |   | Eighth  Supplemental Indenture.  (Exhibit 4(i)  to 1980 MPS Form 10-K)                                                                                  |
|   |   |                                                                                                                                                         |
| 4(j)   |   | Ninth  Supplemental Indenture.  (Exhibit B to  MPS Form 10-Q for the second quarter of 1978)                                                            |
|   |   |                                                                                                                                                         |
| 4(k)   |   | Tenth  Supplemental Indenture.  (Exhibit 4(k)  to 1980 MPS Form 10-K)                                                                                   |
|   |   |                                                                                                                                                         |
| 4(l)   |   | Eleventh  Supplemental Indenture.  (Exhibit 4(l)  to 1982 MPS Form 10-K)                                                                                |
|   |   |                                                                                                                                                         |
| 4(m)   |   | Indenture  defining the rights of the holders of MPS’s 9 7/8% debentures.  (Exhibit A to MPS Form 8-K, dated June 10,  1970)                       |
|   |   |                                                                                                                                                         |
| 4(n)   |   | Indenture  defining the rights of the holders of MPS’s 14% debentures.  (Exhibit 4(n) to 1982 MPS Form 10-K)                                       |
|   |   |                                                                                                                                                         |
| 4(o)   |   | Twelfth  Supplemental Indenture.  (Exhibit 4(o)  to MPS Form 10-Q for the quarter ended September 30, 1984)                                             |
|   |   |                                                                                                                                                         |
| 4(p)   |   | Thirteenth  Supplemental Indenture.  (Exhibit 4(p)  to MPS Form 10-Q for the quarter ended September 30, 1984)                                          |
|   |   |                                                                                                                                                         |
| 4(q)   |   | Fourteenth  Supplemental Indenture, Dated July 1, 1985.   (Exhibit 4(q) to 1985 MPS Form 10-K)                                                          |
|   |   |                                                                                                                                                         |
| 4(r)   |   | Fifteenth  Supplemental Indenture, Dated March 1, 1986.   (Exhibit 4(r) to 1985 MPS Form 10-K)                                                          |
|   |   |                                                                                                                                                         |
| 4(s)   |   | Sixteenth  Supplemental Indenture, Dated September 1, 1991.  (Exhibit 4(s) to MPS’s 1991 Form 10-K)                                                |
|   |   |                                                                                                                                                         |
| 4(t)   |   | Seventeenth  Supplemental Indenture, Dated April 1, 1997.   (Exhibit 4(t) to MPS’s 1998 Form 10-K)                                                 |

 

