**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D. C. 20549**

 

**FORM 10-K**

 

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

** **

**For the fiscal year ended December 31, 2002**

** **

**Commission File No. 1-3429**

 

**Maine Public Service Company**

(Exact name of registrant as specified in itscharter)

 

| **Maine**                                                       |
|-----------------------------------------------------------------|
| (State or other jurisdiction of incorporation or  organization) |
|                                                            |
| **01-0113635**                                                  |
| (I.R.S. Employer Identification No.)                            |
|                                                            |
| **209 State  Street, Presque Isle, Maine**                      |
| (Address of principal executive offices)                        |
|                                                            |
| **04769**                                                       |
| (Zip Code)                                                      |

 

Registrant’stelephone number, including area code:    **207-768-5811**

 

Securitiesregistered pursuant to Section 12(b) of the Act:

 

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

 

Nameof each exchange on which registered: AmericanStock Exchange

Securitiesregistered pursuant to Section 12(g) of the Act:

 
| None           |
|----------------|
| Title of Class |

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

Yes ý.  No o.

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K not contained herein,and will not be contained, to the best of registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes  o.  No ý.

 

Aggregatemarket value of the voting stock held by non-affiliates at June 30, 2002:$47,921,622.

 

Thenumber of shares outstanding of each of the issuer’s classes of common stock asof March 28, 2003.

 

CommonStock, $7.00 par value – 1,574,322 shares

 

**DOCUMENTS INCORPORATED BY REFERENCE**

The Company’s definitive proxy statement(which is also included as part of a registration statement on Form S-4 forMaine & Maritimes Corporation, hereinafter the “S-4”), to be filed pursuantto Regulation 14A no later than 120 days after December 31, 2002, which is theend of the fiscal year covered by this report, is incorporated by referenceinto Part III.

 

 

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**MAINEPUBLIC SERVICE COMPANY**

**FORM 10-K**

**For the Fiscal Year Ended December 31, 2002**

 

TABLE OF CONTENTS

 
| **PART I**    |
|---------------|
| Item  1.      | Business |
|          | General |
|          | Financial Information about Foreign and  Domestic Operations |
|          | Regulation and Rates |
|          | Franchises and Competition |
|          | Employees |
|          | Subsidiaries and Affiliated Companies |
|          | Company Financial Information |
| Item 2.       | Properties, System Security and Reliability |
| Item 3.       | Legal Proceedings |
| Item 4.       | Submission of Matters to a Vote of Security  Holders |
|          |   |
| **PART II**   |
| Item 5.       | Market for Registrant’s Common Equity and  Related Shareholder Matters |
| Item 6.       | Selected Financial Data |
| Item 7.       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|          |   |
| Item 7a.      | Quantitative and Qualitative Disclosures  About Market Risk |
| Item 8.       | Financial Statements and Supplementary Data |
| Item 9.       | Changes In and Disagreements with  Accountants |
|          |   |
| **PART  III** |
| Item 10.      | Directors and Executive Officers of the  Registrant |
| Item 11.      | Executive Compensation |
| Item 12.      | Security Ownership of Certain Beneficial  Owners and Management |
| Item 13.      | Certain Relationships and Related  Transactions |
| Item 14.      | Controls and Procedures |
|          |   |
| **PART IV**   |
| Item 15.      | Exhibits, Financial Statement Schedules and  Reports on Form 8-K |

 

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**PART I**

 

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

 

**General**

 

The Company was originally incorporated asthe Gould Electric Company in April, 1917 by a special act of the Mainelegislature.  Its name was changed toMaine Public Service Company in August, 1929. Until 1947, when its capital stock was sold to the public, it was asubsidiary of Consolidated Electric & Gas Company.  Maine and New Brunswick Electrical PowerCompany, Limited, the Company’s wholly-owned Canadian subsidiary (the “CanadianSubsidiary” or “Me&NB”) was incorporated in 1903 under the laws of theProvince of New Brunswick, Canada. Energy Atlantic, LLC (EA), the Company’s unregulated marketingsubsidiary, formally began operations in January, 1999.

 

The Company, until the generating assets weresold on June 8, 1999, produced and, until March 1, 2000, purchased electricenergy for retail and wholesale customers. The Company continues to provide transmission services to formerwholesale energy customers and transmission and distribution services to retailcustomers in the service territory. Geographically, the service territory is approximately 120 miles longand 30 miles wide, with a population of approximately 72,000.  Since March 1, 2000, the beginning of retailcompetition in Maine, customers in the Company’s service territory have beenpurchasing energy from suppliers other than the Company.  This energy comes from competitiveelectricity providers or, if customers are unable or do not wish to choose acompetitive supplier, the Standard Offer Service (SOS) provider.

 

The Company’s service area featuresagricultural and wood product customers. Potato growing and processing, as well as the manufacturing of woodproducts, principally lumber, continue to be the dominant economic forces inthe service area.  The growing andprocessing of broccoli has added diversity to the region’s agriculturalportfolio.  However, the Northern Mainearea continues to lag behind National economic trends and is experiencingpopulation losses based on census data and recent projections.  Attracting new businesses to Northern Maineand reversing the migration of population from the Company’s service territoryis a continuing challenge to the area’s leaders and businesses, including theCompany.

 

The Canadian Subsidiary was primarily ahydro-electric generating company.  Itowned and operated the Tinker hydro plant in New Brunswick, Canada, until June8, 1999, when these assets were sold to WPS-PDI.  Prior to the generating asset sale, the Canadian Subsidiary soldenergy not needed to supply its wholesale New Brunswick customer to theCompany.  For the period 2000-2002, theCanadian Subsidiary has been inactive and did not have unaffiliated customerrevenues.

 

EA participated in the wholesale power marketduring 1999 and until March 1, 2000, when it began selling energy in the retailelectricity market in Maine.  The retailmarket consists of two pieces, SOS and competitive energy supply (CES), asmentioned above.  The Maine PublicUtilities Commission (MPUC) requests bids for SOS in each serviceterritory.  As a result of this biddingprocess, EA was the Standard Offer Service (SOS) provider in Central MainePower Company’s (CMP’s) territory from March 1, 2000 until its contract expiredon February 28, 2002.  In the Company’sservice territory, EA provided 20% of the medium non-residential SOS from March1, 2000 until February 28, 2001.  EAalso provided energy to several large commercial customers in CMP’s territoryunder one-year competitive energy supply (CES) contracts, which expiredthroughout 2001.  EA, along with itsenergy supplier, was not successful in obtaining any of the SOS in theCompany’s service territory starting March 1, 2001 nor CMP’s service territorystarting March 1, 2002.  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.  As part of acontract settlement reached in May 2001, EA was allowed to purchase energy fromsources in addition to Engage.  EA hassecured several sources of power, enabling it to participate in competitivemarkets within Maine.  EA’s CES sales toretail customers during 2002 produced far less operating margin than EA hadpreviously earned from SOS in CMP’s territory. On February 24, 2003, EA announced its intent to withdraw from theNorthern Maine market due to the lack of profitability in that market resultingfrom an illiquid wholesale market, inability to obtain price differentiatedwholesale electric products, and other factors.  EA will continue to serve existing contracts in Northern Maineuntil they expire through February 28, 2004. For further information regarding EA, its contract settlement withEngage and its future business plans, see Item 7, Management’s Discussion andAnalysis of Financial Condition and Results of Operations, “Energy AtlanticActivities,” incorporated herein by reference.

 

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By regulatory order, on June 4, 1984, theCompany entered into a Power Purchase Agreement (PPA) with Sherman PowerCompany, which assigned its interest in the Agreement to Wheelabrator-ShermanEnergy Company (W-S), formerly Signal-Sherman Energy Company, (a cogenerator),for 17.6 MW of capacity which began July, 1986.  The original contract was scheduled to expire at the end of 2000,however, either party had the option to renew the contract for an additionalfifteen years.  The Company and W-Sagreed to amend the PPA with the amendment approved by the MPUC in December,1997.  Under the terms of thisamendment, W-S agreed to reductions in the price of purchased power ofapproximately $10 million over the PPA’s current term.  The Company and W-S also agreed to renew thePPA for an additional six years at agreed-upon prices.  The Company made an up-front payment to W-Sof $8.7 million on May 29, 1998, with the financing provided by the FinanceAuthority of Maine (FAME).  This paymenthas been reflected as a regulatory asset, as determined by the MPUC in itsDecember, 1997 order and, based on an MPUC order, included in stranded costsand recovered in the rates of the transmission and distribution utility,beginning January 1, 2001.  The amendedPPA helped relieve the financial pressure caused by the closure of Maine Yankeein 1997, as well as the need for substantial increases in the Company’s retailrates, and also reduced its stranded costs. Every two years, the W-S output is sold via competitive bids, with thebidding process monitored by the MPUC. The sale of the W-S output offsets the W-S costs in determining strandedcosts.  For the period March 1, 2000 toFebruary 28, 2002, WPS-PDI was the successful bidder.  For the period March 1, 2002 to February 28, 2004, EA will betaking delivery of 40% of W-S’s output, while WPS-PDI takes the remainder.  The Company records the above-market cost ofthe W-S contract as stranded costs.  Asstated above, the Company’s Canadian Subsidiary has been inactive for theperiod of 2000-2002, as reflected in the table below.

 

**Financial Information about Foreign and DomesticOperations**

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

 
|                         |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Revenues from                |   |     |   |     |   |     |   |
| Unaffiliated Customers:      |   |     |   |     |   |     |   |
| Parent-United States         |   | 31,401   |   | 31,780   |   | 37,443   |   |
| Subsidiary-United States     |   | 6,901    |   | 15,771   |   | 38,021   |   |
| Subsidiary-U.S. - SOS Margin |   | 5,802    |   | 2,147    |   | 2,774    |   |
| Total Domestic               |   | 44,104   |   | 49,698   |   | 78,238   |   |
| Subsidiary-Canada            |   | —   |   | —   |   | —   |   |
| Total                        |   | 44,104   |   | 49,698   |   | 78,238   |   |
|                         |   |     |   |     |   |     |   |
| Intercompany Revenues:       |   |     |   |     |   |     |   |
| Parent-United States         |   | —   |   | —   |   | —   |   |
| Subsidiary-United States     |   | 9        |   | 3        |   | 70       |   |
| Total Domestic               |   | 9        |   | 3        |   | 70       |   |
| Subsidiary-Canada            |   | —   |   | —   |   | —   |   |
| Total                        |   | 9        |   | 3        |   | 70       |   |
|                         |   |     |   |     |   |     |   |
| Operating Income (Loss):     |   |     |   |     |   |     |   |
| Parent-United States         |   | 3,732    |   | 5,379    |   | 5,404    |   |
| Subsidiary-United States     |   | 3,349    |   | 1,006    |   | 1,515    |   |
| Total Domestic               |   | 7,081    |   | 6,385    |   | 6,919    |   |
| Subsidiary-Canada            |   | (7       | )      | (25      | )      | 86       |   |
| Total                        |   | 7,074    |   | 6,360    |   | 7,005    |   |
|                         |   |     |   |     |   |     |   |
| Net Income (Loss)            |   |     |   |     |   |     |   |
| Parent-United States         |   | 3,089    |   | 4,331    |   | 3,354    |   |
| Subsidiary-United States     |   | 3,444    |   | 897      |   | 1,688    |   |
| Total Domestic               |   | 6,533    |   | 5,228    |   | 5,042    |   |
| Subsidiary-Canada            |   | 10       |   | 9        |   | 259      |   |
| Total                        |   | 6,543    |   | 5,237    |   | 5,301    |   |

 

 

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|                     |   |    |   |    |   |    |   |
|--------------------------|--------|---------|--------|---------|--------|---------|--------|
| Identifiable Assets:     |   |    |   |    |   |    |   |
| Parent-United States     |   | 131,035 |   | 136,931 |   | 143,716 |   |
| Subsidiary-United States |   | 6,324   |   | 5,632   |   | 6,385   |   |
| Total Domestic           |   | 137,359 |   | 142,563 |   | 150,101 |   |
| Subsidiary-Canada        |   | 779     |   | 772     |   | 756     |   |
| Total                    |   | 138,138 |   | 143,335 |   | 150,857 |   |

 

The identifiable assets, by company, arethose assets used in each company’s operations, excluding intercompanyreceivables and investments.

 

**Regulationand Rates**

 

The information with respect to regulationand rates is presented in Item 3, “Legal Proceedings,” which information isincorporated herein by reference.

 

**Franchises and Competition**

 

Except for consumers served at retail by theCompany’s wholesale customers, the Company has practically an exclusivefranchise to deliver electric energy in the Company’s service area.  For additional information on changes to thestructure of the electric utility industry in Maine, see Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations,“Overview,” incorporated herein by reference. For information on the competitive conditions facing EA, see Item 7,Management’s Discussion and Analysis of Financial Condition and Results ofOperations, “Energy Atlantic Activities,” incorporated herein by reference.

 

**Employees**

 

The information with respect to employees ispresented in Item 7, Management’s Discussion and Analysis of FinancialCondition and Results of Operations, “Employees,” which information isincorporated herein by reference.

 

**Subsidiaries and Affiliated Companies**

 

The Company owns 100% of the Common Stock ofMaine and New Brunswick Electrical Power Company, Limited (the “CanadianSubsidiary”).  The Canadian Subsidiaryowned and operated the Tinker Station located in the Province of New Brunswick,Canada, prior to its sale on June 8, 1999, and has not conducted an active businesssince the sale.

 

On August 24, 1998, the MPUC approved theformation of the Company’s unregulated subsidiary, Energy Atlantic, LLC(EA).  EA began formal operations onJanuary 1, 1999, performing various non-core activities, such as wholesalemarketing of electric power and the sales of energy-related products andservices.  EA began retail salesactivity on March 1, 2000, the start of retail competition in Maine.  As a start-up unregulated subsidiary, theBoard of Directors and the MPUC limited the capital contributions to a maximumof $2 million, subsequently amended to $2.5 million during 2002.

 

The Company owns 5% of the Common Stock ofMaine Yankee, which operated an 860 MW nuclear power plant (the “Plant”) inWiscasset, Maine.  On August 6, 1997,the Board of Directors of Maine Yankee voted to permanently cease poweroperations and to begin decommissioning the Plant.  The Plant experienced a number of operational and regulatoryproblems and did not operate after December 6, 1996.  The decision to close the Plant permanently was based on aneconomic analysis of the costs, risks and uncertainties associated withoperating the Plant compared to those associated with closing anddecommissioning it.  The Plant’s operatinglicense from the Nuclear Regulatory Commission (NRC) was due to expire onOctober 21, 2008.  For furtherinformation regarding Maine Yankee and its decommissioning progress, see Item7, Management’s Discussion and Analysis of Financial Condition and Results ofOperations, “Maine Yankee,” incorporated herein by reference.

 

The Company also owns 7.49% of the CommonStock of Maine Electric Power Company, Inc., (MEPCO).  MEPCO owns and operates a 345-KV (kilovolt) transmission lineabout 180 miles long, which connects the New Brunswick Power (NB Power) systemwith the New England Power Pool.

 

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**Company Financial Information**

 

The public may read and copy any materialsthe Company files with the SEC at the SEC’s Public Reference Room at 450 FifthStreet, N.W. Washington, D.C. 20549.  The public may obtaininformation on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330.

 

The Company is an electronic filer and theSEC maintains an Internet site that contains reports, proxy and informationstatements, and other information regarding issuers that file electronicallywith the SEC at http://www.sec.gov.  TheCompany maintains an Internet site containing such reports at www.mainepublicservice.com.  Also listed at the Company’s site underInvestor Relations, Corporate Governance, is the Code of Ethics for SeniorFinancial Officers and all other Principal Executive Officers and Managers, aswell as the Company’s policy regarding Insider Trading and Dissemination ofInside Information.

 

**Item2.  Properties**

 

As of December 31, 2002, the Company hadapproximately 393 pole miles of transmission lines and the Company ownedapproximately 1,714 miles of distribution lines.  Net electric plant in service was approximately $48.74 million atDecember 31, 2002.

 

Substantially all of the properties owned bythe Company are subject to the liens of the First and Second MortgageIndentures and Deeds of Trust.

 

In response to a Maine environmentalregulation to phase out PCB transformers, the Company has implemented a programto eliminate transformers on its system that do not meet the new Stateenvironmental guidelines.  The programwill test the almost 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 two years, the Company has spent approximately $576,000under the program.

 

**System Security and Reliability**

 

During 2002 the engineering consulting firmof R.W. Beck, Inc., (R.W. Beck), was retained to undertake a comprehensivefacilities evaluation and engineering audit of the Maine Public Service Companytransmission and distribution systems. The purpose of the evaluation and audit were to provide a comprehensivecondition baseline of the transmission and distribution systems as a platformfor new system planning and asset management initiatives.  By creating a condition baseline andincreasing focus on system planning, the Company is in the process ofdeveloping a long-term capital expenditure plan.  By implementing a comprehensive asset management initiative, thecorporation is focusing on extending transmission and distribution assets’lifecycles, while ensuring increasing reliability.

 

The R.W. Beck audit recommended the need forimprovements in the Company’s T&D system and capital expenditure planningprocesses.  Steps have been and arebeing undertaken to enhance overall planning efforts.  As a result of the audit, R.W. Beck suggested a number of shortand long-term improvements, such as substation consolidation to reduce costsand increase overall system reliability. Through the development of a comprehensive system plan, the Company isdeveloping a long-term strategy to consolidate substations and increase the useof new technologies.  Overall, the goalsof these initiatives are to reduce capital expenditure requirements, improvereliability and reduce overall operating costs over a long-term planninghorizon (ten to fifteen years).

 

From a transmission perspective, the auditnoted that transmission lines appeared to be in good condition and reasonablymaintained.  However, they did note on arelative basis that certain lines were older, but in good condition with theexception of some of the oldest wood pole lines and areas where woodpeckerdamage is a problem.  The auditsuggested that higher maintenance costs could be anticipated in the future forcertain older lines due to age, type and life expectancy.  As a recommendation of the audit, theCompany has begun a regular climbing inspection program to ensure the integrityof all poles, cross arms and pole tops. In addition, expanded thermal infrared inspections were recommended andwill be implemented.

 

Audits of the Company’s substations andsubstation-related business processes were undertaken.  The overall ratings for substations werelower due to the fact that almost half of the distribution substations rely onpower transformers that have

 

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exceeded their useful lives or are withinfive years of exceeding their useful lives. Additionally, a number of minor National Electric Safety Code (NESC)violations were noted and are being corrected, representing a cost impact forcompliance of less than $100,000.  Whilecertain transformers are beyond their normal life expectancy, the Company hasimplemented a comprehensive testing program to identify problem transformers,implementing preventive maintenance to extend equipment life expectancies.  As part of the system planning process, theCompany is developing a plan to replace older transformers, which will focus onconsolidating substations where possible, all a part of the Company’s long-termsystem planning process.

 

R.W. Beck recommended a more focused renewaland replacement program for certain older three-phase 12.5 kV and single-phasedistribution lines, as well as a prioritization of certain urban distributionfacilities that were observed to be below acceptable standards.  Rural distribution lines were generallyfound to be in good condition.  However,the audit suggested improved distribution line vegetation management, notingthe transmission system vegetation management was in good condition.

 

Aggressive and remedial steps are beingundertaken to address the findings of the audit.  Management, with input by R.W. Beck, indicate their belief thatcontinued capital expenditures at or near the level of annualized transmissionand distribution system asset depreciation rates of approximately $2.5 to $3.0million per year should be adequate to address concerns raised through theaudit.  Final long-term capitalexpenditure plans will be subject to completion of a comprehensive system plan.

 

In addition to the transmission anddistribution system audit, and as a result of the closure of an on-systemgeneration facility and potential closure of other merchant generationfacilities, a series of analyses were undertaken by independent consultants toevaluate the voltage support impact of the loss of on-system generation.  Through load-flow analysis and utilizationof specific contingency or transmission outage scenarios, it was determined thatunder a single contingency or outage condition and during peak load situations,a system-wide outage was possible if at least 50 MW’s of on-system generationwas not operating.  Additionally, undercertain conditions, the analyses noted that a second contingency ortransmission line outage could not be survived within a thirty-minute timeframe when similar conditions existed after a single contingency.  Although Maine Public Service Company doesnot have a bulk delivery transmission system as defined by the NortheasternPower Coordinating Council, the Company is using their standards for planningcriteria.  It should be noted thatpotential contingencies that were studied focused on situations that couldimpact the Company’s transmission and distribution systems, even though certaintransmission assets are located in Canada and are owned by other companies ororganizations.  Further, the Companydoes have contingency plans to mitigate such conditions or events in the casethat a major transmission outage or system outage occurred.

 

Maine Public Service Company, given theactual and potential impact of the loss of on-system generation, is working onplanning projects to address the potential impact that may include newtransmission interconnections and/or increasing of existing interconnections.  The Maine Public Utilities Commission isaware of the Company’s concerns and has opened a Notice of Inquiry (MPUC DocketNo. 2003-82) to investigate market conditions within Northern Maine, includingoverall system security due to the loss of on-system generation.  The outcomes of the Notice of Inquiry arenot known at this time.  However, theCompany has suggested certain options to address those issues of inquiry.  As a result of conditions that may exist ifon-system generation closes, the Company is closely evaluating construction ofat least one additional transmission interconnection and/or improving existinginterconnections with NB Power.  Furtherinformation concerning the Notice of Inquiry can be found in the following“Legal Proceedings” section, Item 3 (g).

 

**Item3.  Legal Proceedings**

 

(a)                                  WPS Energy Services, Inc., Complaint againstMaine Public Service Company, and Petition to Alter or Amend the MPUC’s OrderAuthorizing the Formation of Energy Atlantic, LLC, MPUC Docket Nos. 98-138 and00-894

 

On October 30, 2000, WPSEnergy Services (WPS), a Competitive Electricity Provider (CEP) offering retailsales of electricity in the Company’s service territory, filed a Complaint(Docket No. 00-894) against the Company, as well as a Petition to Alter or Amendthe MPUC’s September 2, 1998 Order in Docket No. 98-138.

 

The Complaint alleged thatthe Company violated various provisions of Chapter 304 of the MPUC’sRegulations governing relations between the Company and all CEPs, including theCompany’s own marketing subsidiary, Energy

 

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Atlantic, LLC (EA).  According to the Complaint, various of theCompany’s employees engaged in conduct that either awarded EA a competitiveadvantage over other CEPs or burdened WPS with an unfair disadvantage relativeto EA.  These allegations included suchpractices as denying WPS information made available to EA, or providing EA withinformation about WPS’s customers that was not available publicly.  The Company did not believe it in any wayviolated any provisions of Chapter 304 and so argued to the MPUC.

 

In its September 2, 1998Order in Docket No. 98-138 authorizing the formation of EA, the Commissionallowed the Company and EA to share the services of certain employees undercertain conditions on the grounds that such sharing was in the public interestand would not have any anti-competitive effect on the retail market forelectricity.  WPS claimed that thesharing did not conform to the conditions set forth in the Order and that, inany event, the Commission should find such sharing not in the public interest,thereby amending its original September 2, 1998 Order.