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| 4(u)     |   | Eighteenth  Supplemental Indenture, Dated April 1, 1998.   (Exhibit 4(u) to MPS’s 1998 Form 10-K)                                                                                                                                                                                                                                           |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 4(v)     |   | Nineteenth  Supplemental Indenture, Dated May 1, 1998.   (Exhibit 4(v) to MPS’s 1998 Form 10-K)                                                                                                                                                                                                                                             |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 4(w)     |   | Twentieth  Supplemental Indenture, Dated October 1, 2000.  (Exhibit 4(w) to MPS’s 2000 Form 10-K)                                                                                                                                                                                                                                           |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 9        |   | Not  applicable.                                                                                                                                                                                                                                                                                                                                      |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(a)(1) |   | Joint  Ownership Agreement with Public Service of New Hampshire in respect to  construction of two nuclear generating units designated as Seabrook Units 1  and 2, together with related amendments to date.  (Exhibit 10 to MPS’s 1980 Form 10-K)                                                                                          |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(a)(2) |   | Twentieth  Amendment to Joint Ownership Agreement. (Exhibit 10(a)(6) to MPS’s 1986 Form  10-K)                                                                                                                                                                                                                                                   |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(a)(3) |   | Twenty-Second  Amendment to Joint Ownership Agreement.   (Exhibit 10(a)(3) to the 1988 MPS Form 10-K)                                                                                                                                                                                                                                            |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(b)(1) |   | Capital  Funds Agreement, dated as of May 20, 1968 between Maine Yankee Atomic Power  Company and MPS.  (Exhibit 10(b)(1) to  MPS Form 10-Q for the quarter ended March 31, 1983)                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(b)(2) |   | Power  Contract, dated as of May 20, 1968 between Maine Yankee Atomic Power Company  and MPS.  (Exhibit 10(b)(2) to MPS  Form 10-Q for the quarter ended March 31, 1983)                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(c)(1) |   | Participation  Agreement, as of June 20, 1969, with Maine Electric Power Company, Inc.  (Exhibit 10(c)(1) to MPS Form 10-Q for the  quarter ended March 31, 1983)                                                                                                                                                                                |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(c)(2) |   | Agreement,  as of June 20, 1969, among MPS and the other Maine Participants.  (Exhibit 10(c)(2) to MPS Form 10-Q for  quarter ended March 31, 1983)                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(c)(3) |   | Power  Purchase and Transmission Agreement Supplement to Participation Agreement,  dated as of August 1, 1969, with Maine Electric Power Company, Inc.  (Exhibit 10(c)(3) to MPS Form 10-Q for  quarter ended March 31, 1983)                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(c)(4) |   | Supplement  Amending Participation Agreement, as of June 24, 1970, with Maine Electric  Power Company, Inc.  (Exhibit 10(c)(4)  to MPS Form 10-Q for quarter ended March 31, 1983)                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(c)(5) |   | Second  Supplement to Participation Agreement, dated as of December 1, 1971,  including as Exhibit A the Unit Participation Agreement dated November 15,  1971, as amended, between Maine Electric Power Company, Inc. and the New  Brunswick Electric Power Commission.   (Exhibit 10(c)(5) to MPS Form 10-Q for quarter ended March 31, 1983)  |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(c)(6) |   | Agreement  and Assignment, as of August 1, 1977, by Connecticut Light & Power  Company, Hartford Electric Company, Holyoke Water Power Company, Holyoke  Power Company, Western Massachusetts Electric Company and MPS.  (Exhibit 10(c)(6) to MPS Form 10-Q for the  quarter ended March 31, 1983)                                           |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(c)(7) |   | Amendment  dated November 30, 1980 to Agreement and Assignment as of August 1, 1977,  between Connecticut Light & Power Company, Hartford Electric Company,  Holyoke Water Power Company, Holyoke Power Company, Western Massachusetts  Electric Company and MPS.  (Exhibit  10(c)(7) to MPS Form 10-Q for the quarter ended March 31, 1983) |
|     |   |                                                                                                                                                                                                                                                                                                                                                  |
| 10(c)(8) |   | Assignment  Agreement as of January 1, 1981, between Central Maine Power Company and  MPS.  (Exhibit 10(c)(8) to MPS Form  10-Q for the quarter ended March 31, 1983)                                                                                                                                                                            |

 