 

The Complaint and Petitionto Amend the September 2, 1998 Order, in addition to requesting a prohibitionon the sharing of certain employees, particularly Maine Public ServiceCompany’s General Counsel, also sought a formal investigation of the Complaint,penalties for any violations of the Commission’s rules and certain specificrelief for violations of Chapter 304.

 

In its response, the Companystrongly denied the allegations in the WPS Complaint and asked the Commissionto dismiss the Complaint and for Summary Judgment in its favor.

 

On May 1, 2001, theCommission issued its Order in this matter, finding that some counts in the WPSComplaint should  be dismissed, but thatothers raised factual issues that could be resolved only through a more formalhearing process.  The Commission declined,however, to take initial jurisdiction over the Complaint.  Instead, the Commission ordered the partiesto submit their dispute to the informal dispute resolution process set forth inMPS’s Chapter 304 Implementation Plan. Under this Plan, the dispute was submitted to an independent law firm,which issued its decision within 30 days of the Commission’s Order.  The Commission’s Order stated that theCommission would take jurisdiction over the dispute only if the matter was notresolved to both parties’ satisfaction. The Commission also stated that it would open an investigation into theissues of whether MPS’s General Counsel’s dual role with MPS and EA wasinherently problematic and what standards should govern any MPS employees whoalso provide services to EA.

 

The parties submitted thedispute to an independent arbitrator who issued his proposed findings on June29, 2001.  The arbitrator found that MPSdid not violate any provisions of Chapter 304, except for the Company’sunintentional failure to identify WPS as a Standard Offer Service provider onits March and April 2000 bills to customers. The arbitrator recommended that MPS refund to WPS its billing fees forthese two months, approximately $18,000. On July 5, 2001, the Company and WPS informed the Commission of theiracceptance of the arbitrator’s findings. As a result, the Commission, in its July 13, 2001 Order, stated that itwould not be necessary for it to further address the allegations in the WPScomplaint, even though it would continue its investigation into the sharing ofemployee services.

 

On March 6, 2002, theCompany, WPS and the Public Advocate filed with the MPUC a Stipulationresolving all remaining issues in the investigation.  The Stipulation contained several provisions that clarified theextent to which the Company’s senior management could become involved in theaffairs of EA and included restrictions and requirements governing the directcontact between the Company’s senior management and EA personnel for all butone designated executive.  TheStipulation also specifically prohibited one employee, (the “designatedexecutive”) from being involved in certain types of Company activities,knowledge of which could gain EA a competitive advantage in the retailmarket.  Finally, the Stipulation gavethe MPUC the right to conduct an annual audit to determine whether EA and theCompany are complying with Chapter 304. The costs of this audit, up to $10,000, shall be paid for by theCompany.  This Stipulation was approvedby the MPUC in an Order dated April 29, 2002. On February 24, 2003, EA announced its intent to withdraw from theNorthern Maine market due to the lack of profitability in that market and otherwholesale market factors.  EA willcontinue to serve its existing contracts in Northern Maine until they expire throughFebruary 28, 2004.  EA believes thatthis action substantially relieves the underlying concerns that gave rise tothe WPS Complaint, particularly regarding the sharing of employees inconnection with EA’s energy marketing within the Company’s service territory.  On February 21, 2003 the Company

 

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filed with the MPUC an“Application for Exemption of Chapter 304” (MPUC Docket No. 2003-122) andexpects a ruling on the application during calendar year 2003.

 

(b)                                 Maine Public Utilities CommissionInvestigation of Maine Public Service Company’s Stranded Cost RevenueRequirement in MPUC Docket No. 01-240

 

On May 8, 2001, the MPUCissued a notice of investigation to determine whether the Company’s annualrecovery of $12.5 million in stranded investment must be changed, effectiveMarch 1, 2002, to reflect any changes in its stranded costs.  On July 12, 2001, the Company filed itsproposal in which it advocated continuing the $12.5 million annual recovery ofstranded costs and also proposed to begin the recovery of deferred amountsassociated with the discounted rates it had made available to certainindustrial customers. Also at issue in the proceeding was the Company’s receiptof a $1,005,000 insurance refund associated with Maine Yankee.  As of December 31, 2001, the Companyreflected the refund as a miscellaneous deferred credit.  A Stipulation approved by the MPUC onJanuary 7, 2002, with the appropriate order issued on February 27, 2002,included annual stranded cost recovery of $11,540,000 and a 15% sharing of theMaine Yankee insurance refund with the Company’s shareholders, thereby leavingthe rates charged to core retail customers unchanged.

 

(c)                                  Maine Public Utilities Commission,Investigation of Rate Design of Transmission and Distribution Utilities, MPUCDocket No. 01-245.

 

On May 8, 2001, the MPUCissued a Notice of Investigation into certain common fundamental issuesregarding the rates for the State’s three major electric utilities: theCompany, Central Maine Power Company (CMP) and Bangor Hydro-Electric Company(BHE).  These issues have been definedby the MPUC as follows:

 

(i)                                     The extent to which stranded cost recoveryshould be shifted from variable KWH and kw charges to a fixed charge;

(ii)                                  The redefinition of time of use periods forrate design; and

(iii)                               The elimination or reduction of seasonalrates.

 

The Company originallybelieved stranded costs should be recovered through fixed charges that itscustomers cannot avoid by reducing or eliminating their usage.  The Company, together with CMP and BHE,filed testimony in support of its position on April 16, 2002.  The Company recommended that 50% of thestranded costs allocable to residential and small to medium commercialcustomers and 25% of the stranded cost allocable to large industrial customersbe immediately collected through a fixed charge, with all remaining strandedcosts to be phased in during the Company’s next rate case.  The Company also recommended immediateelimination of its seasonal rates. After further review of the impact of these proposed changes, which hadno overall revenue impact, the Company filed a motion to be permitted towithdraw or be released from this proceeding. The Company stated that its service territory was located in a retailenergy market that was distinct from that of CMP or BHE.  Because, unlike CMP and BHE, the Company hadnot yet filed an Alternative Rate Plan (ARP), management, when it became awareof the MPUC Docket No. 01-245, to reconsider its rate design options and, atthe same time, avoided the promotion of any billing structures that might limitor conflict with these options.  TheCompany filed an ARP (MPUC Docket 2003-85) on March 6, 2003.  On July 30, 2002, the Company filed aStipulation with the Commission, signed by the parties to the proceeding, towithdraw, without prejudice from the investigation in MPUC Docket No.01-245.  The Commission approved theCompany’s petition on August 20, 2002.

 

(d)                                 Federal Energy Regulatory Commission (FERC)Approves Increase in Retail Transmission Rates 

 

The FERC approved wholesaletransmission rates effective June 1, 2002 in FERC Docket No. ER00-1053, aproceeding related to MPS’s Open Access Transmission Tariff (OATT).  On August 6, 2002, the Company notified the MPUCof its intention to implement the associated transmission component of itsretail transmission and distribution (T&D) rates, with the new rateseffective October 1, 2002.  The FERCmaintains jurisdiction over all transmission rates.  This implementation increased overall delivery rates byapproximately 2%.  The Company hasincreased its transmission rates subject to refund and issuance of a finalorder by FERC.  Although the Companyexpects FERC’s final order to support the rate increase without any furtheradjustments, it cannot predict the final outcome of this proceeding.

 

9

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(e)                                  Maine Public Utilities Commission, Requestfor Approval of Reorganization of the Company Into a Holding Company Structure,Docket No. 02-676

 

On October 31, 2002, theCompany filed a request for Commission approval of the formation of aMaine-based holding company structure. Under this structure, the Company, Energy Atlantic, as well as otheraffiliates which might be created at a later date, will become subsidiaries ofa holding company (HoldCo).  In itsapplication, the Company stated that the corporate restructuring will beaccomplished through a “reverse triangular merger,” similar to the one employedin Central Maine Power Company Application for Approval of Reorganization, ofTransactions with Affiliated Interests, and Transfer of Assets, Docket No.97-930.

 

The proposed restructuringconstitutes a reorganization requiring Commission approval pursuant to theprovisions of 35-A M.R.S.A. § 708.  Inaddition to the proposed reorganization, the Company also requested theapproval of certain stock issuances and affiliated interest transactions.

 

Specifically, the Companyrequested Commission approval of the following transactions and arrangements:

 

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

 

2.               the creation of a corporation (MergeCo) whoseonly purpose will be to facilitate the corporate reorganization and which, whenorganized, will be a wholly-owned subsidiary of HoldCo and which will cease toexist once it has served its purpose;

 

3.               the conversion and exchange of all theoutstanding shares of the Company’s common stock into an equal number of sharesof HoldCo’s common stock (to the degree that the conversion and exchange of MPSstock to be effected in that transaction is deemed to constitute an issuance ofutility stock within the meaning of 35-A M.R.S.A. §§ 901and 902);

 

4.               the merger of MergeCo into the Company, withthe Company as the surviving corporation, and the resulting conversion of theoutstanding shares of MergeCo common stock into a number of shares of thecommon stock of the Company equal to the number of shares of the Company’scommon stock outstanding immediately prior to the share conversion described initem 3 above, which will be deemed issued by the Company 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 are not “necessary or useful” within the meaning of Section 1101 oftitle 35-A, from MPS to any MPS affiliate, and (ii) the transfer of all otherassets from MPS to HoldCo or any non-MPS HoldCo subsidiary in the total amountof up to $1,000,000 over the three-year period beginning upon the merger date.

 

10

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The Company also requestedthat the Commission authorize the creation of HoldCo and MergeCo within thirtydays of the date of its filing.  This“interim approval” would be for the limited purpose of making necessary filingswith the Securities and Exchange Commission under the Public Utility HoldingCompany Act and for executing a registration statement under federal securitieslaw.  As part of this request forinterim approval, the Company also represented that should the Commission denyits petition for reorganization, or if for any other reason their organizationdoes not occur, it will dissolve both HoldCo and MergeCo.

 

Subsequent to its filing,the Company received and responded to several requests for information from theMPUC and Office of Public Advocate, an intervenor in the proceeding, and met onseveral occasions with interested parties. The parties settled all issues in the proceeding, and entered a signedStipulation formally approved by the MPUC on March 26, 2003.  Please see the text of the MPUC Order,Docket No. 2002-676 on Pages O-1 to O-21 of this Form 10-K.  The Company has also filed, on March 11,2003, a Form S-4 Registration Statement with the Securities and ExchangeCommission for “Maine & Maritimes Corporation” the entity designated as“HoldCo” in this disclosure.  The filingis reviewable on the SEC’s website at “http://www.sec.gov/edgar” or on the MPSInvestor Relations page at “http://www.mainepublicservice.com/corporate/1373T04_CP.PDF.”

 

(f)                                    Maine Public Utilities Commission, Requestfor Approval of Alternative Rate Plan

 

On March 6, 2003, followinga series of informal meetings with the Office of Public Advocate and the MPUC,the Company submitted its formal “Request for Approval of Alternate Rate Plan”(MPUC Docket 2003-85).  The proposal(ARP) is a seven-year rate plan for its distribution delivery services with atarget implementation date on or before July 1, 2003.  The ARP is an alternative form of regulating MPS’s distributionassets, similar to the performance rate plans the MPUC has adopted for CentralMaine Power Company and Bangor Hydro-Electric Company.  The ARP has numerous components, all ofwhich have been designed to fit together as an integrated whole that will allowthe Company to continue to meet the unique needs of its Northern Mainecustomers.  Its key components include:an inflation index and productivity offset; an adjustment for the treatment ofextraordinary costs the Company may incur; an interest expense adjustment; aneconomic conditions adjustment; a shareholder earnings sharing mechanism;pricing flexibility; reliability safety and service quality indices; and asharing mechanism for non-core revenues. The Company believes that the ARP will benefit customers by: (1)ensuring that customer’s electric service does not suffer under the planthrough the use of the above-described mechanisms; (2) providing predictableand stable rates; (3) providing an acceptable risk sharing environment; and (3)encouraging the Company to minimize its costs wherever possible.  At this time the Company cannot predict thenature or the outcome of any decision or ruling by the MPUC in this proceeding.

 

(g)                                 Maine Public Utilities Commission Notice ofInquiry

 

On February 11, 2003, theMPUC initiated a formal Notice of Inquiry (NOI) into the status of thecompetitive market for electricity supply in Northern Maine (MPUC Docket No.2003-82).  The NOI is not directed atthe Company or any specific party or entity but is a general inquiry designedto gather information about the adequacy of existing market structures, rulesand laws in light of the limited number of supplier/generator participants inthe region.  The MPUC’s inquiry is forthe purpose of identifying potential concerns related to Northern Maine’ssupply and market situation, and to explore possible solutions.  In contrast to the rest of Maine, which ispart of the Independent System Operator — New England (ISO-NE) region, NorthernMaine is electrically interconnected to the Canadian Maritimes region, whichalso includes the electric loads and generation of New Brunswick, as well asNova Scotia and Prince Edward Island. Load and generation in Northern Maine, which comprises the Company’sservice territory, are interconnected to the rest of Maine and New England onlyby transmission through New Brunswick. The Northern Maine Independent System Administrator (NMISA) operates thebulk power and transmission systems for the region.  The divestiture of generation assets in connection with the MaineElectric Industry Restructuring Act eliminated rate regulation for theproduction and sale of electricity supply as of March 1, 2000.  During the subsequent period of time, theretail and wholesale markets have experienced a limited number of participants.  In furtherance of the MPUC’s inquiry, itrequested comments on a number of issues related to these unique marketconditions.  The Company has providedcomments for the MPUC’s consideration. At this time the Company cannot predict the nature or the outcome of anyfinding, decision or ruling by the MPUC in this proceeding.

 

11

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**Item 4. Submission of Matters to a Vote of SecurityHolders**

 

At the Company’s AnnualMeeting of Stockholders, held on May 14, 2002, two matters were votedupon.  First was the uncontestedelection of the following directors to serve until the 2005 Annual Meeting ofStockholders, each of whom received the votes shown:

 

| **Nominee**        |   | **For**   |   | **Against** |   | **Non-votes  and  Abstentions** |   |
|--------------------|--------|-----------|--------|-------------|--------|---------------------------------|--------|
| D. James Daigle    |   | 1,374,207 |   | 36,933      |   | 162,498                         |   |
| Deborah L. Gallant |   | 1,374,692 |   | 36,448      |   | 162,498                         |   |
| G. Melvin Hovey    |   | 1,373,393 |   | 37,747      |   | 162,498                         |   |
| Lance A. Smith     |   | 1,374,995 |   | 36,145      |   | 162,498                         |   |

 

Second was the approval ofthe stock option plan reported in Item 5 below, Securities Authorized for IssuanceUnder Equity Compensation Plans, which received the votes shown:

 

|              |   | **For** |   | **Against** |   | **Non-Votes  and  Abstentions** |   |
|-------------------|--------|---------|--------|-------------|--------|---------------------------------|--------|
| Stock Option Plan |   | 787,210 |   | 429,078     |   | 357,350                         |   |

 

**PART II**

 

**Item 5. Market for Registrant’s Common Equity andRelated Stockholder Matters**

 

The Company’s Common Stockis listed and traded on the American Stock Exchange.  As of December 31, 2002, there were 934 holders of record of theCompany’s Common Stock.  As of December31, 2002 and 2001, Common Stock shares issued and outstanding were 1,574,115and 1,573,510, respectively.

 

Dividend data and marketprice related to the Common Stock are tabulated as follows for the two mostrecent calendar years:

 
|            |   | **Market  Price** |   | **Dividends** |   |
|-----------------|--------|-------------------|--------|---------------|--------|
|            |   | **High**          |   | **Low**       |   | **Paid Per  Share** |   | **Declared  Per Share** |   |
| 2001            |   |              |   |          |   |   |   |   |   |
| First Quarter   |   | $                 | 26.63  |          | $      | 23.37 |   | $ | .32 |   | $ | .32 |   |
| Second Quarter  |   | $                 | 30.50  |          | $      | 26.00 |   | .32 |   | .32 |   |
| Third Quarter   |   | $                 | 29.60  |          | $      | 27.00 |   | .32 |   | .35 |   |
| Fourth Quarter  |   | $                 | 30.75  |          | $      | 27.75 |   | .35 |   | .35 |   |
| Total Dividends |   |              |   |          |   | $ | 1.31 |   | $ | 1.34 |   |
|            |   |              |   |          |   |   |   |   |   |
| 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 |   |

 

Dividends declared withinthe quarter are paid on the first day of the succeeding quarter.

 

See Item 15, FinancialStatements, Note 7 to the Consolidated Financial Statements, “CommonShareholders’ Equity,” incorporated herein by reference, concerning restrictionson payment of dividends on Common Stock.

 

The Company has determinedthat the Common Stock dividends paid in 2002 are fully taxable for federalincome tax purposes.  Thesedeterminations are subject to review by the Internal Revenue Service, andshareholders will be notified of any significant changes.

 

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SecuritiesAuthorized for Issuance Under Equity Compensation Plans.

 

| **Plan Category**                                     |   | **Number of  securities  to be issued upon  exercise of  outstanding options,  warrants and rights  (a)** |   | **Weighted-average  exercise price of  outstanding options,  warrants and rights  (b)** |   | **Number of  securities  remaining available  for future issuance  under equity compen-  sation plans (exclud-  ing securities reflected  in column  (a)  (c)** |   |
|-------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Equity compensation plan approved by security holders |   | 5,250                                                                                                     |   | 30.45                                                                                   |   | 144,750                                                                                                                                                              |   |
| Equity compensation plan approved by security holders |   | 0                                                                                                         |   | n/a                                                                                     |   | 0                                                                                                                                                                    |   |
| Total                                                 |   | 5,250                                                                                                     |   |                                                                                    |   | 144,750                                                                                                                                                              |   |

 

**Item 6. Selected Financial Data**

 

A five-year summary of selectedfinancial data (1998-2002) is as follows:

 

**Five-Year Summary ofSelected Financial Data**

 
|                                                   |   | **2002**   |        | **2001**   |   | **2000**    |   | **1999**   |        | **1998**   |   |
|--------------------------------------------------------|--------|------------|-------------|------------|--------|-------------|--------|------------|-------------|------------|--------|
| Income Statement Data:                                 |   |       |        |       |   |        |   |       |        |       |   |
| Revenues(1)                                            |   | $          | 44,104,133  |       | $      | 49,698,040  |   | $          | 78,238,279  |       | $      | 67,456,117 |   | $ | 56,626,906 |   |
| Net Income Available for Common Stock                  |   | $          | 6,543,421   |       | $      | 5,236,527   |   | $          | 5,300,632   |       | $      | 4,005,556 |   | $ | 2,252,915 |   |
| Basic and Diluted Net Income Per Share of Common Stock |   | $          | 4.16        |       | $      | 3.33        |   | $          | 3.34        |       | $      | 2.48 |   | $ | 1.39 |   |
|                                                   |   |       |        |       |   |        |   |       |        |       |   |
| Balance Sheet Data:                                    |   |       |        |       |   |        |   |       |        |       |   |
| Total Assets                                           |   | $          | 138,137,562 |       | $      | 143,334,943 |   | $          | 150,856,876 |       | $      | 171,548,480 |   | $ | 164,295,548 |   |
| Capitalization:                                        |   |       |        |       |   |        |   |       |        |       |   |
| Long-Term Debt Outstanding                             |   | $          | 33,765,000  |       | $      | 34,940,000  |   | $          | 35,990,000  |       | $      | 42,015,000 |   | $ | 47,190,000 |   |
| Less amount due  within one  year                 |   | 3,085,000  |        | 1,175,000  |   | 1,050,000   |   | 25,000     |        | 1,275,000  |   |
| Long-Term Debt                                         |   | 30,680,000 |        | 33,765,000 |   | 34,940,000  |   | 41,990,000 |        | 45,915,000 |   |
| Common Shareholders’ Equity                       |   | 47,029,071 |        | 42,731,149 |   | 39,585,951  |   | 37,159,608 |        | 34,933,027 |   |
| Total Capitalization                                   |   | $          | 77,709,071  |       | $      | 76,496,149  |   | $          | 74,525,951  |       | $      | 79,149,608 |   | $ | 80,848,027 |   |

 

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(1) As noted below in Item 7, Management’sDiscussion and Analysis of Financial Condition and Results of Operations,“Overview,” incorporated herein by reference, results for periods ending afterMarch 1, 2000 are not comparable to those for periods ending before that date,which was the effective date of deregulation in Maine, after which the Companyno longer sold (as opposed to delivered) energy to its customers.

 

See Item 7a, Quantitative and QuantitativeDisclosures about Market Risk incorporated herein by reference, concerningmaterial risks and uncertainties which could cause the data reflected here innot to be indicative of the Company’s future financial condition or results ofoperations.

 

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

 

**Overview**

 

This Management’s Discussionand Analysis of Financial Condition and Results of Operations should be read inconjunction with the Company’s Consolidated Financial Statements, Item 15 (a)of this Form 10-K.

 

This Management’s Discussionand Analysis contains certain forward-looking statements, as defined by theSecurities and Exchange Commission (the “SEC”), such as forecasts andprojections of expected future performance or statements of management’s plansand objectives.  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.

 

Factors that could causeactual results to differ materially from our projections include, among othermatters, electric utility restructuring; future economic and demographicconditions; changes in tax rates; interest rates or rates of inflation; anddevelopments in our legislative, regulatory, and competitive environment.

 

Maine Public Service Company(the “Company”) is an energy delivery company serving approximately 35,000retail electric customers in Northern Maine. The Company is subject to the regulatory authority of the Maine PublicUtilities Commission (the “MPUC”) for its distribution rates and the FederalEnergy Regulatory Commission (the “FERC”) for its transmission rates.  Current rates are determined usingtraditional rate base, and rate of return ratemaking principals used by theregulatory agencies.  Future rates maybe based on performance based rates, subject to approval of the Company’salternative rate plan filing with the Maine Public Utilities Commission.  (See “Legal Proceedings,” Item 3 (f)).

 

The Company has twowholly-owned subsidiaries.  Theaccompanying consolidated financial statements include the financial results ofits wholly-owned Canadian subsidiary, Maine and New Brunswick Electrical PowerCompany, Limited, and its wholly-owned marketing subsidiary, Energy Atlantic,LLC (EA).

 

This section explains thegeneral financial condition of the Company and its subsidiaries and theirresults of operations.  This explanationincludes:

 

•                  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.

 

Electric restructuring inMaine began on March 1, 2000, with the Company providing only transmission anddistribution (T & D) or delivery services. Prior to March 1, 2000, the Company provided electric power to itscustomers by operating its own generating facilities or purchasing thepower.  The MPUC allowed the recovery ofstranded costs from our customers, beginning March 1, 2000.  Although the Company’s sales in MWH’s arecomparable to pre-March 1, 2000 sales since the new T&D delivery rates arestill applied to MWH’s delivered, financial results for periods before March 1,2000, reflect revenues and associated expenses for delivery charges andelectric power provided to our customers. After March 1, 2000 the Company’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.