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| 10(d)  |   | Wyman  Unit #4 Agreement for Joint Ownership as of November 1, 1974, with Amendments  1, 2, and 3, dated as of June 30, 1975, August 16, 1976, December 31, 1978,  respectively.  (Exhibit 10(d) to MPS  Form 10-Q for the quarter ended March 31, 1983)                                                                                                                                                                                                                                                                                                                                                 |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(e)  |   | Agreement  between Sherman Power Company and Maine Public Service Company, dated June 4,  1984, with amendments dated July 12, 1984 and February 14, 1985.  (Exhibit 10(f) to 1984 MPS Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(f)  |   | Credit  Agreement, dated as of October 8, 1987 among MPS and The Bank of New York,  Bank of New England, N.A., The Merrill Trust Company and The Bank of New  York, as agent for the Participating Banks.   (Exhibit 10(g) to MPS Form 8-K dated October 13, 1987)                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(g)  |   | Amendment  No. 1, dated as of October 8, 1989, to the Revolving Credit Agreement, dated as  of October 8, 1987, among MPS and The Bank of New York, Bank of New England,  N.A., Fleet Bank (formerly the Merrill Trust Company) and The Bank of New  York as agent for the participating banks.   (Exhibit 10(l) to MPS Form 8-K dated September 22, 1989)                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(h)  |   | Amendment  No. 2, dated as of June 5, 1992, to the Revolving Credit Agreement, among MPS  and The Bank of New York, Bank of New England, N.A., Shawmut Bank and the  Bank of New York, as agent for the participating banks.  (Exhibit 10(h) to MPS’s 1992 Form 10-K)                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(i)  |   | Indenture  of Second Mortgage and Deed of Trust, dated as of October 1, 1985, made by  MPS to J. Henry Schroder Bank and Trust Company, as Trustee.  (Exhibit 10(i) to MPS Form 8-K dated  November 1, 1985)                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(j)  |   | First  Supplemental Indenture of the Second Mortgage and Deed of Trust Dated March  1, 1991.  (Exhibit 10(i) to MPS’s 1991  Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(k)  |   | Second  Supplemental Indenture of the Second Mortgage and Deed of Trust Dated  September 1, 1991.  (Exhibit 10(j) to  MPS’s 1991 Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(l)  |   | Agency  Agreement dated as of October 1, 1985, between J. Henry Schroder Bank and  Trust Company, as Trustee under the Indenture of Second Mortgage and Deed of  Trust dated as of October 1, 1985, made by MPS to J. Henry Schroder Bank and Trust  Company, as Trustee, and Continental Illinois National Bank and Trust  Company, as Trustee, under an Indenture of Mortgage and Deed of Trust, dated  as of October 1, 1945, as amended and supplemented, made by MPS to  Continental Illinois National Bank and Trust Company, as Trustee.  (Exhibit 10(j) to MPS Form 8-K dated  November 1, 1985) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(q)  |   | Employment  Contract between William L. Cyr and Maine Public Service Company, dated  November 5, 1999.  (Exhibit 10(q) to  1999 MPS Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(s)  |   | Maine  Public Service Company, Prior Service Executive Retirement Plan, dated May  12, 1992.  (Exhibit 10(s) to 1992 MPS  Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(t)  |   | Maine  Public Service Company Pension Plan.   (Exhibit 10(t) to 1992 MPS Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(u)  |   | Maine  Public Service Company Retirement Savings Plan.  (Exhibit 10(u) to 1992 MPS Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(v)  |   | Third  Supplemental Indenture of the Second Mortgage and Deed of Trust Dated as of  June 1, 1996.  (Exhibit 10(t) to 1996  MPS Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(w)  |   | Amendment  No. 3, dated as of October 8, 1995, to the Revolving Credit Agreement, dated  as of October 7, 1987, among MPS and The Bank of New York, Shawmut Bank of  Boston, Fleet Bank of Maine, and The Bank of New York, an agent for the  participating Banks.  (Exhibit 10(u)  to 1996 Form 10-K)                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(x)  |   | Fourth  Supplemental Indenture of the Second Mortgage and Deed of Trust dated May 1,  1998.  (Exhibit 10(v) to MPS’s 1998  Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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| 10(y)   |   | Fifth  Supplemental Indenture of the Second Mortgage and Deed of Trust dated October  1, 2000. (Exhibit 10(y) to MPS’s 2000 Form 10-K)                                                                                                                                                                                                                                                                                   |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(z)   |   | Agreement  between WPS Power Development, Inc. and Maine Public Service Company, dated  July 7, 1998.  (Exhibit 10(w) to MPS’s  1998 Form 10-K)                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(aa)  |   | Agreement  between Wheelabrator-Sherman Energy Company and Maine Public Service Company,  dated October 15, 1997, with amendments dated January 30, 1998 and April 28,  1998.  (Exhibit 10(x) to MPS’s 1998  Form 10-K)                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(ab)  |   | Agreement  between Loring Development Authority of Maine and Maine Public Service  Company, dated July 9, 1998.  (Exhibit  10(y) to MPS’s 1998 Form 10-K)                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(ac)  |   | Wholesale  Power Sales Agreement between Energy Atlantic, LLC and Engage Energy US,  L.P., dated December 9, 1999, with amendments dated March 10, 2000 and August  1, 2000 and addendums dated December 14, 1999 and December 1, 2000.  (Exhibit 10(ac) to MPS’s 2000 Form 10-K)                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(ad)  |   | Fourth  Amendment to Wholesale Power Agreement between Energy Atlantic, LLC and  Engage Energy US, L.P., dated June 26, 2001.   (Exhibit 99.2 to MPS’s May 24, 2001 Form 8-K)                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(ae)  |   | General  Release Agreements between Engage Energy America, LLC, Energy Atlantic, LLC  (EA), Maine Public Service Co., Central Maine Power Company (CMP) and Frontier  Insurance Company (Frontier) for any and all claims under or in connection  with any Bonds issued by Frontier in connection with EA’s provision of the  standard offer service in the service territory of CMP in Maine, both dated  May 24, 2001. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(af)  |   | Master  Power Purchase & Sale Agreement between Energy Atlantic, LLC and Duke  Energy Trading and Marketing, LLC dated September 19, 2001.                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(ag)  |   | Sixth  Supplemental Indenture of the Second Mortgage and Deed of Trust dated June 1,  2002.  (Exhibit 10.1 to MPS’s Form  10-Q for the quarter ended June 30, 2002).                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(ah)  |   | Stock  Option Grant Agreement dated June 1, 2002.   (Exhibit 10.2 to MPS’s Form 10-Q for the quarter ended June 30, 2002.)                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10(ai)  |   | Employee  Continuity Agreement between James Nicholas Bayne and Maine Public Service  Company dated July 25, 2002.  (Exhibit  10.3 to MPS’s Form 10-Q for the quarter ended June 30, 2002.)                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *10(aj) |   | Interest  Rate Swap Confirmation for 1996 Tax-Exempt Bonds, dated September 9, 2003.                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *10(ak) |   | Interest  Rate Swap Confirmation for 1998 FAME Note, dated September 9, 2003.                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *10(al) |   | Interest  Rate Swap Confirmation for 2000 Tax-Exempt Bonds, dated September 9, 2003                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *10(am) |   | Temporary  Line of Credit with Bank of New York, dated October 1, 2003.                                                                                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *10(an) |   | Assignment  and Amendment Agreement to Employee Retention Agreement between J. Nicholas  Bayne and Maine & Maritimes Corporation and Maine Public Service Company,  dated October 3, 2003.                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *10(ao) |   | Employee  Retention Agreement between Kurt A. Tornquist and Maine & Maritimes  Corporation, dated September 5, 2003.                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| *10(ap) |   | Employee  Retention Agreement between Larry E. LaPlante and Maine & Maritimes  Corporation, dated September 5, 2003.                                                                                                                                                                                                                                                                                                      |