 

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**Critical Accounting Policies**

 

In preparing the financialstatements in accordance with generally accepted accounting principles,management must often make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenues, expenses and related disclosures atthe date of 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**

 

The Company records anestimate for revenue for electricity delivered, but not yet billed tocustomers.  This estimate requires theCompany to make certain assumptions.  Achange in those assumptions could cause the amounts reported as revenues tochange.  Energy Atlantic’s sales can beclassified into two general categories: Standard Offer Service (SOS) in CMP’s service territory which expiredFebruary 28, 2002, and Competitive Energy Supply (CES) sales to individualretail customers within the State of Maine. For Standard Offer Service, revenues were received and expenses werepaid directly by an escrow agent which was controlled by Engage Energy America,LLC (Engage).  EA received a percentageof the net profit from the sale of energy. The utilities bore SOS account collection risk, as they were required toremit the amounts billed 26 days after the billing date to the escrow accountmentioned above and maintain the billing and customer servicerelationship.  EA recorded the accruednet margin of the SOS activity as revenue in the financial statements.  For CES sales, EA negotiates the pricedirectly with the customer, maintains customer service responsibility and hascollection risk.  CES activity is recordedon a gross basis to 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.

 

**Pension and Other PostretirementBenefit Plans**

 

The Company has pension andother postretirement benefit plans, principally healthcare benefits, coveringsubstantially all of its employees.  Inaccordance with Statement of Financial Accounting Standards No. 87, “Employer’sAccounting for Pensions,” and Statement of Financial Accounting Standards No.106, “Employer’s Accounting for Post-retirement Benefits Other Than Pensions,”the valuation of benefit obligations and the performance of plan assets aresubject to various assumptions.  Theprimary assumptions include the discount rate, expected return on plan assets,rate of compensation increase, health care cost inflation rates, expected yearsof future service under the pension benefit plans and the methodology used toamortize gains or losses.  Changes inthose assumptions could also have a significant effect on the Company’snon-cash pension income or expense or the Company’s postretirement benefitcosts.  As of December 31, 2002, theCompany decreased the discount rate from 7.0% to 6.5%.  For additional information on the Company’sbenefit plans, see Item 15 (a) of this Form 10-K, Notes to the ConsolidatedFinancial Statements.

 

**Utility Regulation**

 

The Company is subject tothe regulatory authority of the Maine Public Utilities Commission (MPUC) andthe Federal Energy Regulatory Commission (FERC).  As a result of the ratemaking process, the applications ofaccounting principles by the Company differ in certain respects fromapplications by non-regulated businesses. Approximately 71% of the Company’s 2002 revenues, as depicted in the“Operating Revenues and Energy Deliveries” section below, derived fromregulated operations are accounted for pursuant to Statement of FinancialAccounting Standards No. 71, “Accounting for the Effects of Certain Types of Regulations.”

 

Prior to the start ofderegulation in Maine on March 1, 2000, the MPUC determined the amount ofstranded costs to be recovered via rates. The Company’s annual amortization of its stranded costs represents theamounts allowed by the MPUC in the determination of revenue requirements.

 

15

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**Results of Operations**

 

Earningsand Dividends

 

Net income and earnings pershare for the Company’s core transmission and distribution (T&D) servicesbusiness, as well as for its wholly-owned unregulated marketing subsidiary,Energy Atlantic, are as follows for the three-year period:

 

* *

|               |   | **(Dollars in Thousands)** |   |
|--------------------|--------|----------------------------|--------|
| **Net Income**     |   | **2002**                   |   | **2001** |   | **2000** |   |
| Core T&D       |   | $                          | 3,099  |   | $ | 4,340 |   | $ | 3,613 |   |
| EA                 |   | 3,444                      |   | 897 |   | 1,688 |   |
| Total Company      |   | $                          | 6,543  |   | $ | 5,237 |   | $ | 5,301 |   |
|               |   |                       |   |   |   |   |   |
| Earnings per Share |   | $                          | 4.16   |   | $ | 3.33 |   | $ | 3.34 |   |

 

Net income above isallocated based upon the segment allocation as presented in Item 15(a) of thisForm 10-K, Note 4 of the Notes to Consolidated Financial Statements, “SegmentInformation.”  Core T & D earningsfor 2002 were $1,241,000 less than 2001. Although 2002 sales were 1.4% more than 2001 sales, earnings wereimpacted by the incremental charges, for the Company’s Voluntary EarlyRetirement Program (VERP) of $242,000, net of income taxes ($.15 per share),and expenses associated with seeking approval for the formation of the holdingcompany of $105,000, net of income taxes ($.07 per share).  The Company incurred additional expenses foremployee benefits, principally pension and medical costs, and insurance costsresulting in a reduction in earnings of $723,000, net of income taxes ($.46 pershare).  In addition, consulting feesfor evaluating business processes in the Company and legal expenses for regulatoryaffairs and compliance with provision of the Sarbanes-Oxley Act of 2002 reducednet income by $575,000, net of income taxes ($.37 per share).  Offsetting these additional expenses was areduction of the Company’s borrowing costs increasing earnings by $362,000, netof income taxes ($.23 per share).

 

EA earnings for 2002 were$3,444,000, or $2.19 per share.  As morefully explained in the “Energy Atlantic Activities” section below, EA’searnings include $1.89 per share representing the recognition in September 2002of the final settlement between EA and Engage Energy America, LLC (Engage) andthe reversal of regulatory assessments associated with power arrangements.

 

EA earnings in 2001 reflecta $1.08 million charge in accordance with a settlement agreement with EA’ssupplier for Standard Offer Service in Central Maine Power Company’s serviceterritory, Engage Energy America, LLC. This charge reduced earnings per share by $.69 and was the principalreason for the decrease in EA’s 2001 earnings, as compared to 2000.

 

Although 2001 sales for theretail regulated T&D business were 1.8% less than 2000 sales, as more fullyexplained in the “Operating Revenues and Energy Deliveries” section below, 2001net income increased by $727,000 to $4,340,000 compared to net income in 2000of $3,613,000.  T&D Operation andMaintenance expenses, as noted in the “Operating Expenses” section below, were$255,000, net of income taxes, less in 2001 than 2000, resulting in an increasein earnings per share of $.16.  Inaddition, interest expenses in 2001 were approximately $720,000, net of incometaxes, less than 2000, reflecting the significant reductions in short-terminterest rates and the variable interest rates on the tax-exempt bonds used bythe Company to fund its construction program, and the reduction in debt as aresult of the use of cash proceeds from the generation asset sale, providing anincrease in earnings per share of $.44. The reductions in short-term interest rates follow the National trend oflower interest rates as a result of the Federal Reserve’s interest rate cuts tospur the economy.

 

The Company’s return onequity (net income divided by average common shareholders’ equity) for 2002 was14.6% compared to 12.7% for 2001 and 13.8% for 2000.  The core T&D business earned a return on equity of 7.6% in2002 compared to 10.5% and 9.5% for 2001 and 2000, respectively.  In determining rates at the beginning ofderegulation on March 1, 2000, the MPUC authorized a return of equity of 10.7%for the core T&D business.  In 2002,as explained above, the Company recorded incremental charges for its VERP,additional consulting fees for

 

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evaluating businessprocesses in the Company and expenses associated with seeking approval for theformation of the holding company, which impact the 2002 return on equity.  In addition, the Company incurred additionalexpenses for employee benefits, insurance costs, and legal expenses associatedwith regulatory affairs and Sarbanes- Oxley compliance.  As explained in Item 3, “Legal Proceedings”of this Form 10-K, the Company is seeking to increase its distribution rates inorder to cover the increase in additional operating costs.

 

Your Board of Directorsincreased the quarterly dividend from $.30 per share to $.32 per shareeffective October 1, 2000.  On an annualbasis, the increase was from $1.20 per share to $1.28 per share.  On October 1, 2001, the quarterly dividendwas increased by $.03 per share to $.35 per share, or $1.40 per share peryear.  Effective October 1, 2002, thequarterly dividend was once again increased by $.02 per share to $.37 pershare, or $1.48 per share per year.

 

**Operating Revenues and EnergyDeliveries**

 

Consolidated revenues andMegawatt Hours (MWH) delivered for the years 2002, 2001 and 2000 are asfollows:

 

(Dollars in Thousands)

 

 
|                                     |   | **2002**    |   | **2001** |    | **2000**    |   |
|------------------------------------------|--------|-------------|--------|----------|---------|-------------|--------|
|                                     |   | **Dollars** |   | **MWH**  |    | **Dollars** |   | **MWH** |   | **Dollars** |   | **MWH** |   |
| Residential                              |   | $           | 12,672 |     | 169,489 |        | $      | 12,382 |   | 166,012 |   | $ | 14,605 |   | 166,049 |   |
| Large Commercial                         |   | 4,799       |   | 166,954  |    | 4,684       |   | 160,575 |   | 6,111 |   | 171,023 |   |
| Medium Commercial                        |   | 5,166       |   | 103,840  |    | 5,242       |   | 107,207 |   | 5,908 |   | 103,914 |   |
| Small Commercial                         |   | 6,091       |   | 86,639   |    | 5,994       |   | 85,605 |   | 7,075 |   | 87,867 |   |
| Other Retail                             |   | 774         |   | 3,345    |    | 767         |   | 3,309 |   | 783 |   | 3,259 |   |
| Total Regulated Retail                   |   | 29,502      |   | 530,267  |    | 29,069      |   | 522,708 |   | 34,482 |   | 532,112 |   |
| Energy Atlantic CompetitiveEnergy Supply |   | 6,899       |   | 148,072  |    | 15,771      |   | 375,768 |   | 37,054 |   | 824,845 |   |
| Total Retail                             |   | 36,401      |   | 678,339  |    | 44,840      |   | 898,476 |   | 71,536 |   | 1,356,957 |   |
| Sales for Resale                         |   | —      |   | —   |    | —      |   | — |   | 1,798 |   | 38,010 |   |
| Total Deliveries of Electricity          |   |        |   | 678,339  |    | 44,840      |   | 898,476 |   | 73,334 |   | 1,394,967 |   |
| Other Operating Revenues                 |   | 1,901       |   |     |    | 2,711       |   |   |   | 2,130 |   |   |   |
| Total Operating Revenues                 |   | 38,302      |   |     |    | 47,551      |   |   |   | 75,464 |   |   |   |
| Energy Atlantic Standard                 |   |        |   |     |    |        |   |   |   |   |   |   |   |
| Offer Service Margin                     |   | 5,802       |   |     |    | 2,147       |   |   |   | 2,774 |   |   |   |
| Total Revenues                           |   | $           | 44,104 |     |    |        | $      | 49,698 |   |   |   |   | $ | 78,238 |   |   |   |
|                                          |        |             |        |          |         |             |        |  |  |  |  |  |  |  |  |  |  |

 

The year 2001 was the firstfull year after Maine’s electric industry restructuring which, as discussedabove, began on March 1, 2000.  TheCompany provides transmission and distribution (T&D) delivery services,regulated by the Maine Public Utilities Commission (MPUC), but no longersupplies electric energy.  The Company’swholly-owned marketing subsidiary, Energy Atlantic, LLC, (EA), provides retailelectricity as a competitive energy supplier within Maine Public ServiceCompany’s and Central Maine Power’s service areas in Maine.  As noted earlier, EA has withdrawn from providingretail electricity services to new customers within Maine Public ServiceCompany’s service territory, but will serve existing customers throughout theterm of their contracts, which expire in February, 2004.  Comparisons of the regulated retail revenuesfor the years 2000 through 2002, as evidenced by the chart above, aredifficult, but MWH deliveries continue to be comparable.  The following discussion on both the T&Dand EA segments of the Company, therefore, focus on MWH deliveries.

 

Regulated retail sales for2002 were 530,267 MWH, an increase of 1.4% over 2001 and a decrease of .3% over2000.  Residential sales increased by2.1% over sales in 2001 and 2000, with the 2002 winter months colder thaneither 2001 or 2000.  Large commercialsales were 4% higher than 2001 sales but 2.4% lower than 2000 sales.  Sales to McCain Foods, the Company’s largestcustomer, increased in 2002 to 66,301 MWH, an increase of 7,672 MWH over 2001and 7,613 MWH over 2000.  Sales in 2002to other food processor customers, other than McCain Foods, decreased by 7,394MWH and 11,440 MWH over 2001 and 2000, respectively, due principally to theclosing of Maine Frozen Foods.

 

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Sales to wood productcustomers in 2002 were 4,573 MWH more than 2001 but 2,432 MWH less than2000.  Sales in 2002 to other largecustomers other than food processing and wood product customers increased by1,528 MWH and 2,190 MWH over sales in 2001and 2000, respectively.  Medium commercial sales in 2002 werecomparable to 2000, but 3,367 MWH less than 2001.  Sales to small commercial customers were 86,639 MWH, as comparedto 85,005 MWH in 2001 and 87,867 MWH in 2000.

 

The MPUC, with jurisdictionover retail rates, approved rates for the Company’s T&D utility as of March1, 2000, exclusive of energy supply.  OnOctober 1, 2002, the Company’s T&D rates were increased by 2% for anincrease in transmission rates.  TheFederal Energy Regulatory Commission (FERC) has jurisdiction over transmissionrates.  As more fully explained in Item3, “Legal Proceedings,” section of this Form 10-K, the Company has requested anincrease in its distribution rates.

 

EA’s business is comprisedof Standard Offer Service (SOS) and Competitive Energy Supply (CES) activity,as more fully explained in the “Energy Atlantic Activities” section below.  EA’s CES activity in 2002 produced sales of148,072 MWH and $6.9 million in revenues. In 2001, CES sales of 375,768 MWH produced $15.8 million in revenues.  In 2000, based on only ten months ofactivity, CES sales were 824,845 MWH’s and $37.1 million of revenue.  The dramatic decline in sales over thethree-year period reflects EA’s difficulties in procuring competitive energysupplies at a level of risk consistent with the Company’s conservative fiscalpolicies, requiring minimal credit coverage. In 2000, with its arrangement with Engage Energy America, LLC (Engage),EA was able to reach an agreement with several large industrial customers inCMP’s service territory.  However, thesecontracts expired during 2001 resulting in the reduction in sales andrevenues.  The SOS margin represents thenet margin on sales of SOS service to approximately 525,000 residential andsmall commercial customers in CMP’s service territory from March 1, 2000 throughFebruary 28, 2002.  The SOS margin in2002 includes the final account settlement with Engage of approximately $4.6million, before taxes, as more fully explained in the “Energy AtlanticActivities” section below.  In 2001, SOSmargin reflects a $1.8 million before-tax charge for a contract settlement withEngage.

 

Other operating revenues in2002 were $1,901,000 compared to $2,711,000 in 2001 and $2,774,000 in2000.  Wheeling revenues in 2002 wereapproximately $130,000 less in 2002 compared to 2001 and 2000.  The revenues recognized from flexiblepricing adjustments from customer discounts as approved by the MPUC were$761,000 less in 2002 compared to 2001 and $180,000 less than 2001.  The MPUC in its stranded cost rate review,as more fully described in Item 3, “Legal Proceedings,” of this Form 10-K,adjusted customers rates on March 1, 2002, for these customer discounts.

 

**Operating Expenses**

 

Energy Supply, Transmissionand Distribution (T&D) Operation and Maintenance expenses and strandedcosts for the three-year period 2000 to 2002 are as follows:

 
| **(****Dollars in Thousands****)** |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Energy Supply                      |   |     |   |     |   |     |   |
| Purchased Power (to 3/1/2000)      |   | $        | — |     | $      | —   |   | $ | 7,046 |   |
| Deferred Fuel                      |   | —   |   | —   |   | 114      |   |
|                               |   |     |   |     |   |     |   |
| Net Purchased Power                |   | —   |   | —   |   | 7,160    |   |
| Energy Atlantic Purchases          |   | 5,533    |   | 14,984   |   | 36,433   |   |
| Total Energy Supply                |   | $        | 5,533  |     | $      | 14,984   |   | $ | 43,593 |   |

 

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| **T&D Operation and Maintenance**          |   | **2002** |   | **2001** |   | **2000** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Transmission and Distribution                  |   | $        | 3,334  |     | $      | 3,343    |   | $ | 3,219 |   |
| Customer Accounting and General Administrative |   | 9,710    |   | 7,198    |   | 7,493    |   |
| Energy Atlantic                                |   | 1,445    |   | 1,097    |   | 1,351    |   |
| Other Oper. & Maint.                       |   | $        | 14,489 |     | $      | 11,638   |   | $ | 12,063 |   |
|                                           |   |     |   |     |   |     |   |
| **Stranded  Costs**                            |   |     |   |     |   |     |   |
| Wheelabrator-Sherman                           |   | $        | 8,308  |     | $      | 9,003    |   | $ | 10,694 |   |
| Maine Yankee                                   |   | 3,008    |   | 3,170    |   | 2,727    |   |
| Seabrook                                       |   | 1,110    |   | 1,110    |   | 925      |   |
| Amortization of Gain from Asset Sale           |   | (2,988   | )      | (4,863   | )      | (5,440   | )      |
| Deferred Fuel & Special Discounts          |   | (677     | )      | 840      |   | —   |   |
|                                           |   |     |   |     |   |     |   |
| Total Stranded Costs                           |   | $        | 8,761  |     | $      | 9,260    |   | $ | 8,906 |   |

 

With the advent of deregulation,March 1, 2000, the Company no longer supplies electricity to our retailcustomers under regulated rates and no longer was required to purchase powerfor its customers.  As discussed above,the Company’s wholly-owned unregulated marketing subsidiary, Energy Atlantic,began providing power to retail markets within the State of Maine.  On March 1, 2000, EA’s sales and purchasedpower expenses for competitive energy supply (CES) were recognized on a grossbasis, while its Standard Offer Service (SOS) sales were recognized based onnet margin.

 

Energy supply expenses of$7,160,000 in 2000 represent the Company’s expenses for the first two months of2000.  EA purchases were $36,433,000 in2000 compared to $14,984,000 in 2001, and $5,533,000 in 2002.  As discussed in the “Energy AtlanticActivities” section below, starting March 1, 2000, EA was purchasing power fromEngage Energy America, LLC (Engage) for a period of two years for SOS andCES.  During 2000, several largeindustrial customers purchased power from EA under one-year agreements.  The decrease in purchases in 2001 ascompared to 2000 for EA reflects the expiration of several of these largecontracts during 2001.  As previouslystated in the “Operating Revenues and Energy Deliveries” section above, EA’sCES sales during 2002 produced less revenue than prior years and,correspondingly, required reductions in purchased power.

 

Transmission anddistribution (T&D) expenses in 2002 were $3,334,000, which were slightlylower than 2001 expenses of $3,343,000 and $115,000 higher than 2000 expensesof $3,219,000.  Additional tree trimmingexpense was the primary reason for the increase of expenses for 2001, comparedto 2000.  For 2002 compared to 2001,reduction in tree trimming expenses were offset by increases in labor costs.

 

Customer accounting andgeneral administrative expenses were $7,198,000 in 2001, a decrease of $295,000from 2000, principally due to decreases in regulatory, legal expenses and otheremployee benefits, which were partially offset by increased medical insurancecosts.  In 2002, customer accounting andgeneral administrative expenses were $9,710,000, an increase of $2,512,000 over2001.  Approximately $402,000 of theincrease was associated with a Voluntary Early Retirement Program (VERP)instituted by the Company in late 2002. As more fully explained in the “Employee” section below, employeesrepresenting approximately 7% of the workforce participated in the program.  Employee and retiree medical expenses andpension expenses increased by $711,000 in 2002 over 2001.  The increase in pension expenses reflectsthe lower discount rates used to determine pension liabilities and returns thatthe Company has realized on its pension investments with the sluggishinvestment markets over the past few years. The Company’s medical costs continue to escalate comparably withNational trends.  As mentioned in the“Employee” section below, employee contributions will increase and retireeswill begin contributing to help offset these escalating costs.  Regulatory, consulting and legal expensesincreased by $774,000 reflecting costs associated with initial compliance withthe Sarbanes-Oxley Act of 2002; increased regulatory activity with the FederalEnergy Regulatory Commission concerning the Company’s Open Access TransmissionTariff; legal and rate consulting assistance related to preparation for analternative rate plan filed with the MPUC during the first quarter of 2003;additional regulatory assessments; legal costs associated with the Company’s proposedmigration to a holding company structure, and the undertaking of transmissionand distribution and information systems benchmarking audits enabling increasedasset management, decreases in overall capital expenditures, increasedproductivity, improved reliability, and improved prioritization of capitalexpenditures.

 

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The Company’s charge-offsfor bad debts increased $191,000 in 2002 compared to 2001, reflecting thebankruptcies and plant closings of several customers.  The Company’s insurance expenses increased by $104,000, followingthe National cost trend for property and casualty  insurance after the terrorist attack on September 11, 2001 andincreased Directors’ and Officers’ liability insurance costs followingcorporate scandals of a number of major corporations.

 

Energy Atlantic’s 2002operating expenses increased $348,000 to $1,445,000 over 2001 expenses of$1,097,000, principally due to an increase in bad debt expense, legal expensesassociated with the Engage settlement and consulting fees.  Operating Expenses for 2000 were $1,351,000,$94,000 less than 2002 operating expenses.

 

Beginning on March 1, 2000,the Company began recovering stranded costs from its retail customers.  As discussed in Item 3(b) of the “LegalProceedings” section, the MPUC reviewed the Company’s stranded costs andadjusted the Company’s recovery effective March 1, 2002.  For 2002, the Company recognized strandedcosts of $8,761,000 compared to $9,260,000 for 2001 and $8,906,000 for2000.  The reduction of stranded costsin 2002 reflects the reduction in revenue requirements as discussed in Item3(b) of the “Legal Proceedings” section. The stranded costs for Wheelabrator-Sherman and Maine Yankee representactual cash expenses during the year, while the other costs reflect theamortization or recognition of regulatory assets and regulatory liabilities.

 

**Operating Capital and Liquidity**

 

The Company’s “Statements ofConsolidated Cash Flows,” of the Company’s Consolidated Financial Statements aspresented in Item 15(a) of this Form 10-K, reflects the Company’s liquidity andsources of operating capital.  In 2000,net cash flows provided by operations were $4.7 million.  Although netincome was $5.3 million, the recognition of $5.4 million of the gain from the1999 sale of the generating assets, an element of stranded costs, and increasesin Energy Atlantic accounts receivable for SOS significantly reduced net cashflows from operations.  During 2000, the Company withdrew asset saleproceeds from the trustee of $19 million, using $15 million for the redemptionof the 9.775% Series of first mortgage bonds and $2.1 million for theassociated redemption premium on that debt.  In addition, the Company paidtaxes on the generating asset sale of approximately $7.9 million.  During2000, as more fully explained in “Capital Resources,” below, the Maine PublicUtilities Financing Bank issued $9 million of its tax-exempt bonds, the 2000Series, on behalf of the Company to be drawn for the reimbursement of issuancecosts of $.3 million and for qualifying expenditures for distributionproperty.  During 2000, $1.6 million was drawn from the trustaccount.  As of December 31, 2000, the Company had approximately $7.5million remaining in the tax-exempt bond trust fund for the 2000 Series to beused for the construction of qualifying property.  As more fully explainedin “Capital Resources” below, the Company reinstated a stock buy back programduring 2000 and spent $.9 million for 45,000 shares of Common Stock.  In2000, the Company paid $1.9 million in dividends and spent $4.7 million forelectric plant.  During 2000, an additional $1.3 million was borrowedunder the Company’s short-term credit facilities.

 

Net cash flows provided byoperating activities were $10.1 million in 2001.  Net income for the yearwas $5.24 million.  The collection of accounts receivable, principally thecollection by EA of the SOS service receivable from the escrow agent, accountedfor most of the increase in cash flows from operating activities, as more fullydiscussed in the “Energy Atlantic Activities” section below.  In 2001, the Company paid $2.1 million individends while reducing short-term borrowings and long-term debt by $2million.  During 2001, the Company received $1.05 million from asettlement with Central Maine Power concerning the 1999 sale of Wyman Unit No.4, as well as $.5 million for a partial stock redemption from MaineYankee.  As mentioned above, the Company has available proceeds from theissuance of tax-exempt bonds in 2000.  During 2001, $2 million waswithdrawn from the trust account for the construction of qualifyingdistribution property.  As of December 31, 2001, approximately $5.7million remained in the tax-exempt bond trust fund to be used for theconstruction of qualifying property.  In 2001, $4.7 million was spent forelectric plant.

 

In 2002, net cash flowsprovided by operating activities were $6.9 million, while net income for theyear was $6.54 million.  In 2002, $3 million of the gain from the 1999sale of the generating assets was recognized while regulatory assets increasedby $1.9 million to reflect the rate treatment of stranded costs, which bothreduced cash flows.  During 2002, theCompany paid $2.2 million in dividends, retired $1.2 million of long-term debtand reduced short-

 

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term borrowings by $1.2million, for a total of $4.6 million used for financing activities.  In2002, $5.9 million was invested in the electric plant with $3.7 millionwithdrawn from the trust account for the tax-exempt bonds.  In addition,the Company received approximately $0.4 million for the partial redemption ofits Maine Yankee Common Stock.  As of December 31, 2002, approximately$2.1 million remains in the tax-exempt trust fund to be used for theconstruction of qualifying property through October 2003.

 

For additional informationregarding construction expenditures for 2000 to 2002 and anticipatedconstruction expenditures for 2003, see Items 15(a) of this Form 10-K, Note 13of Notes to Consolidated Financial Statements, “Commitments, Contingencies, andRegulatory Matters — Construction Program.”

 

To satisfy working capitalrequirements, the Company uses short-term borrowings from its revolving creditagreement of $6 million.  The agreement is secured by $6 million of firstmortgage bonds and its due date has been extended to June, 2004.  Atthe end of 2002, the Company had $2.8 million of short-term debt compared to$3.95 million and $4.9 million at the end of 2001, and 2000,respectively.  During 2000 to 2002, the interest rates on these short-termborrowings were below the existing prime rate.  For additional informationon the short-term credit facility, see Item 15(a) of this Form 10-K, Note 6 ofthe Notes to Consolidated Financial Statements, “Short-Term CreditArrangements.”  Based on current projections for 2003, the Companyestimates that operating cash flows and short-term borrowings will besufficient to cover its other sinking fund payments, construction activities,and other financial obligations.

 

**Capital Resources**

 

The Company has the abilityto raise capital through the issuance of Common and Preferred Stock.  TheCompany is authorized to issue up to 3,000,000 shares of Common Stock.  In addition, the Company’s articles ofincorporation authorize the issuance of 200,000 shares of Preferred Stock withthe par value of $100 per share and 200,000 shares of Preferred Stock with thepar value of $25 per share.  The Company can also issue second mortgagebonds of $14.3 million without bondable property additions.  As more fullyexplained in the “Holding Company Reorganization” section below, the Company isseeking approvals to reorganize into a Holding Company.

 

It is anticipated that MainePublic Service Company and Energy Atlantic will become subsidiaries of theHolding Company.  The above-mentioned capabilities would continue forMaine Public Service Company, while a newly formed Holding Company, ifapproved, will seek its own authority for capital formation.

 

Effective March 1, 2000, inaccordance with a Stipulation approved by the MPUC on December 1, 1999, forratemaking purposes, the Company is required to maintain a capital structurefor ratemaking purposes with 51% common equity for the determination of itsdelivery rates.  In anticipation of this requirement, the Company soughtapproval, which the MPUC granted on November 17, 1999, to repurchase up to500,000 shares of its Common Stock over a five-year period through an openmarket program, which began in February 2000.  During 2000, the Companypurchased 45,000 shares under this program at a cost of $922,000.  Withthe market price of the Company’s stock exceeding its book value during most of2002 and, in accordance with previous repurchase programs, the Company did notacquire any stock during 2002 and 2001.

 

With the sale of thegenerating assets and the use of sale proceeds to redeem debt, the Company’slong-term debt has dramatically decreased.  As reflected in Item 6 of thisForm 10-K, on January 1, 1999, the Company had $47.2 million of long-term debtcompared to $33.8 million at the end of 2002.  The Company’s long-termdebt currently consists of a 7.95% Series of first mortgage bonds in the amountof $1.8 million due to be redeemed in 2003, two series of tax-exempt bondsissued on behalf of the Company by the Maine Public Utility Financing Bank(MPUFB) totaling $22.6 million, and a series of bonds issued by FAME of $9.4million, which provided the Company with the funds necessary for the up-frontpayment to restructure the W-S PPA, as mentioned above.

 

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The MPUFB has issued itstax-exempt bonds on behalf of the Company for the construction of qualifyingdistribution property.  Originally issued for $15 million and reduced withgenerating asset sale proceeds, the 1996 Refunding Series has $13.6 millionoutstanding at December 31, 2002 and is due in 2021.  On October 19, 2000,the 2000 Series of bonds was issued in the amount of $9 million with thesebonds due in 2025.  The proceeds of the 2000 Series were placed in trustto be drawn down for the reimbursement of issuance costs and for theconstruction of qualifying distribution property and, as of December 31, 2002,approximately $2.1 million is available until October, 2003.  For bothtax-exempt bond series, a long-term note was issued under a loan agreementbetween the Company and the MPUFB with the Company agreeing to make payments tothe MPUFB for the principal and interest on the bonds.  Concurrently,pursuant to a letter of credit and reimbursement agreement, the Bank of NewYork has separately issued its direct pay letter of credit (LC’s) for thebenefit of the holders of each series of bonds.  Both LC’s are due to expirein June 2004.  To secure the Company’s obligations under the letter ofcredit and reimbursement agreement for the 1996 Refunding Series, the Companyissued second mortgage bonds in the amount of $14.4 million in June 2002. For the 2000 series, the Company issued first and second mortgage bonds, in theamounts of $5 million and $4.525 million, respectively, to secure the Company’sobligation under the letter of credit and reimbursement agreement for thisseries.  For both series, the Company has the option of selecting weekly,monthly, annual or term interest rate periods.  For both series, theCompany has continued to use the weekly interest rate period.  Sinceissuance, the average of these weekly rates was 3.28% and 2.35% for the 1996Refunding Series and the 2000 Series, respectively.  On November 17, 2000,the Company purchased an interest rate cap of 6%, expiring in November 2003 tocover both series at a cost of $36,386.  At the end of 2002, thecumulative effective interest rate, which includes the weekly interest rate, LCfees and cost of issuance, were 5.14% for the 1996 Refunding Series and 4.96%for the 2000 Series.

 

On May 29, 1998, FAME issued$11,540,000 of its Taxable Electric Rate Stabilization Revenue Notes, Series1998A (Maine Public Service Company) (the “Notes”) on behalf of theCompany.  The Notes were issued pursuant to, and are secured under, aTrust Indenture by and between FAME and Peoples Heritage Bank, Portland, Maine,as Trustee (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 FAME under their Electric Rate Stabilization Program; and (iii)for issuance costs.  The Notes are limited obligations of FAME, payablesolely out of the trust estate available under the Indenture, principally theLoan Note and Loan Agreement with the Company and the Capital Reserve Fund heldby the Trustee.  The Company issued $4 million of its first mortgage bondsand $7.54 million of its second mortgage bonds as collateral for itsperformance under the Loan Note issued pursuant to the Loan Agreement. The Notes will bear interest at a Floating Interest Rate and will be adjustedweekly.  Since issuance, the average of these weekly rates is 4.52%. On June 1, 1998, the Company purchased an interest rate cap of 7% at a cost of$172,000, to expire June, 2008, to limit its interest rate exposure toquarterly U.S. LIBOR rates.  At the end of 2002, the cumulative effectiveinterest rate, including issuance costs and credit enhancement fees, sinceissuance for this Series was 5.57%.

 

**Energy Atlantic Activities**

 

Energy Atlantic’s sales canbe classified into two general categories:  Standard Offer Service (SOS)in CMP’s service territory which expired February 28, 2002, and CompetitiveEnergy Supply (CES) sales to individual retail customers within the State ofMaine.  Except as stated below, the electricity for those sales within ISONew England was provided entirely under a Wholesale Power Sales Agreement (the“Agreement”) with Engage Energy America, LLC (Engage), which also expired onFebruary 28, 2002.  Under this Agreement, all revenues from both SOS andCES sales were paid directly to an Escrow Agent that disbursed funds inaccordance with instructions from Engage.  For SOS sales, EA receivedreimbursement for certain expenses and a portion of the net profit that wasreported as SOS margin.

 

On May 24, 2001, the MainePublic Utilities Commission (MPUC) issued an Order authorizing a comprehensivesettlement of the dispute between EA and Engage.  In connection with the MPUC Order, EA, Engage, CMP, and otherparties entered into a comprehensive settlement which included the following:

 

(i)            Engage continued to supply EA withall energy required to perform outstanding retail contracts and the SOScommitments, until the expiration of the Agreement.

 

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(ii)           Engage and EA released one anotherfrom liabilities arising on or before May 24, 2001, with limited exceptions.

 

(iii)          EA was no longer required to purchasepower exclusively from Engage.

 

(iv)          Before its expiration on February 28,2002, the Wholesale Agreement could not be terminated by EA or Engage exceptupon the willful and material misconduct of the other party.

 

(v)           The order waives the requirement thatEA provide a performance bond.  FrontierInsurance Company (Frontier) was released from liability under its bond andFrontier released EA and the Company from any and all claims forindemnification, subrogation or contribution under the bond     and associated indemnification agreement.

 

(vi)          Westcoast Energy, Inc., (Engage’s thencurrent parent company) provided CMP a $33 million guarantee of Engage’s performance,and Coastal Corporation (a former affiliate of Engage) was released from itsprior guarantee of Engage’s performance.

 

(vii)         Engage received $8 million over theremaining term of the Wholesale Power Agreement consisting of thefollowing:  $1 million received fromFrontier; a $4.5 million offset from amounts Engage was otherwise obligated topay to CMP for entitlements; a total of $1.0 million of payments from EA inmonthly increments through March, 2002; and a $1.5 million payment from EA in April,2002.  Under the Order, CMP was allowedto recover the $4.5 million from ratepayers instead of from Engage.

 

In connection with thissettlement, EA recognized a charge against second quarter 2001 earnings(after-tax) of approximately $1.08 million, or $.69 per share.

 

During a scheduled audit ofthe revenue and expenses accruing under the Agreement conducted by Engage’sauditors in August of 2001, a discrepancy was identified between thereconciliation of kilowatt-hours (KWH) settled by CMP with ISO New England andtransferred by ISO New England to Engage, and the KWH revenues achieved byEngage and EA through customer billing derived from actual meterreadings.  The August 2001 audit noted that this discrepancy was negativein some months and positive in others during the preceding year.  As aprecautionary measure, on January 21, 2002, EA and Engage agreed to instructthe Escrow Agent to maintain $1.5 million in the escrow account until thecompletion of the scheduled final audit of the contract activity, theexpiration of the Escrow Agreement, and the release of EA from furtherobligations pertaining to the Agreement.  When final billing informationfor the month following the February 28, 2002 expiration of the SOS activity inCMP’s service territory was received, EA determined that SOS megawatt-hours(MWH) billed to residential and small commercial customers by CMP exceeded theMWH allocated to the SOS activity by ISO New England by approximately 152,000MWH, or approximately 2% of the total load charged to the SOS over the two-yearperiod.  The associated $6.1 million represents additional cash andrevenue distributed to and shared by EA and Engage, with EA’s share being $4.8million.  Management believes the difference in MWH was a result of thedifference between estimated and actual line loss or the estimating process theutility and ISO New England uses to report the amount of energy transferred toindividual energy providers.  Management also believes the SOS customerswere billed only for the energy delivered according to their meters as read byCMP.  Through August 31, 2002, EA recognized revenues based on the MWHallocated to the SOS by ISO New England, thereby excluding the impact of thediscrepancy.  During the third quarter of 2002, EA and Engage concludedtheir business relationship pursuant 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 aresult of the final account settlement, EA recognized the $4.8 million ofadditional Standard Offer Service (SOS) revenue during the third quarter of2002 with an after-tax impact of $2.9 million, or $1.84 pershare.  In addition to the SOS revenue adjustment, EA reversed $321,000($.12 per share) of expenses previously accrued for EA’s share of possibleregulatory assessments under the Agreement with Engage.  This assessment was imposed on Engage byFERC during the course of the Engage/EA Agreement.  Engage has indicated that due to a change in regulation, FERC hasnotified Engage that it will not be making any further assessments inconnection with this matter.  A furtheradjustment in the fourth quarter reduced the

 

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settlement by approximately$105,000, after taxes, or $.07 per share. As a result, the total impact of the settlement increased earnings pershare by $1.89.

 

EA has entered into acontract for 40% of the output of the Wheelabrator-Sherman (W-S) energyfacility for the two years beginning March 1, 2002.  The output from thistake-or-pay contract amounts to approximately 55,000 MWH annually and is beingused to provide electricity for additional CES sales within MPS’s serviceterritory.  This is EA’s first take-or-pay contract, which carries morecounterparty risk than others entered into to date.  To mitigate thisrisk, EA has entered into a contract with NB Power, whereby NB Power will buyW-S output in excess of load requirements in the Company’s service territory ata rate indexed to the price of 3% Sulphur Max No. 6 residential oil into NewYork Harbor, which is intended to reflect NB Power’s avoided cost, subject to afloor and ceiling.  Currently, all output has been sold to CES customers,therefore limiting the risk that energy will be sold to NB Power.  Inaddition, NB Power will sell electricity to EA when load exceeds W-S output ata fixed on and off-peak rate.

 

In addition, EA has a powersupply relationship with Duke Energy Trading and Marketing (DETM) forelectricity in CMP’s service area.  In connection with this relationship,and certain transactions between EA and DETM, MPS provided a contractualguarantee on behalf of EA in an aggregate amount of one million dollars($1,000,000).  This guarantee was related specifically to the deliveryand/or receipt of electric power between EA and DETM.  This guarantee wasrenewed in September of 2002 for an additional year.  Effective March 21, 2003, DETM has agreed to waive this creditrequirement in lieu of EA’s commitment to maintain a $1 million ($1,000,000)minimum bank account balance.

 

The following illustratesthe type of EA’s risk exposure related to these contracts for supply and sales:

 

•                  Counterparty risk includes the possibility ofthe other parties’ failure to fulfill their contractual obligations to EA suchas:

 

a)              Deliverability risk, referring to EA notbeing able to serve contracted load due to the   supplier’sfailure to provide energy.

 

b)             Transmission risk, indicating EA’s relianceon the 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 occur(1) if energy is not available from W-S, NB Power or other energy supplyarrangements, while the contracted customer load must still be satisfied or (2)if the existing customer load deteriorated and NB Power could not buy theexcess power from W-S, as contracted.

 

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

 

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

 

With the expiration of theSOS arrangement in CMP’s service territory, EA will be adversely impacted bythe decrease in revenues and correspondingly, earnings.  In 2002, EA realized SOS margin in CMP’sservice territory of approximately $5.8 million, which included the finalaccount settlement discussed above.  The Company continues to review EA’scurrent and future business model, which may include a possible exit from theCES market in part or

 

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in whole, a refinement ofits market area, and/or expansion into other product and service lines.  On February 24, 2003, EA announced itsintent to withdraw from the Northern Maine market due to the lack ofprofitability 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 factors.  EAwill continue to serve existing contracts in Northern Maine until they expireby February 28, 2004.  CES sales inNorthern Maine were approximately $5 million in 2002.  EA believes that, in addition to minimizing its risk profile,this action will substantially relieve any underlying concerns that may existin connection with the issue of employee sharing and EA’s energy marketingactivities within the Company’s service territory.  On February 21, 2003 the Company filed with the MPUC an“Application for Exemption of Chapter 304” to exempt the Company and EA fromcertain management restrictions that have arisen due to this aspect of the corporaterelationship and expects a ruling on the application during calendar year2003.  (See Item 3 “Legal Proceedings,”paragraph (a)).

 

**Holding Company Reorganization**

 

On October 4, 2002, theCompany’s Board of Directors authorized the Company to reorganize into aholding company structure.  The intended result would be that Maine PublicService Company (the “Company”) would become a wholly-owned subsidiary of a newholding company.  Maine and NewBrunswick Electrical Power Company, Ltd., will remain a subsidiary of theCompany until all obligations have terminated, at which time it is proposed thesubsidiary may be dissolved.  Theownership of Energy Atlantic, LLC, now a subsidiary of the Company, would betransferred to the holding company.  To achieve this corporate structure,stock in the Company will be exchanged for stock in the new holding companythrough a “reverse triangular merger.”  The reorganization will not goforward without an opinion of counsel that the transaction does not cause federalincome tax liability to the Company’s shareholders, whose stock is exchanged inthe reorganization.  The Company will be undertaking the reorganization inorder to maintain its focus on its core regulated business, while at the sametime positioning the Company for more diversified growth.

 

The reorganization willrequire the approval of the Maine Public Utilities Commission, the U.S.Securities and Exchange Commission under the Public Utilities Holding CompanyAct, and from the Federal Energy Regulatory Commission under the Federal PowerAct.  Among the first steps authorized by the Board was the filing of apetition for MPUC approval on October 31, 2002 and the preparation and filingof documents necessary for other State and federal regulatory approvals. Certain other regulatory and non-regulatory consents must also be obtained, andwill be sought, in connection with the Company’s outstanding indebtedness.

 

After regulatory approvalshave been obtained, the Company will request shareholder approval for the reorganization. Prior to the Company’s Annual Shareholder Meeting, specific details concerningthe holding company will be provided to shareholders.  Investor tours anda web-cast will be held prior to the 2003 Annual Shareholders Meeting to detailplans and answer specific shareholder questions.  Management’s goal is tohave the necessary regulatory approvals in place prior to the date of ourannual meeting.  Subsequent to itsfiling, the Company received and responded to several requests for information fromthe MPUC and Office of Public Advocate, an intervenor in the proceeding, andmet on several occasions with these and other interested parties.  The parties settled all issues in theproceeding and entered a signed Stipulation to that effect that was formallyapproved by the MPUC on March 26, 2003. The MPUC Order in Docket No. 2002-676, authorizing the Company to form aholding company structure is included on Pages O-1 to O-21 of this Form 10-K.  The Company filed, on March 11, 2003, a FormS-4 Registration Statement with the Securities and Exchange Commission for the“Maine & Maritimes Corporation,” the entity designated as “HoldCo” in thisdisclosure.  The filing is reviewable onthe SEC’s website at http://www.sec.gov/edgar or on the MPS Investor Relationspage at http://www.mainepublicservice.com/corporate/ 1373T04_CP.PDF.  For additional information on the strategicvision for the Maine & Maritimes Corporation, please refer to the Form S-4mentioned above and Exhibit 99(ao) of this Form 10-K, Letter to Shareholdersand Q&A with the President from the 2002 Maine Public Service CompanyAnnual Report, incorporated herein by reference.

 

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**Employees**

 

At the end of 2001, theCompany had 145 full-time employees and 146 at the end of 2002.  As of March 1, 2003, the Company’semployment was 136.  The Canadiansubsidiary, Maine and New Brunswick Electrical Power Company, Ltd., has had noemployees since the generating asset sale on June 8, 1999.  Energy Atlantic, the unregulated marketingsubsidiary, had 9 and 11 full-time employees at the end of both 2002 and 2001,respectively.  As of March 1, 2003, EAhad a total of 8 employees. Consolidated payroll costs were $7.3 million for 2002 and $7.0 millionfor 2001.

 

Local 1837 of theInternational Brotherhood of Electrical Workers ratified a three-year contractwith the Company, effective on October 1, 2002.  The agreement included wage increases of 3.25%, 3.35% and 3.5%over the three-year period of the contract.

 

In November, 2002, aVoluntary Early Retirement Program (VERP) was offered to employees age 59 andover with 16 years of service.  Of the13 employees eligible for the program, 10 accepted the program and retired effectiveJanuary 1, 2003.  As further discussedin the “Earnings” and “Operating Expenses” sections above, a charge ofapproximately $402,000, before income taxes, was taken in the fourth quarter of2002.  In an effort to control medicalinsurance costs, employee contributions will increase by approximately 45%,effective January 1, 2003, and plan deductibles will increase.  In addition, all retirees began contributingtoward retiree medical coverage.

 

**Maine Yankee**

 

The Company owns 5% of theCommon Stock of Maine Yankee, which operated an 860 MW nuclear power plant (the“Plant”) in Wiscasset, Maine.  On August6, 1997, the Board of Directors of Maine Yankee voted to permanently ceasepower operations and to begin decommissioning the Plant.

 

On September 1, 1997, MaineYankee estimated the sum of the future payments for the closing,decommissioning and recovery of the remaining investment in Maine Yankee to beapproximately $930 million, of which the Company’s 5% share would beapproximately $46.5 million.  InDecember 1998, June 1999, September 2000, February 2001, December 2001, March2002, May 2002, and again in September, 2002, Maine Yankee updated its estimateof decommissioning costs based on the Settlement.  Legislation enacted in Maine in 1997 calls for restructuring theelectric utility industry and provides for recovery of decommissioning costs,to the extent allowed by federal regulation, through the rates charged by thetransmission and distribution companies. Based on the Maine legislation and regulation precedent established bythe FERC in its opinion relating to the decommissioning of the Yankee Atomicnuclear plant, the Company believes that it is entitled to recoversubstantially all of its share of such costs from its customers and, as ofDecember 31, 2002, is carrying on its consolidated balance sheet a regulatoryasset and a corresponding liability in the amount of $22.15 million, whichreflects the Company’s 5% share of Maine Yankee’s September 2002 revisedestimate of the remaining decommissioning costs, less actual decommissioningpayments made since then.

 

The MPUC, on January 27,2002, approved a Stipulation providing for the recovery of stranded investment,for a two-year period March 1, 2002 until February 29, 2004, which includes theCompany’s share of Maine Yankee decommissioning expenses, Maine Yankeereplacement power costs, and the remaining Maine Yankee investment.  As of December 31, 2002, deferred fuel of$13.1 million is reflected as a regulatory asset, which includes the Maine Yankeereplacement power costs, as well as deferred Wheelabrator-Sherman fuel costs.