 

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| *10(aq) |   | Employee  Retention Agreement between John P. Havrilla and Maine & Maritimes  Corporation, dated September 5, 2003.                                                                                                                                                               |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                  |
| *10(ar) |   | Employee  Retention Agreement between Michael A. Thibodeau and Maine & Maritimes  Corporation, dated September 5, 2003.                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                  |
| *10(as) |   | Employee  Retention Agreement between Brent M. Boyles and Maine Public Service Company,  dated September 5, 2003.                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                  |
| *10(at) |   | Employee  Continuity Agreement between Calvin D. Deschene and Maine Public Service  Company, dated May 9, 2000.                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                  |
| *21     |   | Subsidiaries  of the Company                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                  |
| *31     |   | Rule  13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                  |
| *32     |   | Certification  of Financial Reports Pursuant to 18 USC Section 1350                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(a)   |   | Agreement  of Purchase and Sale between Maine Public Service and Eastern Utilities Associates,  dated April 7, 1986.  (Exhibit 28(a)  to MPS Form 10-Q for the quarter ended June 30, 1986)                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(b)   |   | Addendum  to Agreement of Purchase and Sale, dated June 26, 1986.  (Exhibit 28(b) to MPS Form 10-Q for the  Quarter ended June 30, 1986)                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(c)   |   | Stipulation  between Maine Public Service Company, the Staff of the Commission and the  Maine Public Utilities Commission and the Maine Public Advocate, dated July  14, 1986. (Exhibit 28(c) to MPS Form 10-Q for the quarter ended June 30,  1986)                                  |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(d)   |   | Amendment  to July 14, 1986 Stipulation, dated July 18, 1986.  (Exhibit 28(d) to MPS Form 10-Q for the quarter ended June 30,  1986)                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(e)   |   | Order  of the Maine Public Utilities Commission dated July 21, 1986, Docket Nos.  84-80, 84-113 and 86-3.  (Exhibit  28(g) to 1986 MPS Form 10-K)                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(f)   |   | Order  of the Maine Public Utilities Commission, dated May 9, 1986, Docket Nos.  84-113 and 86-3 (with attached Stipulations).  (Exhibit 28(r) to 1986 MPS Form 10-K)                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(g)   |   | Order  of the Maine Public Utilities Commission, dated July 31, 1987, Docket Nos.  84-80, 84-113, 87-96 and 87-167 (with attached Stipulation).  (Exhibit 28(i) to 1988 MPS Form 10-K)                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(h)   |   | Agreement  between Maine Public Service Company and various current Seabrook Nuclear  Project Joint Owners, dated January 13, 1989.  (Exhibit 28(o) to 1988 MPS Form 10-K)                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(i)   |   | Order  of the Maine Public Utilities Commission dated November 30, 1995 (with  attached Stipulation) in Docket No. 95-052.   (Exhibit 28(p) to 1995 MPS Form 10-K)                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(j)   |   | Order  of the Federal Energy Regulatory Commission dated May 31, 1995 in Docket No.  ER 95-836-000.  (Exhibit 28(r) to 1995  MPS Form 10-K)                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(k)   |   | Order  of Maine Public Utilities Commission dated June 26, 1996 in Docket 95-052  (Rate Design).  (Exhibit 99(n) to 1996  MPS Form 10-K)                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(l)   |   | Independent  Auditors Report of Deloitte & Touche L.L.P. dated February 14, 1996  regarding year ended December 31, 1995.   (Exhibit 99(l) to 1997 MPS Form 10-K)                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(m)   |   | Amendment  No. 1, dated as of March 28, 1997, to the Letter of Credit and Reimbursement  Agreement, dated as of June 1, 1996, among MPS, The Bank of New York, Fleet  Bank of Maine, and The Bank of New York, as Agent and Issuing Bank.  (Exhibit 99(m) to 1997 MPS Form 10-K) |