 

In May 2000, Maine Yankeeterminated its decommissioning operations contract with Stone & WebsterEngineering Corporation (Stone & Webster) pursuant to terms of thecontract.  Stone & Webster disputedMaine Yankee’s grounds for the termination. In June 2000 Stone & Webster filed a voluntary petition underChapter 11 of the United States Bankruptcy Code with the United StatesBankruptcy Court for the District of Delaware.

 

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Upon the contracttermination, Maine Yankee temporarily assumed the general contractor role andentered into interim agreements with Stone & Webster and obtainedassignments of several subcontracts in order to allow decommissioning work tocontinue and to avoid the adverse consequences of an abrupt or inefficientdemobilization from the Plant site. Decommissioning of the Plant site continued with major emphasis directedto maintaining the schedule on critical-path projects such as construction ofan independent spent fuel storage installation (ISFSI) and preparation of thePlant’s reactor vessel for eventual shipment to an off-site disposalfacility.  After assessing its long-termalternatives for safely and efficiently completing the decommissioning,including evaluating proposals from prospective successor general contractors,on January 26, 2001, Maine Yankee announced that it would continue to managethe project itself.

 

In June 2000, FederalInsurance Company (Federal), which had provided performance and payment bondsin the amount of approximately $38.5 million each in connection with thedecommissioning operations contract, filed a declaratory-judgment complaintagainst Maine Yankee in the Bankruptcy Court in Delaware, which was subsequentlytransferred to the United States District Court in Maine.

 

The complaint alleged thatMaine Yankee had improperly terminated the decommissioning operations contractwith Stone & Webster and had failed to give proper notice of thetermination to Federal under the contract, and that Federal had no furtherobligations under the bonds.

 

After extensive discoveryand resolution of certain preliminary issues by the court, in December 2001Maine Yankee and Federal entered into a settlement agreement pursuant to whichFederal paid Maine Yankee $44 million on January 18, 2002.  The settlement was reflected on MaineYankee’s 2001 financial statements. That amount represents full payment under the performance bond, plus anadditional amount under the payment bond reflecting certain payments previouslymade by Maine Yankee to subcontractors and suppliers who had not been fullypaid by Stone & Webster.  MaineYankee deposited the payment in its decommissioning trust fund to offset pastand future expenses resulting from the failures of Stone & Webster.

 

Maine Yankee has continuedto pursue its claim for damages that was originally filed against Stone &Webster and its parent corporations in August 2000 in the Bankruptcy Court inDelaware.  After recognizing the paymentfrom Federal, Maine Yankee has asserted a right to recover an additional $21million in that court from the bankruptcy estates.  In February 2002, Stone & Webster filed a claim forapproximately $7 million against Maine Yankee in the Bankruptcy Court in Delawarefor alleged breaches of contract and to subordinate any Maine Yankeeclaims.  On May 30, 2002, the courtconcluded extensive hearings and argument by allowing a claim in favor of MaineYankee under section 502 (c) of the Bankruptcy Code, in the estimated amount of$20.8 million against each of the three principal estates (jointly andseverally).  The Court’s ruling alsoeffectively precluded approximately $4 million of Stone & Webster’sFebruary 2002 claim against Maine Yankee, while offering no opinion or findingson the remainder, the resolution of which will, if necessary, be the subject offurther motions and proceedings.  Theactual cash amount to be recovered by Maine Yankee on this allowed claimremains contingent on a number of factors beyond Maine Yankee’s control,including without limitation the extent to which the bankruptcy estatesultimately have assets available to pay the claim, the ultimate disposition ofStone & Webster’s February 2002 claim, possible reconsideration of the rulingin the future based on actual expenses of completing the decommissioning, andthe effect, if any, of any appeal of the May 30, 2002 decision by thebankruptcy estates.  Maine Yankee,therefore, cannot predict the final outcome of the Bankruptcy Court proceeding.

 

Federal legislation enactedin 1987 directed the DOE to proceed with the studies necessary to develop andoperate a permanent high-level waste (spent fuel) repository at Yucca Mountain,Nevada.  The project has encountereddelays, and the DOE has indicated that the permanent disposal site is notexpected to open before 2010, although originally scheduled to open in 1998.

 

In accordance with theprocess set forth in the legislation, in February 2002 the Secretary of Energyrecommended the Yucca Mountain site to the President of the United States forthe development of a nuclear waste repository, and the President thenrecommended development of the site to the Congress.  As provided in the statutory procedure, the State of Nevadaformally objected to the site in April 2002, and in July 2002, the Congressoverrode the

 

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objection.  Construction of the repository requires theapproval of the Nuclear Regulatory Commission (NRC), upon application of theDOE and after a public adjudicatory hearing as well as second NRC approvalafter completion of construction to operate the facility.  Maine Yankee cannot predict the timing orresults of those proceedings.

 

In November, 1997, the U.S.Court of Appeals for the District of Columbia Circuit confirmed the obligationof the DOE under the Nuclear Waste Policy Act of 1982 to take responsibilityfor spent nuclear fuel from commercial reactors in January 1998.  After an unsuccessful effort by Maine Yankeein the same court to compel the DOE to take Maine Yankee’s spent fuel, in June1998 Maine Yankee filed a claim for money damages in the U.S. Court of FederalClaims for the costs associate with the DOE’s default.  In November 1998 the Court granted summaryjudgment in favor of Maine Yankee, ruling the DOE had violated its contractualobligations, but leaving the amount of damages incurred by Maine Yankee forlater determination by the Court.  Sincethen the parties have been engaged in extensive discovery and resolution ofpre-trial issues in the damages phase of the proceeding.  Maine Yankee is pursuing its claim fordetermination of damages vigorously, but cannot predict the outcome or timingof the determination.

 

At the same time, as aninterim measure until the DOE meets its contractual obligation to dispose ofMaine Yankee’s spent fuel at Yucca Mountain or elsewhere, Maine Yankeeconstructed an independent spent fuel storage installation (ISFSI), utilizingdry-cask storage, on the Plant site and is in the process of transferring thespent fuel from the spent-fuel pool to the individual casks and the casks tothe ISFSI.  Maine Yankee’s total cost ofmaintaining the ISFSI will be substantially affected by heightened security costsand by the length of time it is required to operate the ISFSI before the DOEhonors its contractual obligation to take the 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.

 

On January 15, 2003, MaineYankee notified NAC International (NAC), the contractor responsible forproviding for the fabrication of the spent-fuel casks and transferring the fuelto the casks and the casks to the ISFSI, that Maine Yankee was terminating itscontract with NAC pursuant to the terms of the contract.  NAC had been experiencing financialdifficulties and had requested relief 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 had indicated that itdisputes Maine Yankee’s basis for terminating the contract and has served MaineYankee with a demand to arbitrate the dispute, while at the same time theparties have been in negotiations to resolve the situation.  In the meantime, Maine Yankee has enteredinto contracts with the major subcontractors and resumed the transfer of fuelto the ISFSI under its own management. Maine Yankee believes that its termination of the NAC contract waslegally justified, but cannot predict the outcome of the negotiations orarbitration proceeding.

 

On February 28, 2003, theNuclear Regulatory Commission approved Maine Yankee’s License Termination Plan(LTP).  The LTP was approved without anyunexpected conditions.

 

In accordance with a planapproved by the Securities and Exchange Commission, Maine Yankee has startedthe redemption of its Common Stock periodically through 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     |             |
|                               |   | 165,500                      |   | 8,275             |   | $                       | 1,099,262 |                 |             |   |

 

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**New Accounting Pronouncements**

 

The Company has adoptedStatement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting forthe Impairment or Disposal of Long Lived Assets,” effective January 1,2002.  This Statement addresses financialaccounting and reporting for the impairment or disposal of long-livedassets.  SFAS 144 establishes a singleaccounting model, based on the framework established in Statement 121, forlong-lived assets to be disposed of by sale and also resolves significantimplementation issues related to Statement 121.  The adoption of this statement had no impact on its financialposition or results of operations.

 

In June of 2001, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 143, “Accounting for Asset RetirementObligations.”  This Statement addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and associated asset retirement costs.  This Statement is effective for financialstatements issued for fiscal years beginning after June 15, 2002.  The Company currently records an assetretirement obligation related to the decommissioning of Maine Yankee in itsfinancial statements.  The Company doesnot expect the adoption of this statement to have a material impact on itsfinancial position or results of operations.

 

In December 2002, the FASBissued “Accounting for Stock-Based Compensation” (SFAS No. 148).  This Statement provides alternative methodsof transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation.  Additionally, SFAS No. 148 amends the disclosure requirements ofStatement 123 to require prominent disclosures in both annual and interimfinancial statements about the method of accounting for stock-based employeecompensation and the effect of the method used on reported results.  The Company has adopted the additionaldisclosure provisions of this statement required for the year ended December31, 2002 and will include the prescribed additional disclosures in futurefilings on Form 10-Q.

 

On January 17, 2003, theFinancial Accounting Standards Board issued FASB Interpretation No. 46, (FIN46), “Consolidation of Variable Interest Entities.”  The provisions have far-reaching effects and will be the guidancethat determines (1) whether consolidation is required under the “controllingfinancial interest” model of Accounting Research Bulletin No. 51 (ARB 51),“Consolidated Financial Statements” (or other existing authoritative guidance)or, alternatively, (2) whether the variable interest model under FIN 46 shouldbe used to account for existing and new entities.  The transitional disclosures are required for financialstatements issued after February 1, 2003. FIN 46 is effective and required to be applied to pre-existing entitiesas of the beginning of the first interim period beginning after June 15,2003.  The Company does not expect theadoption of this statement will have a material impact on the Company based onits current structure.

 

In November 2002, the FASBissued FIN No. 45, (FIN 45) “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others aninterpretation of FASB Statements No. 5, 57, and 107 and rescission of FASBInterpretation No. 34.” FIN 45 requires that a guarantor recognize, at theinception of a guarantee, a liability for the fair value of the obligationundertaken by issuing the guarantee. The Interpretation 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.

 

As permitted under Mainelaw, we have agreements whereby we indemnify our officers and directors forcertain events or occurrences while the officer or director is, or was serving,at our request in such capacity.  Theterm of the indemnification period is for the officer’s or director’slifetime.  The maximum potential amountof future payments we could be required to make under these indemnificationagreements is unlimited; however, we have a Director and Officer insurancepolicy that limits our exposure and enables us to recover a portion of anyfuture amounts paid.  As a result of ourinsurance policy coverage, we believe the estimated fair value of theseindemnification 

 

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**Item 7a. Quantitative and Qualitative Disclosures about Market Risk**

 

agreements is minimal.  All of these indemnification agreements weregrandfathered under the provisions of FIN 45 as they were in effect prior toDecember 31, 2002.  Accordingly, we haveno liabilities recorded for these agreements as of December 31, 2002.

 

**Regulatory Proceedings**

 

For regulatory proceedings,see Item 3, “Legal Proceedings,” incorporated herein by reference.

 

(a)          The Company has interest rate risk with threevariable rate debt issues of the regulated business as of December 31, 2002 forpurposes other than trading.  One issue,$9 million of tax-exempt bonds as of December 31, 2002, issued on the Company’sbehalf by the Maine Public Utility Financing Bank (MPUFB) on October 19, 2000,Public Utility Revenue Bonds, 2000 Series is discussed in detail in Item 15(a), the Company’s Consolidated Financial Statements, in Note 8 to theConsolidated Financial Statements, “Long-Term Debt,” and is hereby incorporatedby reference.  The other two variablerate debt issues include the Taxable Electric Rate Stabilization Revenue Notesissued on May 29, 1998 by the Finance Authority of Maine with an outstandingbalance of $9.365 million as of December 31, 2002, and the Public UtilityRefunding Revenue Bonds, 1996 Series, issued by the MPUFB on behalf of theCompany in 1996, with $13.6 million outstanding as of December 31, 2002.  As discussed in Note 8 to the ConsolidatedFinancial Statements, the Company purchased interest rate caps for each ofthese issues.  If interest rates on thevariable rate debt issues described above increased by 1%, the Company’sinterest costs will increase by approximately $320,000.

 

(b)         The Company’s unregulated marketingsubsidiary, Energy Atlantic, LLC (EA) is engaged in retail and     wholesale energy transactions for purposesother than trading.  This activityexposes EA to a number of risks such as market liquidity, deliverability andcredit risk.  EA seeks to assure thatrisks are identified, evaluated and actively managed.

 

(c)          As a regulated electric utility, the businessis exposed to regulatory and legislative risks.  An example of legislative and regulatory risks includes the Stateof Maine’s deregulation and unbundling of the electric utility industry.  The Company cannot predict with certaintythe future rules, regulations and mandates that may be imposed by Federal orState regulatory and/or legislative bodies.

 

**Item 8. Financial Statements and Supplementary Data**

 

(a)          The following financial statements andsupplementary data are included in Item 15(a), the Company’s ConsolidatedFinancial Statements, and are incorporated herein by reference:

 

Report of IndependentAccountants.

 

Statements ofConsolidated Income for the years ended December 31, 2002, 2001 and 2000.

 

Statements ofConsolidated Cash Flows for the years ended December 31, 2002, 2001 and 2000.

 

Consolidated Balance Sheetsas of December 31, 2002 and 2001.

 

Statementsof Consolidated Common Shareholders’ Equity for the years ended December 31,2002, 2001 and 2000.

 

ConsolidatedStatements of Capitalization as of December 31, 2002 and 2001.

 

Notesto Consolidated Financial Statements.

 

**Item 9. Changes In And Disagreements With Accountants On Accounting andFinancial Disclosure**

 

None.

 

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** **

**PART III**

 

**Item 10. Directors and Executive Officers of theRegistrant**

 

Information with regard tothe Directors of the registrant is set forth in the proxy statement of theregistrant relating to its 2003 Annual Meeting of Stockholders, which informationis incorporated herein by reference. Certain information regarding executive officers is set forth below andalso in the proxy statement of the registrant relating to the 2003 AnnualMeeting of Stockholders, under “Compliance with Section 16(a) of the Securitiesand Exchange Act of 1934,” which information is incorporated by reference.

 

**Executive Officers**

 

The executive officers ofthe registrant are as follows:

 
| **Name**             |   |                                                   | **Age** |   | **Office  Continuously  Held Since** |
|----------------------|--------|--------------------------------------------------------|---------|--------|--------------------------------------|
|                 |   |                                                   |    |   |                                 |   |
| J. Nicholas Bayne    |   | President and Chief Executive  Officer                 |    | 49     |                                 | 9/1/02 |
|                 |   |                                                   |    |   |                                 |   |
| Larry E. LaPlante    |   | Vice President, Treasurer  and Chief Financial Officer |    | 51     |                                 | 6/1/99 |
|                 |   |                                                   |    |   |                                 |   |
| William L. Cyr       |   | Vice President, Power  Delivery                        |    | 43     |                                 | 6/1/00 |
|                 |   |                                                   |    |   |                                 |   |
| Michael A. Thibodeau |   | Vice President, Controller  and Chief Risk Officer     |    | 46     |                                 | 9/1/02 |
|                 |   |                                                   |    |   |                                 |   |
| Scott L. Sells       |   | General Counsel                                        |    | 45     |                                 | 7/12/02 |
|                 |   |                                                   |    |   |                                 |   |
| Brent M. Boyles      |   | Vice President, Marketing  and Customer Service        |    | 45     |                                 | 9/2/02 |
|                 |   |                                                   |    |   |                                 |   |
| Kurt A. Tornquist    |   | Vice President, Corporate  Performance and Development |    | 43     |                                 | 9/2/02 |
|                 |   |                                                   |    |   |                                 |   |
| John P. Havrilla     |   | Vice President,  Unregulated Businesses                |    | 44     |                                 | 11/15/02 |

 

**James Nicholas Bayne** was elected to the position of President andChief Executive Officer-Elect on March 1, 2002 to be effective March 18,2002.  He replaced Paul R. Cariani asPresident on June 1, 2002, and upon Mr. Cariani’s retirement effectiveSeptember 1, 2002, he also assumed the position of Chief ExecutiveOfficer.  Immediately prior to joiningthe Company, Mr. Bayne served as an executive consultant to the energy,utilities, and energy-software industries. During 2001, he served as the Chief Executive Officer and as a member ofthe Board of Directors for Aspect, LP, a Houston, Texas-based energy riskmanagement and FASB 133 ASP software firm wholly owned by Koch Ventures / KochIndustries.  From 2000 to 2001, heserved as Senior Vice President for Strategic Advisory Services for EnergyE-Comm.com, a web-based, advanced knowledge management software firm servingthe energy and utilities industries. From 1997 to 2000 he served as a member of executive management and as amember 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.

 

**Larry E. LaPlante** was elected to the position of VicePresident, Treasurer and Chief Financial Officer on June 1, 1999.  Mr. LaPlante was appointed Secretary andClerk of the Company effective February 15, 2002.  He has been an employee of the Company since November 4, 1983,starting as Controller.  In May, 1984,he was also appointed Assistant Secretary and Assistant Treasurer until hiselection as Vice President, Finance and Treasurer effective June 1, 1994.  Effective June 1, 1996, he was elected toVice President, Finance, Administration and Treasurer.

 

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**William L. Cyr** was elected to the position of VicePresident, Power Delivery effective June 1, 2000.  He has been a full-time employee of the Company since July 1,1982 in various engineering capacities until his appointment to Assistant VicePresident, Power Delivery, effective June 1, 1999.

 

**Michael A. Thibodeau** was elected to the position of VicePresident, Controller and Chief Risk Officer effective September 2, 2002.  He has been an employee of the Company sinceAugust 3, 1981, serving in various accounting, finance and human resourcecapacities.  He served as AssistantTreasurer from June 1, 1986 until his appointment to Assistant Vice President,Administration effective April 1, 1991. Effective April 1, 1996, he was appointed Assistant Vice President,Human Resources.  Effective December 1,2000, he was elected Vice President, Human Resources.

 

**Scott L. Sells**, Esquire, of the law firm of Curtis ThaxterStevens Broder & Micoleau, LLC, was elected to the position of GeneralCounsel on July 12, 2002.  Mr. Sells hasbeen with Curtis Thaxter for two years. Prior to joining Curtis Thaxter, Mr. Sells was an Assistant GeneralCounsel for Duke Energy in Denver, practiced law with a firm in Denver, CO andserved as Assistant Attorney General for the State of Colorado.

 

**Brent M. Boyles** was elected to the position of VicePresident, Marketing and Customer Service, effective September 2, 2002.  He has been an employee of the Company sinceMay 14, 1984 in various positions including Planning Engineer, Supervisor ofPower Supply and Planning, Manager of Corporate Planning, and Manager ofPlanning and System Operations.

 

**Kurt A. Tornquist** was elected to the position of VicePresident, Corporate Performance and Development, effective September 2,2002.  He has been an employee of theCompany since July 1, 1992, joining the Company as Assistant Controller.  On June 1, 1994, Mr. Tornquist was appointedController and Assistant Treasurer until his election to his current position.

 

**John P. Havrilla** was elected to the position of VicePresident, Unregulated Businesses, effective November 15, 2002.  Mr. Havrilla has over twenty-two years ofregulated and unregulated energy experience having served as Vice President ofStrategic and Financial Systems for Duke Energy’s unregulated retail energyservices company.  Prior to  joining Duke Power (ultimately Duke Energy)in their mergers and acquisitions area, he spent sixteen years in positions ofincreasing responsibility with New York State Electric & Gas Company(NYSEG).  During his career he has ledthe successful acquisition and integration of eight U.S. and Canadianfirms.  He is a professional engineer licensedin the States of New York and Maine and graduated from Pennsylvania StateUniversity with a B.S. degree in Electrical Engineering Technology.

 

With the exception of Mr.Sells, each executive office is a full-time position and has been the principaloccupation of each officer since first elected.  All officers were elected to serve until the next annual electionof officers and until their successors shall have been duly chosen andqualified.  The next annual election ofofficers will be on May 30, 2003.

 

There are no familyrelationships among the executive officers.

 

**Item 11. Executive Compensation**

 

Information for this item isset forth in the proxy statement of the registrant relating to its 2003 AnnualMeeting of Stockholders, which information is incorporated herein by reference.

 

**Item 12. Security Ownership of Certain BeneficialOwners and Management**

 

Information for this item isset forth in the proxy statement of the registrant relating to its 2003 AnnualMeeting of Stockholders, which information is incorporated herein by reference.

 

32

----

 

**Item 13. Certain Relationships and RelatedTransactions**

 

Not applicable.

 

**PART IV**

 

**Item 14. Controls and Procedures**

 

1)                                      Evaluationof disclosure controls and procedures.

 

The Company’sPresident and Chief Executive Officer and Vice President, Treasurer and ChiefFinancial Officer have implemented new disclosure controls and procedures.  Based on their reviews of these disclosurecontrols and the procedures, conducted within 90 days of the filing of thisForm 10-K, as evidenced by the certifications appearing at the end of this Form10-K, the aforementioned officers have concluded that the controls are workingeffectively.

 

2)                                      Changesin Internal Controls

 

There have notbeen any significant changes in the Company’s internal controls or in otherfactors that could significantly offset these controls subsequent to the dateof their evaluation; there were also no corrective actions with regard tosignificant deficiencies and material weaknesses.

 

**Item 15.* *****Exhibits, Financial Statement Schedules and Reports on Form8-K**

 

(a)                                  (1)                                  Financial Statements

 

Report of IndependentAccountants

 

Statements ofConsolidated Income for years ended December 31, 2002, 2001 and 2000

 

Statements ofConsolidated Cash Flows for the years ended December 31, 2002, 2001 and 2000

 

Consolidated Balance Sheetsas of December 31, 2002 and 2001

 

Statementsof Consolidated Common Shareholders’ Equity for the years ended December 31,2002, 2001and 2000

 

ConsolidatedStatements of Capitalization as of December 31, 2002 and 2001

 

Notesto Consolidated Financial Statements

 

33

----

 

**Report of Independent Accountants**

 

To The Directors and Shareholders of

Maine Public Service Company:

 

In our opinion, the consolidated financialstatements listed in the index appearing under Item 15(a)(1) on Page 33 presentfairly, in all material respects, the financial position of Maine PublicService Company and its Subsidiaries at December 31, 2002 and 2001, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2002 in conformity with accounting principlesgenerally accepted in the United States of America.  In addition, in our opinion, the financial statement schedulelisted in the index appearing under Item 15(a)(2) on Page 63 presents fairly,in all material respects, the information set forth therein when read inconjunction with the related consolidated financial statements.  These financial statements and financialstatement schedule are the responsibility of the Company’s management; ourresponsibility is to express an opinion on these financial statements andfinancial statement schedule based on our audits.  We conducted our audits of these statements in accordance withauditing standards generally accepted in the United States of America, whichrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial 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.

 

 
| /s/PricewaterhouseCoopers  LLP |   |
|--------------------------------|--------|
|                           |
| Portland, ME                   |
| February 14, 2003              |

 

34

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**MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES**

**Statementsof Consolidated Income**

 
|                                                       |   | **Year Ended December 31,** |       |
|------------------------------------------------------------|--------|-----------------------------|------------|
|                                                       |   | **2002**                    |       | **2001** |   | **2000** |   |
| **Revenues**                                               |   |                        |       |   |   |   |   |
| Operating Revenues                                         |   | $                           | 38,302,463 |   | $ | 47,551,157 |   | $ | 75,464,430 |   |
| EA - Standard Offer Service Margin                         |   | 5,801,670                   |       | 2,146,883 |   | 2,773,849 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Total Revenues**                                         |   | 44,104,133                  |       | 49,698,040 |   | 78,238,279 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Operating Expenses**                                     |   |                        |       |   |   |   |   |
| Energy Supply                                              |   | 5,532,679                   |       | 14,983,899 |   | 43,593,025 |   |
| T & D Operation and Maintenance                        |   | 14,489,191                  |       | 11,637,878 |   | 12,063,273 |   |
| Depreciation                                               |   | 2,420,215                   |       | 2,502,034 |   | 2,310,252 |   |
| Amortization of Stranded Costs                             |   | 8,761,233                   |       | 9,259,657 |   | 8,905,707 |   |
| Amortization                                               |   | 236,444                     |       | 216,842 |   | 297,360 |   |
| Taxes Other Than Income                                    |   | 1,431,245                   |       | 1,344,299 |   | 866,259 |   |
| Provision for Income Taxes                                 |   | 4,159,002                   |       | 3,393,006 |   | 3,197,446 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Total Operating Expenses**                               |   | 37,030,009                  |       | 43,337,615 |   | 71,233,322 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Operating Income**                                       |   | 7,074,124                   |       | 6,360,425 |   | 7,004,957 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Other Income (Deductions)**                              |   |                        |       |   |   |   |   |
| Equity in Income of Associated Companies                   |   | 279,514                     |       | 299,299 |   | 334,136 |   |
| Interest and Dividend Income                               |   | 157,163                     |       | 167,684 |   | 854,093 |   |
| Allowance for Equity Funds Used During Construction        |   | 3,463                       |       | 85,963 |   | 35,809 |   |
| Benefit (Provision) for Income Taxes                       |   | 19,366                      |       | 46,702 |   | (292,610 | ) |
| Other - Net                                                |   | (513,932                    | )          | (432,208 | ) | (176,732 | ) |
| **Total**                                                  |   | (54,426                     | )          | 167,440 |   | 754,696 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Income Before Interest Charges**                         |   | 7,019,698                   |       | 6,527,865 |   | 7,759,653 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Interest Charges**                                       |   |                        |       |   |   |   |   |
| Long-Term Debt and Notes Payable                           |   | 1,626,145                   |       | 2,285,711 |   | 3,245,138 |   |
| Less Stranded Costs Carrying Charge                        |   | (1,076,369                  | )          | (962,579 | ) | (767,751 | ) |
| Less Allowance for Borrowed Funds Used During Construction |   | (73,499                     | )          | (31,794 | ) | (18,366 | ) |
| **Total**                                                  |   | 476,277                     |       | 1,291,338 |   | 2,459,021 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Net Income Available for Common Stock**                  |   | $                           | 6,543,421  |   | $ | 5,236,527 |   | $ | 5,300,632 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Basic and Diluted Earnings Per Share of Common Stock**   |   | $                           | 4.16       |   | $ | 3.33 |   | $ | 3.34 |   |
|                                                       |   |                        |       |   |   |   |   |
| **Average Shares Outstanding**                             |   | 1,573,865                   |       | 1,573,294 |   | 1,588,009 |   |

 

*See Notesto Consolidated Financial Statements.*

 

35

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**MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES**

**Statementsof Consolidated Cash Flows**

** **
|                                                                                        |   | **Year Ended December 31,** |      |
|---------------------------------------------------------------------------------------------|--------|-----------------------------|-----------|
|                                                                                        |   | **2002**                    |      | **2001** |   | **2000** |   |
| **Cash Flow From Operating Activities**                                                     |   |                        |      |   |   |   |   |
| Net Income                                                                                  |   | $                           | 6,543,421 |   | $ | 5,236,527 |   | $ | 5,300,632 |   |
| Adjustments to Reconcile Net Income to                                                      |   |                        |      |   |   |   |   |
| Net Cash Provided by Operations:                                                            |   |                        |      |   |   |   |   |
| Depreciation                                                                                |   | 2,420,215                   |      | 2,502,034 |   | 2,310,252 |   |
| Amortization                                                                                |   | 1,346,443                   |      | 1,362,434 |   | 1,178,684 |   |
| Amortization of Deferred Gain from Asset Sale                                               |   | (2,987,500                  | )         | (4,863,027 | ) | (5,439,750 | ) |
| Deferred Income Taxes - Net                                                                 |   | 641,044                     |      | 872,815 |   | 4,228,605 |   |
| Deferred Investment Tax Credits                                                             |   | (30,521                     | )         | (32,580 | ) | (35,539 | ) |
| Allowance for Funds Used During Construction                                                |   | (76,962                     | )         | (117,757 | ) | (54,175 | ) |
| Income on Tax-Exempt Bonds - Restricted Funds                                               |   | (51,277                     | )         | (249,928 | ) | (97,105 | ) |
| Change in Deferred Regulatory and Debt Issuance Costs                                       |   | (1,883,614                  | )         | (548,257 | ) | 84,633 |   |
| Amortization of W-S Upfront Payment                                                         |   | 1,451,000                   |      | 1,451,000 |   | — |   |
| Gain on Sale of Miscellaneous Property                                                      |   | —                      |      | — |   | (205,237 | ) |
| Change in Benefit Obligations                                                               |   | 1,263,629                   |      | (173,944 | ) | 86,395 |   |
| Change in Current Assets and Liabilities:                                                   |   |                        |      |   |   |   |   |
| Accounts Receivable and Unbilled Revenue                                                    |   | (85,518                     | )         | 5,860,682 |   | (4,305,676 | ) |
| Other Current Assets                                                                        |   | 109,589                     |      | 255,210 |   | (193,870 | ) |
| Accounts Payable                                                                            |   | (1,503,760                  | )         | (1,414,457 | ) | 2,308,867 |   |
| Accrued Taxes and Interest                                                                  |   | (407,622                    | )         | (342,082 | ) | (823,025 | ) |
| Other Current Liabilities                                                                   |   | 4,992                       |      | 2,537 |   | 2,581 |   |
| Other - Net                                                                                 |   | 102,689                     |      | 289,079 |   | 335,440 |   |
|                                                                                        |   |                        |      |   |   |   |   |
| **Net Cash Flow Provided By Operating Activities**                                          |   | 6,856,248                   |      | 10,090,286 |   | 4,681,712 |   |
|                                                                                        |   |                        |      |   |   |   |   |
| **Cash Flow From Financing Activities**                                                     |   |                        |      |   |   |   |   |
| Dividend Payments                                                                           |   | (2,234,678                  | )         | (2,060,821 | ) | (1,948,371 | ) |
| Purchase of Common Stock                                                                    |   | —                      |      | — |   | (921,763 | ) |
| Bond Issuance Costs                                                                         |   | —                      |      | — |   | (322,755 | ) |
| Drawdown (Deposit) of Asset Sale Proceeds with Trustee, Net                                 |   | —                      |      | — |   | 18,957,051 |   |
| Deposit of Land Sale Proceeds with Trustee                                                  |   | —                      |      | — |   | (211,400 | ) |
| Issuance of Long-Term Debt                                                                  |   | —                      |      | — |   | 9,000,000 |   |
| Retirements of Long-Term Debt                                                               |   | (1,175,000                  | )         | (1,050,000 | ) | (15,025,000 | ) |
| Premium on Retirement of Long-Term Debt                                                     |   | —                      |      | — |   | (2,105,470 | ) |
| Short-Term Borrowings, Net                                                                  |   | (1,150,000                  | )         | (950,000 | ) | 1,300,000 |   |
|                                                                                        |   |                        |      |   |   |   |   |
| **Net Cash Flow Provided By (Used For) Financing Activities**                               |   | (4,559,678                  | )         | (4,060,821 | ) | 8,722,292 |   |
|                                                                                        |   |                        |      |   |   |   |   |
| **Cash Flow From Investing Activities**                                                     |   |                        |      |   |   |   |   |
| Investment in Restricted Funds                                                              |   | —                      |      | — |   | (9,000,000 | ) |
| Drawdown of Tax-Exempt Bond Proceeds                                                        |   | 3,717,467                   |      | 2,012,353 |   | 1,612,305 |   |
| Additional Proceeds from Sale of Generating Assets in 1999                                  |   | —                      |      | 1,050,679 |   | — |   |
| Stock Redemption from Associated Company                                                    |   | 375,277                     |      | 499,484 |   | — |   |
| Payment of Taxes on Generating Asset Sale                                                   |   | —                      |      | — |   | (7,853,047 | ) |
| Proceeds from Sale of Miscellaneous Property                                                |   | —                      |      | — |   | 208,319 |   |
| Investment in Electric Plant                                                                |   | (5,928,431                  | )         | (4,707,152 | ) | (4,746,144 | ) |
|                                                                                        |   |                        |      |   |   |   |   |
| **Cash Flow (Used For) Investing Activities**                                               |   | (1,835,687                  | )         | (1,144,636 | ) | (19,778,567 | ) |
|                                                                                        |   |                        |      |   |   |   |   |
| **Increase (Decrease) in Cash and Cash Equivalents**                                        |   | 460,883                     |      | 4,884,829 |   | (6,374,563 | ) |
| **Cash and Cash Equivalents at Beginning of Period**                                        |   | 5,495,539                   |      | 610,710 |   | 6,985,273 |   |
| **Cash and Cash Equivalents at End of Year**                                                |   | $                           | 5,956,422 |   | $ | 5,495,539 |   | $ | 610,710 |   |
|                                                                                        |   |                        |      |   |   |   |   |
| Supplemental Disclosure of Cash Flow Information:                                           |   |                        |      |   |   |   |   |
| Cash Paid During The Period For:                                                            |   |                        |      |   |   |   |   |
| Interest                                                                                    |   | $                           | 1,119,239 |   | $ | 2,499,080 |   | $ | 3,198,874 |   |
| Income Taxes (2001 and 2000 are net of tax refunds of $200,000 and  $499,201, respectively) |   | $                           | 4,028,408 |   | $ | 1,499,654 |   | $ | 7,505,312 |   |

 

*See Notes to Consolidated Financial Statements.*

 

36

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**MAINEPUBLIC SERVICE COMPANY AND SUBSIDIARIES**

**ConsolidatedBalance Sheets**

 
|                                                                                                                      |   | **December 31****,** |        |
|---------------------------------------------------------------------------------------------------------------------------|--------|----------------------|-------------|
|                                                                                                                      |   | **2002**             |        | **2001** |   |
| **Assets**                                                                                                                |   |                 |        |   |   |
|                                                                                                                      |   |                 |        |   |   |
| **Utility Plant**                                                                                                         |   |                 |        |   |   |
| Electric Plant in Service                                                                                                 |   | $                    | 88,072,501  |   | $ | 82,664,751 |   |
| Less Accumulated Depreciation                                                                                             |   | 39,432,024           |        | 37,782,598 |   |
| Net Electric Plant in Service                                                                                             |   | 48,640,477           |        | 44,882,153 |   |
| Construction Work-In-Progress                                                                                             |   | 95,921               |        | 876,179 |   |
| Total                                                                                                                     |   | 48,736,398           |        | 45,758,332 |   |
|                                                                                                                      |   |                 |        |   |   |
| **Investments in Associated Companies**                                                                                   |   | 3,397,544            |        | 3,600,384 |   |
|                                                                                                                      |   |                 |        |   |   |
| **Net Utility Plant and Investments in Associated  Companies**                                                            |   | 52,133,942           |        | 49,358,716 |   |
|                                                                                                                      |   |                 |        |   |   |
| **Current Assets:**                                                                                                       |   |                 |        |   |   |
| Cash and Cash Equivalents                                                                                                 |   | 5,956,422            |        | 5,495,539 |   |
| Accounts Receivable (less allowance for uncollectible accounts of  $213,882 in 2002 and $216,500 in 2001)                 |   | 5,429,383            |        | 5,544,051 |   |
| Unbilled Revenue                                                                                                          |   | 1,293,953            |        | 1,093,767 |   |
| Inventory                                                                                                                 |   | 561,829              |        | 623,543 |   |
| Income Tax Refund Receivable                                                                                              |   | 216,810              |        | 61,646 |   |
| Prepayments                                                                                                               |   | 261,614              |        | 408,690 |   |
|                                                                                                                      |   |                 |        |   |   |
| Total                                                                                                                     |   | 13,720,011           |        | 13,227,236 |   |
|                                                                                                                      |   |                 |        |   |   |
| **Regulatory Assets:**                                                                                                    |   |                 |        |   |   |
| Uncollected Maine Yankee Decommissioning Costs                                                                            |   | 22,153,501           |        | 24,708,311 |   |
| Recoverable Seabrook Costs (less accumulated amortization and  write-offs of $38,188,399 in 2002 and $37,078,399 in 2001) |   | 14,998,611           |        | 16,108,611 |   |
| Regulatory Assets - SFAS 109 & 106                                                                                    |   | 7,161,604            |        | 7,597,091 |   |
| Deferred Fuel and Purchased Energy Costs                                                                                  |   | 13,132,485           |        | 12,106,818 |   |
| Regulatory Asset - Power Purchase Agreement Restructuring                                                                 |   | 5,803,750            |        | 7,254,750 |   |
| Unamortized Debt Expense (less accumulated amortization of $1,372,911  in 2002 and $1,132,358 in 2001)                    |   | 2,532,706            |        | 2,798,333 |   |
| Deferred Regulatory Costs, Net                                                                                            |   | 1,409,092            |        | 1,427,927 |   |
|                                                                                                                      |   |                 |        |   |   |
| Total                                                                                                                     |   | 67,191,749           |        | 72,001,841 |   |
|                                                                                                                      |   |                 |        |   |   |
| **Other Assets:**                                                                                                         |   |                 |        |   |   |
| Restricted Investments (at cost, which approximates market)                                                               |   | 4,436,879            |        | 8,104,005 |   |
| Miscellaneous                                                                                                             |   | 654,981              |        | 643,145 |   |
|                                                                                                                      |   |                 |        |   |   |
| Total                                                                                                                     |   | 5,091,860            |        | 8,747,150 |   |
|                                                                                                                      |   |                 |        |   |   |
| **Total Assets**                                                                                                          |   | $                    | 138,137,562 |   | $ | 143,334,943 |   |

 

*See Notesto Consolidated Financial Statements.*

 

37

----

 

**MAINEPUBLIC SERVICE COMPANY AND SUBSIDIARIES**

**Capitalizationand Liabilities**

 
|                                                          |   | **December 31****,** |        |
|---------------------------------------------------------------|--------|----------------------|-------------|
|                                                          |   | **2002**             |        | **2001** |   |
| **Capitalization (see accompanying statements):**             |   |                 |        |   |   |
| Common Shareholders’ Equity                              |   | $                    | 47,029,071  |   | $ | 42,731,149 |   |
| Long-Term Debt                                                |   | 30,680,000           |        | 33,765,000 |   |
| Total                                                         |   | 77,709,071           |        | 76,496,149 |   |
|                                                          |   |                 |        |   |   |
| **Current Liabilities:**                                      |   |                 |        |   |   |
| Long-Term Debt Due Within One Year                            |   | 3,085,000            |        | 1,175,000 |   |
| Notes Payable to Banks                                        |   | 2,800,000            |        | 3,950,000 |   |
| Accounts Payable                                              |   | 3,523,506            |        | 5,415,525 |   |
| Accounts Payable - Associated Companies                       |   | 248,224              |        | 222,284 |   |
| Accrued Employee Benefits                                     |   | 1,336,087            |        | 973,768 |   |
| Dividends Declared                                            |   | 582,423              |        | 550,729 |   |
| Customer Deposits                                             |   | 27,202               |        | 22,210 |   |
| Taxes Accrued                                                 |   | 18,349               |        | 417,160 |   |
| Interest Accrued                                              |   | 179,745              |        | 188,556 |   |
| Total                                                         |   | 11,800,536           |        | 12,915,232 |   |
|                                                          |   |                 |        |   |   |
| **Deferred Credits:**                                         |   |                 |        |   |   |
| Uncollected Maine Yankee Decommissioning Costs                |   | 22,153,501           |        | 24,708,311 |   |
| Income Taxes                                                  |   | 22,270,998           |        | 21,906,295 |   |
| Investment Tax Credits                                        |   | 189,073              |        | 219,594 |   |
| Deferred Gain & Related Accounts - Generating Asset Sale  |   | 468,440              |        | 3,593,089 |   |
| Miscellaneous                                                 |   | 3,545,943            |        | 3,496,273 |   |
| Total                                                         |   | 48,627,955           |        | 53,923,562 |   |
|                                                          |   |                 |        |   |   |
| Commitments, Contingencies, and Regulatory Matters (Note 13). |   |                 |        |   |   |
|                                                          |   |                 |        |   |   |
| **Total Capitalization and Liabilities**                      |   | $                    | 138,137,562 |   | $ | 143,334,943 |   |

 

*See Notes to Consolidated Financial Statements.*

 

38

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**MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES**

**Statementof Consolidated Common Shareholder’s Equity**

 
|                           |   | **Shares** |   | **Par Value  Issued** |       | **Paid-In  Capital** |   | **Retained  Earnings** |   | **Treasury  Stock** |       |
|--------------------------------|--------|------------|--------|-----------------------|------------|----------------------|--------|------------------------|--------|---------------------|------------|
|                           |   |       |   |                  |       |                 |   |                   |   |                |       |
| **Balance, January 1, 2000**   |   | 1,617,250  |   | $                     | 13,070,750 |                 | $      | 38,317                 |   | $                   | 29,764,917 |   | $ | (5,714,376 | ) |
|                           |   |       |   |                  |       |                 |   |                   |   |                |       |
| Net Income                     |   |       |   |                  |       |                 |   | 5,300,632              |   |                |       |
| Dividends:                     |   |       |   |                  |       |                 |   |                   |   |                |       |
| Common Stock ($1.24 per share) |   |       |   |                  |       |                 |   | (1,966,523             | )      |                |       |
| Stock Repurchased:             |   |       |   |                  |       |                 |   |                   |   |                |       |
| Common Stock                   |   | (45,000    | )      |                  |       |                 |   |                   |   | (921,763            | )          |
| Treasury Stock Reissued        |   | 648        |   |                  |       | 1,351                |   | (1,314                 | )      | 13,960              |       |
|                           |   |       |   |                  |       |                 |   |                   |   |                |       |
| **Balance, December 31, 2000** |   | 1,572,898  |   | 13,070,750            |       | 39,668               |   | 33,097,712             |   | (6,622,179          | )          |
|                           |   |       |   |                  |       |                 |   |                   |   |                |       |
| Net Income                     |   |       |   |                  |       |                 |   | 5,236,527              |   |                |       |
| Dividends:                     |   |       |   |                  |       |                 |   |                   |   |                |       |
| Common Stock ($1.34 per share) |   |       |   |                  |       |                 |   | (2,108,222             | )      |                |       |
| Treasury Stock Reissued        |   | 612        |   |                  |       | 3,794                |   |                   |   | 13,099              |       |
|                           |   |       |   |                  |       |                 |   |                   |   |                |       |
| **Balance, December 31, 2001** |   | 1,573,510  |   | 13,070,750            |       | 43,462               |   | 36,226,017             |   | (6,609,080          | )          |
|                           |   |       |   |                  |       |                 |   |                   |   |                |       |
| Net Income                     |   |       |   |                  |       |                 |   | 6,543,421              |   |                |       |
| Dividends:                     |   |       |   |                  |       |                 |   |                   |   |                |       |
| Common Stock ($1.44 per share) |   |       |   |                  |       |                 |   | (2,266,372             | )      |                |       |
| Treasury Stock Reissued        |   | 605        |   |                  |       | 7,869                |   |                   |   | 13,004              |       |
|                           |   |       |   |                  |       |                 |   |                   |   |                |       |
| **Balance, December 31, 2002** |   | 1,574,115  |   | $                     | 13,070,750 |                 | $      | 51,331                 |   | $                   | 40,503,066 |   | $ | (6,596,076 | ) |

 

*See Notesto Consolidated Financial Statements.*

 

39

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**MAINE PUBLIC SERVICE COMPANY AND SUBSIDIARIES**

**Consolidated Statements of Capitalization**

** **
|                                                                                                               |   | **December 31****,** |       |
|--------------------------------------------------------------------------------------------------------------------|--------|----------------------|------------|
|                                                                                                               |   | **2002**             |       | **2001** |   |
| **Common Shareholders’ Equity**                                                                               |   |                 |       |   |   |
| Common Stock, $7 Par Value-Authorized 3,000,000 Shares in 2002 and  2001; Issued 1,867,250 Shares in 2002 and 2001 |   | $                    | 13,070,750 |   | $ | 13,070,750 |   |
| Paid-In-Capital                                                                                                    |   | 51,331               |       | 43,462 |   |
| Retained Earnings                                                                                                  |   | 40,503,066           |       | 36,226,017 |   |
| Total                                                                                                              |   | 53,625,147           |       | 49,340,229 |   |
| Treasury Stock-Total Shares of 293,135 in 2002 and 293,740 in 2001, at  cost                                       |   | (6,596,076           | )          | (6,609,080 | ) |
|                                                                                                               |   |                 |       |   |   |
| **Total**                                                                                                          |   | $                    | 47,029,071 |   | $ | 42,731,149 |   |
|                                                                                                               |   |                 |       |   |   |
| **Long-Term Debt**                                                                                                 |   |                 |       |   |   |
| First Mortgage and Collateral Trust Bonds:                                                                         |   |                 |       |   |   |
| 7.95% Due Serially through 2003-Interest Payable, March 1 and  September 1 *                                       |   | $                    | 1,800,000  |   | $ | 1,825,000 |   |
| Maine Public Utility Financing Bank, Public Utility Revenue Bonds:                                                 |   |                 |       |   |   |
| Refunding Series 1996:  Due  2021 - Variable Interest Payable Monthly                                         |   | 13,600,000           |       | 13,600,000 |   |
| (1.65% as of December 31, 2002)                                                                                    |   |                 |       |   |   |
| Series 2000:  Due 2025  -Variable Interest Payable Monthly                                                    |   | 9,000,000            |       | 9,000,000 |   |
| (1.65% as of December 31, 2002)                                                                                    |   |                 |       |   |   |
| Finance Authority of Maine:                                                                                        |   |                 |       |   |   |
| 1998 Taxable Electric Rate Stabilization                                                                           |   |                 |       |   |   |
| Revenue Notes: Due 2008 - Variable Interest Payable Monthly                                                        |   | 9,365,000            |       | 10,515,000 |   |
| (1.5% as of December 31, 2002)                                                                                     |   |                 |       |   |   |
|                                                                                                               |   |                 |       |   |   |
| Total Outstanding                                                                                                  |   | 33,765,000           |       | 34,940,000 |   |
| Less - Amount Due Within One Year                                                                                  |   | 3,085,000            |       | 1,175,000 |   |
|                                                                                                               |   |                 |       |   |   |
| **Total**                                                                                                          |   | $                    | 30,680,000 |   | $ | 33,765,000 |   |

 

**Current Maturitiesand Redemption Requirements for the Succeeding Five Years and Thereafter Are asFollows:**

**Long-TermDebt:**

 
| 2003       |   | $ | 3,085,000  |   |
|------------|--------|---|------------|--------|
| 2004       |   | $ | 1,450,000  |   |
| 2005       |   | $ | 1,625,000  |   |
| 2006       |   | $ | 1,830,000  |   |
| 2007       |   | $ | 2,055,000  |   |
| Thereafter |   | $ | 23,720,000 |   |

 

----

** Subjectto early redemption premiums as defined in the bond indentures.*

 

*See Notesto Consolidated Financial Statements.*

 

40

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**NOTES TO CONSOLIDATED**

**FINANCIALSTATEMENTS**

 

1.  ACCOUNTING POLICIES

 

**Regulations**

Maine Public Service Company(the “Company”) is subject to the regulatory authority of the Maine PublicUtilities Commission (MPUC) and the Federal Energy Regulatory Commission(FERC).  As a result of the ratemakingprocess, the applications of accounting principles by the Company differ incertain respects from applications by non-regulated businesses.