 

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| 99(n)  |   | Amendment  No. 4, dated as of March 28, 1997, to the Revolving Credit Agreement, dated  as of October 8, 1987, by and among MPS, the signatory Banks thereto and The  Bank of New York, as Agent.  (Exhibit  99(n) to 1997 MPS Form 10-K) |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                           |
| 99(o)  |   | Order  of Maine Public Utilities Commission dated January 30, 1998 in Docket No.  97-830 (Annual Increase under Rate Stabilization Plan).  (Exhibit 99(o) to 1997 MPS Form 10-K)                                                          |
|   |   |                                                                                                                                                                                                                                           |
| 99(p)  |   | Order  by the Maine Public Utilities Commission dated January 15, 1998 in Docket No.  97-727.  (Exhibit 99(q) to 1997 MPS  Form 10-K)                                                                                                     |
|   |   |                                                                                                                                                                                                                                           |
| 99(q)  |   | Order  of Maine Public Utilities Commission dated February 20, 1998 in Docket 97-670  (Divestiture of Generation Assets).   (Exhibit 99(q) to MPS’s 1998 Form 10-K)                                                                  |
|   |   |                                                                                                                                                                                                                                           |
| 99(r)  |   | Order  of Maine Public Utilities Commission dated September 21, 1998 in Docket  98-138 (Formation of marketing affiliate).   (Exhibit 99(r) to MPS’s 1998 Form 10-K)                                                                 |
|   |   |                                                                                                                                                                                                                                           |
| 99(s)  |   | Order  of Maine Public Utilities Commission dated December 15, 1998 in Docket 98-865  (Annual Increase Under Rate Stabilization Plan).  (Exhibit 99(s) to MPS’s 1998 Form 10-K)                                                      |
|   |   |                                                                                                                                                                                                                                           |
| 99(t)  |   | Report  of Synapse Energy Economics regarding competition and market power in the  northern Maine market for the Maine Public Utilities Commission for Docket  97-586. (Exhibit 99(t) to MPS’s 1998 Form 10-K)                            |
|   |   |                                                                                                                                                                                                                                           |
| 99(u)  |   | Final  Report of the MPUC and the Maine Attorney General regarding market power  issues raised by the prospect of retail competition in the electric industry  in Docket 97-877.  (Exhibit 99(u) to  MPS’s 1998 Form 10-K)           |
|   |   |                                                                                                                                                                                                                                           |
| 99(v)  |   | Order  of the Federal Energy Regulatory Commission dated December 22, 1998 in Docket  No. ER95-836-000.  (Exhibit 99(v) to  MPS’s 1998 Form 10-K)                                                                                    |
|   |   |                                                                                                                                                                                                                                           |
| 99(w)  |   | Order  of Maine Public Utilities Commission dated April 5, 1999 in Docket 98-584  (Generating Asset Sale Approval).   (Exhibit 99(w) to 1999 MPS Form 10-K)                                                                               |
|   |   |                                                                                                                                                                                                                                           |
| 99(x)  |   | Order  of the Federal Energy Regulatory Commission dated April 14, 1999 in Docket EC  99-29-000 (Generating Asset Sale Approval).   (Exhibit 99(x) to 1999 MPS Form 10-K)                                                                 |
|   |   |                                                                                                                                                                                                                                           |
| 99(y)  |   | Order  of the Federal Energy Regulatory Commission dated November 15, 1999 in Docket  ER 99-4225-000 (Independent System Administrator).  (Exhibit 99(y) to 1999 MPS Form 10-K)                                                           |
|   |   |                                                                                                                                                                                                                                           |
| 99(z)  |   | Order  of Maine Public Utilities Commission dated December 1, 1999 in Docket 98-577  (Stipulation Approval).  (Exhibit  99(z) to 1999 MPS Form 10-K)                                                                                      |
|   |   |                                                                                                                                                                                                                                           |
| 99(aa) |   | Order  of Maine Public Utilities Commission dated December 3, 1999 in Docket 99-111  (Energy Atlantic as Central Maine Power Standard Offer Provider).  (Exhibit 99(aa) to 1999 MPS Form 10-K)                                            |
|   |   |                                                                                                                                                                                                                                           |
| 99(ab) |   | Order  of Maine Public Utilities Commission dated February 17, 2000 in Docket 98-577  (Order Approving Phase II Stipulation).   (Exhibit 99(ab) to 1999 MPS Form 10-K)                                                                    |
|   |   |                                                                                                                                                                                                                                           |
| 99(ac) |   | Order  of the Federal Energy Regulatory Commission dated August 14, 2000 in Dockets  ER00-1053-000 and ER00-1053-002.   (Exhibit 99(ac) to MPS’s 2000 Form 10-K)                                                                     |
|   |   |                                                                                                                                                                                                                                           |
| 99(ad) |   | Order  of the Maine Public Utilities Commission dated November 17, 1999 in Docket  99-610 (Reduction in Capital).   (Exhibit 99(ad) to MPS’s 2000 Form 10-K)                                                                         |
|   |   |                                                                                                                                                                                                                                           |
| 99(ae) |   | Order  of the Maine Public Utilities Commission dated August 11, 2000 in Docket  99-185 (Stipulation Approval).   (Exhibit 99(ae) to MPS’s 2000 Form 10-K)                                                                           |

 

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| 99(af)  |   | Agreement  between the Maine Public Utilities Commission, MPS, Central Maine Power  Company and Bangor Hydro-Electric Company dated January 10, 2001 regarding  Maine Yankee Power Costs.  (Exhibit  99(af) to MPS’s 2000 Form 10-K)                                        |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(ag)  |   | Notice  of Investigation of the Maine Public Utilities Commission dated May 8, 2001  in Docket 01-245 (Rate Design)                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(ah)  |   | Order  of the Maine Public Utilities Commission dated May 24, 2001 in Docket No.  99-764 (Amendments to Entitlement Agreements and Granting Waiver). (Exhibit  99.1 to the May 24, 2001 MPS Form 8-K)                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(ai)  |   | Procedural  Order of the Maine Public Utilities Commission dated July 13, 2001 in Docket  No. 00-894 (WPS Energy Service Complaint and related Proposed Findings and  Decision of Investigator William B. Devoe, Esq.)                                                                |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(aj)  |   | Order  of the Maine Public Utilities Commission dated November 20, 2001 in Docket  No. 01-384 (Entitlement Agreements).                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(ak)  |   | Further  Settlement Agreement between the Maine Public Utilities Commission, the  Public Advocate and MPS dated January 24, 2002 regarding Maine Yankee Power  costs.                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(al)  |   | Order  of the Maine Public Utilities Commission dated February 27, 2002 in Docket  No. 01-240 (Stranded Costs Stipulation approved effective March 1, 2002).                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(an)  |   | Order  of Maine Public Utilities Commission dated April 29, 2002 in Docket No.  2000-894 approving revised stipulation of WPS Complaint Settlement.  (Exhibit 99.1 to MPS’s Form 10-Q for the  quarter ended March 31, 2002.)                                               |
|    |   |                                                                                                                                                                                                                                                                                  |
| *99(ao) |   | Order  dated March 26, 2003 of Maine Public Utilities Commission in Docket No.  2002-676 approving reorganization                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                  |
| *99(ap) |   | Order  dated October 29, 2003 of Maine Public Utilities Commission in Docket No.  2003-85 giving final approval to increase in MPS electric delivery rates                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                  |
| *99(aq) |   | Settlement  Agreement dated February 11, 2004, among, MPS, other parties, FERC Trial  Staff, and the MPUC****regarding  changes to the MPS Formula Rate under the FERC Open Access Transmission  Tariff.                                                                              |
|    |   |                                                                                                                                                                                                                                                                                  |
| 99(ar)  |   | Stipulation  dated February 19, 2004, approved by order dated February 27, 2004 of Maine  Public Utilities Commission dated April 29, 2002 in Docket No. 2003-666  approving stranded cost revenue requirements effective March 1, 2004 (Exhibit  99 to Form 8-K dated March 2, 2004) |