 

**Consolidationand Basis of Presentation**

The accompanying consolidatedfinancial statements include the accounts of the Company, its wholly-ownedCanadian subsidiary, Maine and New Brunswick Electrical Power Company, Limited,(Maine and New Brunswick), and its wholly-owned energy marketing subsidiary,Energy Atlantic, LLC, (EA).  Allintercompany balances and transactions have been eliminated in consolidation.

 

**Estimates**

The preparation of financialstatements in conformity with generally accepted accounting principles 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.

 

**ForeignCurrency Translation**

The functional currency ofMaine and New Brunswick is the U.S. dollar. Accordingly, translation gains and losses are included in otherincome.  Income and expenses of Maineand New Brunswick are translated at rates of exchange prevailing at the timethe income is earned or the expenses are incurred, except for depreciationwhich is translated at rates existing on the applicable in-service dates.  Assets and liabilities are translated atyear-end exchange rates, except for utility plant which is translated at ratesexisting on the applicable in-service dates.

 

**DeferredFuel and Purchased Energy Costs**

Certain Wheelabrator-Sherman(W-S) fuel costs and the sharing provisions for Maine Yankee replacement powercosts were deferred for future recovery as defined in the Company’s rate planuntil March 1, 2000.  All otherfuel 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 W-S fuel is being deferred.  The resulting deferred asset is expected tobe collected in future rates as approved by the MPUC.

 

**RevenueRecognition**

Operating revenues includethe Company’s sales billed on a cycle billing basis and estimated unbilledrevenues for electric service rendered prior to the normal billing cycle.  Operating revenues also include EA’s CESsales since CES activity is recorded on a gross basis to include the relatedrevenues and purchased power expenses.  CES sales are recorded in thismanner because EA negotiates theprice directly with the customer, maintains customer service responsibility andhas collection risk.  For Standard OfferService, revenues were received and expenses were paid directly by an escrowagent which was controlled by Engage. EA received a percentage of the net profit from the sale of energy.  The utilities bore SOS account collectionrisk, as they were required to remit the amounts billed 26 days after thebilling date to the escrow account mentioned above and maintain the billing andcustomer service relationship.  EArecorded the accrued net margin of the SOS activity as revenue in the financialstatements.  Additionally, EA’s activityhas been accounted for as non-trading since management has determined it doesnot meet the definition of a trader as defined in EITF 98-10, as modified byEITF 02-03.

 

In July, 2000, the Companybegan recording the difference between the approved tariff rate for two largeindustrial customers and their current special discount rates, under contractsapproved by the MPUC, as accrued revenue. The resulting deferred asset will be subsequently collected in rates asapproved by the MPUC.  During 2002 and2001, $200,000 and $961,000, respectively, were recognized as revenue asflexible pricing adjustments, as described in Note 13, “Commitments,Contingencies and Regulatory Matters – MPUC Approves Elements of RatesEffective March 1, 2000.”

 

**UtilityPlant**

Utility plant is stated atoriginal cost of contracted services, direct labor and materials, as well asrelated indirect construction costs including general engineering, supervision,and similar overhead items and allowances for the cost of equity and borrowedfunds used during construction (AFUDC). The cost of utility plant which is retired, including the cost ofremoval less salvage, is charged to accumulated depreciation.  The cost of maintenance and repairs,including replacement of minor items of property, are charged to maintenanceexpense as incurred.  The Company’s property,with minor exceptions, is subject to first and second mortgage liens.

 

Costs which are disallowed orare expected to be disallowed for recovery through rates are charged to expenseat the time such disallowance is probable.

 

41

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**Depreciationand Amortization**

Utility plant depreciation isprovided on composite basis using the straight-line method.  The composite depreciation rate, expressedas a percentage of average depreciable plant in service, was approximately3.10%, 3.37%, and 3.23% for 2002, 2001, and 2000, respectively.

 

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

 

**IncomeTaxes**

Statement of FinancialAccounting Standards No. 109 (SFAS 109), “Accounting for Income Taxes,”requires an asset and liability approach to accounting and reporting incometaxes.  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.

 

The Company has deferredinvestment tax credits and amortizes the credits over the remaining estimateduseful life of the related utility plant.

 

The Company recordsregulatory assets or liabilities related to certain deferred tax liabilities orassets, representing its expectation that, consistent with current and expectedratemaking, those taxes will be recovered from or returned to customers throughfuture rates.

 

**Investmentsin Associated Companies**

The Company records itsinvestments in Associated Companies (see Note 5, “Investments in AssociatedCompanies”) using the equity method.

 

**PledgedAssets**

The Common Stock of Maine andNew Brunswick is pledged as additional collateral for the first and secondmortgage and collateral trust bonds of the Company.  In December, 1999, a liquidating dividend in the amount of $14.8 million,representing after-tax proceeds from the sale of the generating assets, waspaid by Maine and New Brunswick to the Company.  In accordance with the mortgage indentures, the dividend net ofwithholding taxes was deposited with the first mortgage trustee.

 

**Inventory**

Inventory is stated at averagecost.

 

**Cash andCash Equivalents**

For purposes of theStatements of Consolidated Cash Flows, the Company considers all highly liquidsecurities with a maturity, when purchased, of three months or less to be cashequivalents.

 

**InterestRate Caps**

Interest rate caps involvethe exchange of cash for a cap on the interest rate the Company can be chargedand are considered derivatives.  OnJanuary 1, 2001, the Company adopted Statement of Financial Accounting StandardsNo. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS133), as amended by SFAS 137 and 138, which establishes accounting andreporting standards for derivative instruments and for hedging activities.  SFAS 133 requires that an entity recognizederivatives as either assets or liabilities on the balance sheet and measurethose instruments at fair value.  Theaccounting for changes in the fair value of the derivative depends on theintended use of the derivative and the resulting designation.  See Note 11, “SFAS No. 133” for requireddisclosure on these interest rate caps.

 

**Stock Option Plan**

At December31, 2002, the Company had one stock-based employee compensation plan, which isdescribed more fully in Note 9, “Stock Compensation Plan.”  The Company accounts for this plan inaccordance with the expense provisions of Statement of Financial AccountingStandards (SFAS) No. 123 “Accounting for Stock Based Compensation.”

 

**Reclassifications**

Certain reclassificationshave been made to the 2001 and 2000 financial statement amounts in order toconform to the 2002 presentation.

 

**Earnings Per Share**

Basic earnings per share(EPS) is determined by dividing net income by the weighted-average number ofshares of Common Stock outstanding during the period.  The weighted-average Common Shares outstanding for diluted EPSinclude the incremental effect of stock options issued.  There was no difference between basic anddiluted earnings per share for the three years in the period ended December 31,2002.  Options to purchase 5,250 sharesof Common Stock at $30.45 per share were outstanding during the second half of2002, but were not included in the computation of diluted EPS because theoptions’ exercise price was greater than the average market price of the CommonShares and, therefore, the effect would be anti-dilutive.  The options, which expire on May 30, 2012,were still outstanding at the end of year 2002.

 

42

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**AccountingPronouncements**

In June of 2001, theFinancial Accounting Standards Board (FASB) issued SFAS No. 143, “Accountingfor Asset Retirement Obligations.”  ThisStatement addresses financial accounting and reporting for obligationsassociated with the retirement of tangible long-lived assets and associatedasset retirement costs.  This Statementis effective for financial statements issued for fiscal years beginning afterJune 15, 2002.  The Company currentlyrecords an asset retirement obligation related to the decommissioning of MaineYankee in its financial statements.  TheCompany does not expect the adoption of this statement to have a materialimpact on its financial position or results of operations.

 

In October of 2001, the FASBissued SFAS 144, “Accounting for the Impairment or Disposal of Long LivedAssets.”  This Statement addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets and is effective for fiscal years beginning after December 15,2001.  This Statement supersedes FASBStatement No. 121, “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of,” and the accounting and reportingprovisions of APB Opinion No. 30, “Reporting the Results of Operations —Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions,” forthe disposal of a segment of a business (as previously defined in thatOpinion).  This Statement also amendsARB No. 51, “Consolidated Financial Statements,” to eliminate the exception toconsolidation for a subsidiary for which control is likely to betemporary.  SFAS 144 establishes asingle accounting model, based on the framework established in Statement 121,for long-lived assets to be disposed of by sale and also resolves significantimplementation issues related to Statement 121.  The adoption of SFAS 144 had no material impact on its financialposition or results of operations.

 

In December2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation”(SFAS No. 148).  This statement providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  Additionally, SFAS 148 amends the disclosurerequirements of Statement 123 to require prominent disclosures in both annualand interim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reportedresults.  The Company has adopted theadditional disclosure provisions of this statement for the year ended December31, 2002 and will include the prescribed additional disclosures in futurefilings on Form 10-Q.

 

On January 17,2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable InterestEntities.” The provisions have far-reaching effects and will be theguidance that determines (1) whether consolidation is required under the“controlling financial interest” model of Accounting Research Bulletin No. 51(ARB 51), “Consolidated FinancialStatements” (or other existing authoritative guidance) or,alternatively, (2) whether the variable interest model under FIN 46 should beused to account for existing and new entities. The transitional disclosures are required for financial statementsissued after February 1, 2003.  FIN 46is effective and required to be applied to preexisting entities as of thebeginning of the first interim period beginning after June 15, 2003.  The Company does not expect the adoption ofthis statement will have a material impact on the Company based on its currentstructure.

 

2.  INCOME TAXES

A summary of Federal,Canadian and State income taxes charged (credited) to income is presentedbelow.  For accounting and ratemakingpurposes, income tax provisions included in “Operating Expenses” reflect taxesapplicable to revenues and expenses allowable for ratemaking purposes, with theexception of Energy Atlantic activity, which is above the line and notallowable for ratemaking purposes.  Thetax effect of items not included in rate base or normal operating activities isallocated as “Other Income (Deductions).”

 
|                    |   | **2002**    |          | **2001**   |   | **2000**  |   |
|-------------------------|--------|-------------|---------------|------------|--------|-----------|--------|
|                    |   |        |          |       |   |      |   |
| Current income taxes    |   | **$**       | **3,473,150** |       | $      | 2,489,429 |   | $ | (853,466 | ) |
| Deferred income taxes   |   | **697,007** |          | 889,455    |   | 4,379,061 |   |
| Investment credits, net |   | **(30,521** | **)**         | (32,580    | )      | (35,539   | )      |
| Total income taxes      |   | **$**       | **4,139,636** | ** ** | $      | 3,346,304 |   | $ | 3,490,056 |   |
|                    |   |        | ** **    |       |   |      |   |
| Allocated to:           |   |        | ** **    |       |   |      |   |
| Operating income        |   | **$**       | **4,159,002** | ** ** | $      | 3,393,006 |   | $ | 3,197,446 |   |
| Other income            |   | **(19,366** | **)**         | (46,702    | )      | 292,610   |   |
| Total                   |   | **$**       | **4,139,636** | ** ** | $      | 3,346,304 |   | $ | 3,490,056 |   |

 

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

 
|                                       |   | **2002** |       | **2001** |   | **2000** |   |
|--------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
| Statutory rate                             |   | **34.0** | **%**      | 34.0     | %      | 34.0     | %      |
| Excess Canadian taxes                      |   | **.0**   | ** ** | .1       |   | (1.7     | )      |
| Amortization of recoverable Seabrook costs |   | **2.1**  | ** ** | 2.6      |   | 2.6      |   |
| State income taxes                         |   | **5.6**  | ** ** | 5.6      |   | 5.9      |   |
| Other                                      |   | **(2.9** | **)**      | (3.3     | )      | (1.1     | )      |
| Effective rate                             |   | **38.8** | **%**      | 39.0     | %      | 39.7     | %      |

 

43

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The elements of deferredincome tax expense (credit) are as follows (in thousands):

 
|                                              |   | **2002**   |       | **2001**   |       | **2000**   |       |
|---------------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
| Temporary Differences at Statutory Rates:         |   |       | ** ** |       |       |       |       |
| Seabrook - costs                                  |   | **$**      | **(186**   | **)**      | $          | (186       | )          | $ | (188 | ) |
| Liberalized depreciation                          |   | **289**    | ** ** | 118        |       | 109        |       |
| AFUDC-borrowed funds                              |   | **—** | ** ** | **—** |       | (6         | )          |
| Deferred fuel                                     |   | **22**     | ** ** | (332       | )          | 196        |       |
| Deferred regulatory expense                       |   | **(25**    | **)**      | (27        | )          | (44        | )          |
| Flexible pricing revenue                          |   | **32**     | ** ** | 383        | ** ** | **—** | ** ** |
| Accrued pension and postretirement benefits       |   | **(404**   | **)**      | 101        |       | 31         |       |
| Wheelabrator-Sherman power purchase restructuring |   | **(579**   | **)**      | (579       | )          | 1,344      |       |
| Generating Asset Sale                             |   | **1,187**  | ** ** | 1,538      |       | 2,320      |       |
| Reacquired debt                                   |   | **(85**    | **)**      | (101       | )          | 765        |       |
| Maine Yankee NEIL Refund                          |   | **401**    | ** ** | **—** | ** ** | **—** | ** ** |
| Other                                             |   | **(45**    | **)**      | (26        | )          | (148       | )          |
| Total temporary differences - statutory rates     |   | **$**      | **697**    | ** ** | $          | 889        |       | $ | 4,379 |   |

 

The Company has not accruedU.S. income taxes on the undistributed earnings of Maine and New BrunswickElectrical Power Company, Ltd. (Maine and New Brunswick), as the withholdingtaxes due on the distribution of any remaining amount would be principallyoffset by foreign tax credits.  No dividendswere received from Maine and New Brunswick in 2002, 2001 or 2000.

 

The following summarizesaccumulated deferred income tax (assets) and liabilities established ontemporary differences under SFAS 109 as of December 31, 2002 and 2001:

 

|                                  |   | **(Dollars  in Thousands)** |   |
|---------------------------------------|--------|-----------------------------|--------|
|                                  |   | **2002**                    |   | **2001** |   |
|                                  |   |                        |   |   |   |
| Seabrook                              |   | $                           | 8,428  |   | $ | 9,041 |   |
| Property                              |   | 7,084                       |   | 6,663 |   |
| Flexible pricing revenue              |   | 567                         |   | 535 |   |
| Deferred fuel                         |   | 4,162                       |   | 4,140 |   |
| Generating asset sale                 |   | (178                        | )      | (1,365 | ) |
| Wheelabrator-Sherman Up-front payment |   | 2,315                       |   | 2,894 |   |
| Pension and post- retirement benefits |   | (478                        | )      | (74 | ) |
| Other                                 |   | 371                         |   | 72 |   |
| Net accumulated deferred Income taxes |   | $                           | 22,271 |   | $ | 21,906 |   |

 

3.  ENERGY ATLANTIC

 

In January, 1999, EnergyAtlantic, the Company’s wholly-owned unregulated marketing subsidiary, formallybegan operations.  This marketingsubsidiary was involved in wholesale energy transactions during 1999 and thefirst two months of 2000, and began selling to retail customers on March 1,2000, the commencement of retail competition in the State of Maine.

 

EnergyAtlantic’s sales can be classified into two general categories:  StandardOffer Service (SOS) in CMP’s service territory which expired February 28, 2002,and Competitive Energy Supply (CES) sales to individual retail customers withinthe state of Maine.  Except as stated below, the electricity for thosesales within ISO New England was provided entirely under a Wholesale PowerSales Agreement (the “Agreement”) with Engage Energy America, LLC (Engage),which also expired on February 28, 2002.  Under this Agreement, all revenuesfrom both SOS and CES sales were paid directly to an Escrow Agent thatdisbursed funds in accordance with instructions from Engage.  For SOSsales, EA received reimbursement for certain expenses and a portion of the netprofit that was reported as SOS margin.

 

On May 24, 2001, the MainePublic Utilities Commission (MPUC) issued an Order authorizing a comprehensivesettlement of the dispute between EA and Engage.  In connection with the MPUC Order, EA, Engage, CMP, and otherparties entered into a comprehensive settlement which included the following:

 

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(i)                                     Engage continued to supply EA with all energyrequired to perform outstanding retail contracts and the SOS commitments, untilthe expiration of the Agreement.

 

(ii)                                  Engage and EA released one another fromliabilities arising on or before May 24, 2001, with limited exceptions.

 

(iii)                               EA is no longer required to purchase powerexclusively from Engage.

 

(iv)                              Before its expiration on February 28, 2002,the Wholesale Agreement could not be terminated by EA or Engage except upon thewillful and material misconduct of the other party.

 

(v)                                 The order waives the requirement that EAprovide a performance bond.  FrontierInsurance Company (Frontier) was released from liability under its bond andFrontier released EA and the Company from any and all claims forindemnification, subrogation or contribution under the bond and associatedindemnification agreement.

 

(vi)                              Westcoast Energy, Inc., (Engage’s then currentparent company) provided CMP a $33 million guarantee of Engage’s performance,and Coastal Corporation (a former affiliate of Engage) released from its priorguarantee of Engage’s performance.

 

(vii)                           Engage received $8 million over the remainingterm of the Wholesale Power Agreement consisting of the following:  $1 million received from Frontier; a $4.5million offset from amounts Engage was otherwise obligated to pay to CMP forentitlements; a total of $1.0 million of payments from EA in monthly incrementsthrough March, 2002; and a $1.5 million payment from EA in April, 2002.  Under the Order, CMP was allowed to recoverthe $4.5 million from ratepayers instead of from Engage.

 

In connection with thissettlement, EA recognized a charge against second quarter 2001 earnings(after-tax) of approximately $1.08 million, or $.69 per share.

 

During a scheduled audit ofthe revenue and expenses accruing under the Agreement conducted by Engage’sauditors in August of 2001, a discrepancy was identified between thereconciliation of kilowatt-hours (KWH) settled by CMP with ISO New England andtransferred by ISO New England to Engage, and the KWH revenues achieved byEngage and EA through customer billing derived from actual meterreadings.  The August 2001 audit noted that this discrepancy was negativein some months and positive in others during the preceding year.  As aprecautionary measure, on January 21, 2002, EA and Engage agreed to instructthe Escrow Agent to maintain $1.5 million in the escrow account until the completionof the scheduled final audit of the contract activity, the expiration of theEscrow Agreement, and the release of EA from further obligations pertaining tothe Agreement.  When final billing information for the month following theFebruary 28, 2002 expiration of the SOS activity in CMP’s service territory wasreceived, EA determined that SOS megawatt-hours (MWH) billed to residential andsmall commercial customers by CMP exceeded the MWH allocated to the SOSactivity by ISO New England by approximately 152,000 MWH, or approximately 2%of the total load charged to the SOS over the two-year period.  Theassociated $6.1 million represents additional cash and revenue distributed toand shared by EA and Engage, with EA’s share being $4.8 million.  Managementbelieves the difference in MWH was a result of the difference between estimatedand actual line loss or the estimating process the utility and ISO New Englanduses to report the amount of energy transferred to individual energyproviders.  Management also believes the SOS customers were billed onlyfor the energy delivered according to their meters as read by CMP. Through August 31, 2002, EA recognized revenues based on the MWH allocated tothe SOS by ISO New England, thereby excluding the impact of the discrepancy. During the third quarter of 2002, EA and Engage concluded their businessrelationship pursuant to the terms of their Agreement.  Followingcompletion of the final scheduled audit, the final escrow disbursements weremade to EA and Engage on September 30, 2002.  As a result of the finalaccount settlement, EA recognized the $4.8 million of additional standard offerservice (SOS) revenue during the third quarter of 2002 with an after-tax impactof $2.9 million, or $1.84 per share.  Inaddition to the SOS revenue adjustment, EA reversed $321,000 ($.12 per share)of expenses previously accrued for EA’s share of possible regulatoryassessments under the Agreement with Engage. This assessment was imposed on Engage by FERC during the course of theEngage/EA Agreement.  Engage hasindicated that due to a change in regulation, FERC has notified Engage that itwill not be making any further assessments in connection with this matter.  A further adjustment in the fourth quarterreduced the settlement by approximately $105,000, after taxes, or $.07 pershare.  As a result, the total impact ofthe settlement increased earnings per share by $1.89.

 

EA has entered into acontract for 40% of the output of the Wheelabrator-Sherman (W-S) energyfacility for the two years beginning March 1, 2002.  The output from thistake-or-pay contract amounts to approximately 55,000 MWH annually and is beingused to provide electricity for additional CES sales within MPS’s serviceterritory.  This is EA’s first take-or-pay contract, which carries morecounterparty risk than others entered into to date.  To mitigate thisrisk, EA has entered into a contract with NB Power, whereby NB Power will buyW-S output in excess of load requirements in the Company’s service territory ata rate indexed to the price of 3% Sulphur Max No. 6 residential oil into NewYork Harbor, which is intended to reflect NB Power’s avoided cost, subject to afloor and ceiling.  Currently, all output has been sold to CES customers,therefore limiting the risk that energy will be sold to NB Power.  Inaddition, NB Power will sell electricity to EA when load exceeds W-S output ata fixed on and off-peak rate.

 

In addition, EA has a powersupply relationship with Duke Energy Trading and Marketing (DETM) forelectricity in CMP’s service area.  In connection with this relationship,and certain transactions between EA and DETM, MPS provides a contractualguarantee on behalf of EA in an aggregate amount of one million dollars($1,000,000).  This guarantee is related specifically to the deliveryand/or 

 

45

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receipt of electric powerbetween EA and DETM.  This guarantee was renewed in September of 2002 foran additional year.  Effective March 21,2003, DETM has agreed to waive this credit requirement in lieu of EA’scommitment to maintain a $1 million ($1,000,000) minimum bank account balance.

 

The following illustrates the type of EA’srisk exposure related to these contracts for supply and sales:

 

•                       Counterparty risk includes the possibility ofthe other parties’ failure to fulfill their contractual obligations to EA suchas:

 

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

 

b)             Transmission risk, indicating EA’s reliance onthe 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 occur(1) if energy is not available from W-S, NB Power or other energy supplyarrangements, while the contracted customer load must still be satisfied or (2)if the existing customer load deteriorated and NB Power could not buy theexcess power from W-S, as contracted.