 

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**Glossary of Terms**

 

| AFUDC      |   | Allowances  for the cost of equity and borrowed funds used during construction |
|------------|--------|--------------------------------------------------------------------------------|
| AMEX       |   | American  Stock Exchange                                                       |
| APBO       |   | Accumulated  Pension Benefit Obligation                                        |
| ARP        |   | Alternative  Rate Plan                                                         |
| BHE        |   | Bangor  Hydro Electric Company                                                 |
| CES        |   | Competitive  Energy Supplier                                                   |
| CMLTD      |   | Current  Maturities Long-Term Debt                                             |
| CMP        |   | Central  Maine Power Company                                                   |
| DETM       |   | Duke  Energy Trading and Marketing                                             |
| DOE        |   | Department  of Energy                                                          |
| EA         |   | Energy  Atlantic, LLC                                                          |
| Engage     |   | Engage  Energy America, LLC                                                    |
| EPS        |   | Earnings  Per Share                                                            |
| FAME       |   | Finance  Authority of Maine                                                    |
| FAS        |   | Financial  Accounting Standards                                                |
| FASB       |   | Financial  Accounting Standards Board                                          |
| FERC       |   | Federal  Energy Regulatory Commission                                          |
| FIN        |   | FASB  Interpretation Number                                                    |
| ISFSI      |   | Independent  Spent Fuel Storage Installation                                   |
| ISO        |   | Independent  System Operator                                                   |
| ISO-NE     |   | Independent  System Operator – New England                                |
| LIBOR      |   | London  InterBank Offering Rate                                                |
| LOC        |   | Letter  of Credit                                                              |
| MAM        |   | Maine  & Maritimes Corporation                                             |
| MAMES      |   | Maine  & Maritimes Energy Services Company                                 |
| Maricor    |   | Maricor  Ltd.                                                                  |
| Me&NB  |   | Maine  & New Brunswick Electrical Power Company, Ltd                       |
| MEPCO      |   | Maine  Electric Power Company, Inc.                                            |
| MPS        |   | Maine  Public Service Company                                                  |
| MPUC       |   | Maine  Public Utilities Commission                                             |
| MPUFB      |   | Maine  Public Utility Financing Bank                                           |
| MW         |   | Megawatt                                                                       |
| MWH        |   | Megawatt  hour                                                                 |
| NEPOOL     |   | New  England Power Pool                                                        |
| NMISA      |   | Northern  Maine Independent System Administrator                               |
| NOI        |   | Notice  of Inquiry                                                             |
| NPCC       |   | Northeastern  Power Coordinating Council                                       |
| NRC        |   | Nuclear  Regulatory Commission                                                 |
| NUG        |   | Non-Utility  Generator                                                         |
| OATT       |   | Open  Access Transmission Tariff                                               |
| PBR’S |   | Performance  Based Rates                                                       |
| PCB        |   | Poly  Chlorinated Bi-phenol                                                    |
| PPA        |   | Power  Purchase Agreement                                                      |
| PURPA      |   | Public  Utilities Regulatory Policy Act                                        |
| PWC        |   | PricewaterhouseCoopers                                                         |
| QF         |   | Qualifying  Facility                                                           |
| ROCE       |   | Return  on Capital Employed                                                    |
| RTO        |   | Regional  Transmission Organization                                            |
| SAM        |   | Strategic  Asset Management                                                    |
| SCADA      |   | Supervisory  Control and Data Acquisition                                      |
| SEC        |   | Securities  and Exchange Commission                                            |
| SFAS       |   | Statement  of Financial Accounting Standards                                   |
| SOS        |   | Standard  Offer Service                                                        |
| T&D    |   | Transmission  and Distribution                                                 |
| VEBA       |   | Voluntary  Employee Benefit Association                                        |
| VERP       |   | Voluntary  Employee Retirement Program                                         |
| WPS-PDI    |   | WPS  – Power Development, Inc.                                            |
| WS         |   | Wheelabrator-Sherman                                                           |

 

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