 

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

 

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

 

With the expiration of the SOS arrangement in CMP’s service territory, EA will beadversely 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.  The Company continues toreview EA’s current and future business model, which may include a possibleexit from the CES market in part or in whole, a refinement of its market area,and/or expansion into other product and service lines.  On February 24, 2003, EA announced itsintent to withdraw from the Northern Maine market due to the lack ofprofitability 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 factors.  EAwill continue to serve existing contracts in Northern Maine until they expireby February 28, 2004.  CES sales inNorthern Maine were approximately $5 million in 2002.  EA believes that, in addition to minimizing its risk profile,this action will substantially relieve any underlying concerns that may existin connection with the issue of employee sharing and EA’s energy marketingactivities within the Company’s service territory.  On February 21, 2003 the Company filed with the MPUC an“Application for Exemption of Chapter 304” to exempt the Company and EA fromcertain management restrictions that have arisen due to this aspect of the corporaterelationship and expects a ruling on the application during calendar year 2003.

 

The Company has determinedthat EA’s activity and related energy contracts are considered non-trading inaccordance with EITF 98-10, which was awarded by EITF 02-03.

 

The Company adopted Statementof Financial Accounting Standards (SFAS) No. 133, “Accounting for DerivativeInvestments and Hedging Activities” on January 1, 2001.  The Company has reviewed EA contracts anddetermined they are not derivative contracts as defined by SFAS No. 133.

 

4.  SEGMENT INFORMATION

 

The Company’s reportablesegments include the electric utility portion of the business, consisting ofMaine Public Service Company (MPS) and Maine and New Brunswick Electrical PowerCompany, Limited, (Maine and New Brunswick), and the energy marketing portionof the business, consisting of Energy Atlantic.  The accounting policies of the segments are the same as thosedescribed in Note 1, “Summary of Significant Accounting Policies.”  The Company provides certain administrativesupport services to Energy Atlantic, which are billed to that entity at cost,based on a combination of direct charges and allocations.  The Company is organized on the basis ofproducts and services.

 

46

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|                                  |   | **(Dollars in  Thousands)**          |   |
|---------------------------------------|--------|--------------------------------------|--------|
|                                  |   | **Twelve Months Ended December 31,** |   |
|                                  |   | **2002**                             |   | **2001** |   | **2000** |   |
|                                  |   | **EA**                               |   | **MPS** |   | **Total  Company** |   | **EA** |   | **MPS** |   | **Total  Company** |   | **EA** |   | **MPS** |   | **Total  Company** |   |
|                                  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating Revenues                    |   | $                                    | 6,901  |   | $ | 31,401 |   | $ | 38,302 |   | $ | 15,771 |   | $ | 31,780 |   | $ | 47,551 |   | $ | 38,021 |   | $ | 37,443 |   | $ | 75,464 |   |
| EA Standard Offer Service Margin      |   | 5,802                                |   | — |   | 5,802 |   | 2,147 |   | — |   | 2,147 |   | 2,774 |   | — |   | 2,774 |   |
| Total Revenues                        |   | 12,703                               |   | 31,401 |   | 44,104 |   | 17,918 |   | 31,780 |   | 49,698 |   | 40,795 |   | 37,443 |   | 78,238 |   |
| Operations & Maintenance Expense  |   | 7,074                                |   | 25,797 |   | 32,871 |   | 16,320 |   | 23,625 |   | 39,945 |   | 38,167 |   | 29,869 |   | 68,036 |   |
| Taxes                                 |   | 2,280                                |   | 1,879 |   | 4,159 |   | 592 |   | 2,801 |   | 3,393 |   | 1,113 |   | 2,084 |   | 3,197 |   |
| Total Operating Expenses              |   | 9,354                                |   | 27,676 |   | 37,030 |   | 16,912 |   | 26,426 |   | 43,338 |   | 39,280 |   | 31,953 |   | 71,233 |   |
| Operating Income (Loss)               |   | 3,349                                |   | 3,725 |   | 7,074 |   | 1,006 |   | 5,354 |   | 6,360 |   | 1,515 |   | 5,490 |   | 7,005 |   |
| Other Income & Deductions         |   | 101                                  |   | (156 | ) | (55 | ) | (103 | ) | 271 |   | 168 |   | 247 |   | 508 |   | 755 |   |
| Income (Loss) Before Interest Charges |   | 3,450                                |   | 3,569 |   | 7,019 |   | 903 |   | 5,625 |   | 6,528 |   | 1,762 |   | 5,998 |   | 7,760 |   |
| Interest Charges                      |   | 6                                    |   | 470 |   | 476 |   | 6 |   | 1,285 |   | 1,291 |   | 74 |   | 2,385 |   | 2,459 |   |
| Net Income (Loss)                     |   | $                                    | 3,444  |   | $ | 3,099 |   | $ | 6,543 |   | $ | 897 |   | $ | 4,340 |   | $ | 5,237 |   | $ | 1,688 |   | $ | 3,613 |   | $ | 5,301 |   |
| Total Assets as of December 31,       |   | $                                    | 6,324  |   | $ | 131,814 |   | $ | 138,138 |   | $ | 5,632 |   | $ | 137,703 |   | $ | 143,335 |   | $ | 6,385 |   | $ | 144,472 |   | $ | 150,857 |   |

 

5.  INVESTMENTS IN ASSOCIATED COMPANIES

 

The Company owns 5% of theCommon Stock of Maine Yankee Atomic Power Company (Maine Yankee), ajointly-owned nuclear electric power company, and 7.49% of the Common Stock ofthe Maine Electric Power Company (MEPCO), a jointly-owned electric transmissioncompany.  For additional information,see Note 13, “Commitments, Contingencies, and Regulatory Matters — CapacityArrangements – Maine Yankee” regarding the closing and decommissioning of MaineYankee.

 

Dividends received during2002, 2001, and 2000 from Maine Yankee were $99,828, $206,000, and $470,000,respectively, and from MEPCO $7,249, $7,249, and $9,061, respectively.  In 2002 and 2001, Maine Yankee completed astock redemption of $375,277 and $499,484 respectively.  Substantially all earnings of Maine Yankeeand MEPCO are distributed to investor companies.  Condensed financial information (unaudited) for Maine Yankee andMEPCO is as follows:

 

|                                        |   | **Maine Yankee** |    | **MEPCO** |   |
|---------------------------------------------|--------|------------------|---------|-----------|--------|
| **(Dollars in Thousands)**                  |   | **2002**         |    | **2001**  |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
| **Earnings**                                |   |             |    |      |   |   |   |   |   |   |   |   |   |
| Operating revenues                          |   | $                | 58,924  |      | $      | 61,994 |   | $ | 43,813 |   | $ | 4,365 |   | $ | 4,514 |   | $ | 4,029 |   |
| Earnings applicable to                      |   |             |    |      |   |   |   |   |   |   |   |   |   |
| Common Stock                                |   | $                | 3,947   |      | $      | 4,371 |   | $ | 4,640 |   | $ | 1,068 |   | $ | 1,152 |   | $ | 1,363 |   |
| Company’s equity share of net earnings |   | $                | 197     |      | $      | 219 |   | $ | 232 |   | $ | 80 |   | $ | 86 |   | $ | 102 |   |
|                                        |   |             |    |      |   |   |   |   |   |   |   |   |   |
| **Investment**                              |   |             |    |      |   |   |   |   |   |   |   |   |   |
| Total assets                                |   | $                | 679,975 |      | $      | 802,118 |   | $ | 915,097 |   | $ | 8,260 |   | $ | 7,396 |   | $ | 6,771 |   |
| Less:                                       |   |             |    |      |   |   |   |   |   |   |   |   |   |
| Preferred stock                             |   | —           |    | —    |   | 15,000 |   | — |   | — |   | — |   |
| Long-term debt                              |   | 21,600           |    | 31,200    |   | 40,800 |   | — |   | — |   | — |   |
| Other liabilities and deferred credits      |   | 600,656          |    | 707,643   |   | 788,703 |   | 1,214 |   | 1,320 |   | 1,761 |   |
| Net assets                                  |   | $                | 57,719  |      | $      | 63,275 |   | $ | 70,594 |   | $ | 7,046 |   | $ | 6,076 |   | $ | 5,010 |   |
| Company’s equity in net assets         |   | $                | 2,886   |      | $      | 3,164 |   | $ | 3,530 |   | $ | 528 |   | $ | 455 |   | $ | 375 |   |

 

47

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6.  SHORT-TERM CREDIT ARRANGEMENTS

 

The Company has a revolvingcredit arrangement with two banks for borrowings up to $6 million.  The revolving credit agreement is subject toextension with the consent of the participating banks and has been extendedthrough June 8, 2004.  These agreementscontain certain restrictive covenants including interest coverage tests anddebt-to-equity ratios.  As of December31, 2002, the Company was in compliance with those covenants.  The Company can utilize, at its discretion,two types of loan options:  A Loans,which are provided on a pro rata basis in accordance with each participatingbank’s share of the commitment amount, and B Loans, which are provided asarranged between the Company and each of the participating banks.  The A Loans, at the Company’s option, bearinterest equal to either the agent bank’s prime rate or LIBOR-basedpricing.  The Company also pays aquarterly commitment fee of .50% of the unused portion of the A Loans.  The B Loans bear interest as arrangedbetween the Company and the participating bank.  As of December 31, 2002, an A Loan for $2.0 million and a B Loanfor $800,000 were outstanding under the revolving credit arrangement at 2.875%and 3.02%, respectively.  As of December31, 2001, an A Loan for $2.8 million and a B Loan for $1.15 million wereoutstanding under the revolving credit arrangement at 3.3125% and 3.37%,respectively.

 

The unregulated subsidiary,Energy Atlantic, LLC (EA) has a revolving line of credit with a bank, for $1.2million.  In April of 2002, the line wasextended until March 30, 2003.  Interestis based on the bank’s prime lending rate. The line of credit sets forth two financial covenants.  The first covenant requires EA to maintain aminimum net worth of $2.75 million.  Thesecond requires the ratio of (i) earnings before interest, taxes, depreciationand amortization less unfunded capital expenditures less cash taxes to (ii)interest expense plus current maturities of long-term debt.  This ratio shall not be less than 1.25 timesand is tested annually.  As of December31, 2002, EA was in compliance with these covenants set forth by the line ofcredit agreement.  The line was not usedduring 2002 and had no balance outstanding as of December 31, 2002 or December31, 2001.

 

7.  COMMON SHAREHOLDERS’ EQUITY

 

On November 17, 1999, theMaine Public Utilities Commission (MPUC) authorized the repurchase of up to500,000 shares of the Company’s Common Stock in order to maintain the Company’scapital structure at levels in accordance with the Stipulation approved by theMPUC on December 1, 1999.  TheStipulation limits common equity to 51% of the capital structure for thedetermination of transmission and distribution rates.  The shares will be repurchased through an open-marketprogram.  During 2000, the Companypurchased 45,000 shares at a cost of $922,000.

 

Under the most restrictiveprovisions of the Company’s long-term debt indentures and short-term creditarrangements, retained earnings (plus dividends declared on Common Stock)available for the distribution of cash dividends on Common Stock were$40,503,066 at December 31, 2002.

 

8.  LONG-TERM DEBT

 

The sale of the Company’sgenerating assets in 1999 significantly impacted long-term debt.  Proceeds from the sale were deposited withthe first mortgage trustee and subsequently withdrawn to redeem the remaining$2.5 million of 9.6% second mortgage bonds and $1.4 million of the variablerate 1996 Public Utility Refunding Revenue Bonds.  On June 14, 2000, the Company redeemed the 9.775% first mortgagebonds in the amount of $15.0 million and paid a related premium on theretirement of $2.1 million.

 

On October 19, 2000, theMaine Public Utilities Financing Bank (MPUFB) issued $9 million of itstax-exempt bonds due October 1, 2025 (the 2000 Series) on behalf of theCompany.  The proceeds have been placedin trust to be drawn down for the reimbursement of issuance costs and for theconstruction of qualifying distribution property.  As of December 31, 2002 and 2001, the proceeds in the trustaccount were $2.1 million and $5.7 million, respectively.  Pursuant to the long-term note issued undera loan agreement between the Company and the MPUFB, the Company has agreed tomake payments to the MPUFB for the principal and interest on the bonds.  Concurrently, pursuant to a letter of creditand reimbursement agreement, the Company caused a Direct Pay Letter of Creditfor an initial term of nineteen months, subsequently extended until June, 2004,to be issued by The Bank of New York for the benefit of the holders of suchbonds.  To secure the Company’sobligations under the letter of credit and reimbursement agreement, the Companyissued first and second mortgage bonds, in the amounts of $5 million and $4.525million, respectively.  The Company hasthe option of selecting weekly, monthly, annual or term interest rate periodsfor the 2000 Series, and, at issuance, selected the weekly interest period,with an initial interest rate of 4.35%. On November 20, 2000, the Company purchased an interest rate cap of 6%at a cost of $36,000, to expire November 2003, that applies to the 2000 and1996 Series.  At the end of 2002, thecumulative effective interest rate of the 2000 Series, including issuance costsand credit enhancement fees since issuance was 4.96%.

 

A similarly structured series of Bonds wasissued on behalf of the Company by the MPUFB in 1996, with $13.6 millionoutstanding due in 2021.  A direct payletter of credit was issued by The Bank of New York, which has been extended toJune 2004, and is secured by $14.4 million of second mortgage bonds.  At the end of 2002, the cumulative effectiveinterest rate of the 1996 series, including issuance costs and creditenhancement fees was 5.14%.

 

On May 29, 1998, FAME issued$11,540,000 of its Taxable Electric Rate Stabilization Revenue Notes, Series1998A (Maine Public Service Company) (the “Notes”) on behalf of theCompany.  The Notes were issued pursuant to, and are secured under, aTrust Indenture by and between FAME and Peoples Heritage Bank, Portland, Maine,as Trustee (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 

 

48

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Capital Reserve Fund, asrequired by 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 the Company and the Capital Reserve Fund held bythe Trustee, which was approximately $2.4 million at the end of 2002 and2001.  The Company has issued $4 millionof its first mortgage bonds and $7.54 million of its second mortgage bonds ascollateral for its performance under the Loan Note issue pursuant to the LoanAgreement.  The Notes will bear interest at a Floating Interest Rate andwill be adjusted weekly.  Since issuance, the average of these weeklyrates is 4.52%.  On June 1, 1998, the Company purchased an interest ratecap of 7% at a cost of $172,000, to expire June, 2008, to limit its interestrate exposure to quarterly U.S. LIBOR rates.  At the end of 2002, the cumulativeeffective interest rate, including issuance costs and credit enhancement fees,since issuance for this Series was 5.57%.

 

The MPUFB tax-exempt issues are subject to thesame restrictive covenants consistent with those discussed for the Company’srevolving credit arrangement in Note 6.

 

9.  STOCK COMPENSATION PLAN

 

Upon approval by theCompany’s shareholders in June of 2002, the Company adopted the 2002 StockOption Plan (the Plan).  The Planprovides designated employees of the Company and its Subsidiaries with stockownership opportunities and additional incentives to contribute to the successof the Company, and to attract, reward and retain employees of outstandingability.  The Plan is administered bythe members of the Performance and Compensation Committee of the Board, who arenot employees of the Company or any 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.

 

The Company accounts for thefair value of its grants under the plan in accordance with the expenseprovisions of  Statement of FinancialAccounting Standards (SFAS) No. 123, “Accounting for Stock-BasedCompensation.”  The effect of the grantson compensation expense for the year ended December 31, 2002 was immaterial.

 

The fair value of each option grant isestimated on the date of grant using the Black-Scholes option-pricing modelwith the following weighted-average assumptions used for grants: dividend yieldof 4.9 percent; expected volatility of 20 percent, risk-free interest rate of3.33%; and expected lives of 7 years.

 

A summary of the status of the Company’s stockoption plan as of December 31, 2002, and changes during the year then ended ispresented below:

 

|                                           |   | **Shares** |   | **Exercise  Price** |   |
|------------------------------------------------|--------|------------|--------|---------------------|--------|
| Options                                        |   |       |   |                |   |
| Outstanding at January 1, 2002                 |   | —     |   | —              |   |
| Granted                                        |   | 5,250      |   | $                   | 30.45  |   |
| Exercised                                      |   | —     |   | —              |   |
| Forfeited                                      |   | —     |   | —              |   |
|                                           |   |       |   |                |   |
| Outstanding at December 31, 2002               |   | 5,250      |   | $                   | 30.45  |   |
|                                           |   |       |   |                |   |   |
| Options exercisable at December 31, 2002       |   | 0          |   |                |   |
| Weighted-average fair value of options granted |   | $          | 3.67   |                |   |   |
|                                                |        |            |        |                     |        |  |  |

 

The following tablesummarizes information about fixed stock options outstanding at December 31,2002:

 

|                           |   | **Options  Outstanding**             |   | **Options  Exercisable**                             |       |
|--------------------------------|--------|--------------------------------------|--------|------------------------------------------------------|------------|
| **Range of  Exercise  Prices** |   | **Number  Outstanding at  12/31/02** |   | **Weighted-  Average  Remaining  Contractual  Life** |       | **Weighted-  Average  Exercise  Price** |   | **Number  Exercisable at  12/31/02** |   | **Weighted-  Average Exercise  Price** |   |
| $                              | 30.45  |                                 | 5,250  |                                                 | 9.5  years |   | 30.45 |   | — |   | — |   |
|                                |        |                                      |        |                                                      |            |  |  |  |  |  |  |  |

 

49

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10.  BENEFIT PLANS

 

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

The Company has an insurednon-contributory defined benefit pension plan covering substantially allemployees.  Benefits under the plan arebased on employees’ years of service and compensation prior to retirement.

The Company’s policy has beento fund pension costs accrued.  TheCompany made a tax-deductible contribution of $276,570 for the 2002 plan yearin January, 2003.  No contribution wasnecessary for the 2001 and 2000 plan years.

 

**HealthCare Benefits**

In addition to providingpension benefits, the Company provides certain health care benefits to eligibleemployees and retirees.  All employeesshare in the cost of their medical benefits, in addition to plan deductiblesand coinsurance payments, totaling approximately 11.26% in 2002.  In 2002, certain amendments were made to theplan, including the following. Effective with retirements after January 1, 1995 and employees hiredbefore January 1, 2003, retirees will be eligible for retiree medical coverageafter completing twenty years of service, subject to a contributionschedule.  Employees hired after January1, 2003 will be eligible for retiree medical coverage after completingtwenty-five years of service; however, their spouse will not be eligible forcoverage.  For employees hired afterDecember 31, 1999 and prior to January 1, 2003, spousal retiree medicalcoverage 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.

 

Based on prior Maine PublicUtilities Commission (MPUC) accounting orders, the Company established aregulatory asset of approximately $1,061,000, representing deferredpostretirement benefits.  As an elementof its four-year rate plan, the Company began recovering these deferredexpenses over a ten-year period, along with the annual expenses in excess ofpay-as-you-go expenses, starting in 1996. The Company made a payment of $354,000 to fund the 401(h) subaccount ofthe Pension Trust for non-union retiree medical payments on September 14,2000.  On December 28, 1999and December 27, 2001, and 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 medicalpayments.  These payments providefunding for future postretirement health care costs at such time as customersare paying for these costs in their rates. For purposes of determining the accrued postretirement benefit cost asof December 31, 2002 the health care cost trend rate used was 9% in 2003 andgraded down to 4.0% in 2012, remaining at that level thereafter.  These rates have a significant effect on theamounts reported for the health care plan. A one-percentage-point change in the trend rates would have thefollowing effects:

 

|                                                         |   | **One-Percentage-Point** |   |
|--------------------------------------------------------------|--------|--------------------------|--------|
| **(Dollars in Thousands)**                                   |   | **Increase**             |   | **Decease** |   |
|                                                         |   |                     |   |   |   |
| Effect on total cost of service and interest cost components |   | $                        | 125    |   | $ | (100 | ) |
|                                                         |   |                     |   |   |   |
| Effect on postretirement benefit obligation                  |   | $                        | 1,242  |   | $ | (1,016 | ) |

 

The following table setsforth the plans’ change in benefit obligation, change in plan assets, fundedstatus and assumptions as of December 31, 2002 and 2001:

 

| **(Dollars  in Thousands)**             |   | **Pension  Benefits** |   | **Health Care  Benefits** |   |
|-----------------------------------------|--------|-----------------------|--------|---------------------------|--------|
|                                    |   | **2002**              |   | **2001**                  |   | **2002** |   | **2001** |   |
| **Changes in  benefit obligation**      |   |                  |   |                      |   |   |   |   |   |
| Benefit obligation at beginning of year |   | $                     | 16,604 |                      | $      | 15,115 |   | $ | 7,930 |   | $ | 5,343 |   |
| Service cost                            |   | 411                   |   | 342                       |   | 175 |   | 108 |   |
| Interest cost                           |   | 1,132                 |   | 1,105                     |   | 577 |   | 431 |   |
| Amendments                              |   | —                |   | —                    |   | (699 | ) | — |   |
| Termination benefits                    |   | 231                   |   | —                    |   | 171 |   | — |   |
| Actuarial loss                          |   | 640                   |   | 1,184                     |   | 1,233 |   | 2,474 |   |
| Employee’s contributions           |   | —                |   | —                    |   | 1 |   | — |   |
| Benefits paid                           |   | (1,051                | )      | (1,011                    | )      | (460 | ) | (426 | ) |
| Administrative expenses                 |   | (128                  | )      | (130                      | )      | (3 | ) | N/A |   |
| Benefit obligation at end of year       |   | 17,839                |   | 16,605                    |   | 8,925 |   | 7,930 |   |
|                                         |        |                       |        |                           |        |  |  |  |  |  |  |  |  |

 

50

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| **(Dollars  in Thousands)**                                      |   | **Pension  Benefits** |   | **Health Care  Benefits** |   |
|------------------------------------------------------------------|--------|-----------------------|--------|---------------------------|--------|
|                                                             |   | **2002**              |   | **2001**                  |   | **2002** |   | **2001** |   |
| **Change in  plan assets**                                       |   |                  |   |                      |   |   |   |   |   |
| Fair value of plan assets atBeginning of year                    |   | 14,731                |   | 16,725                    |   | 2,644 |   | 2,334 |   |
| Actual return on plan assets                                     |   | (222                  | )      | (853                      | )      | (143 | ) | (164 | ) |
| Employee contributions                                           |   | —                |   | —                    |   | 1 |   | — |   |
| Employer contribution                                            |   | —                |   | —                    |   | 298 |   | 901 |   |
| Benefits paid                                                    |   | (1,051                | )      | (1,011                    | )      | (460 | ) | (426 | ) |
| Administrative expenses                                          |   | (128                  | )      | (130                      | )      | (3 | ) | N/A |   |
| Fair value of plan assets at end of year                         |   | 13,330                |   | 14,731                    |   | 2,337 |   | 2,645 |   |
| **Funded  Status**                                               |   | (4,509                | )      | (1,874                    | )      | (6,588 | ) | (5,285 | ) |
| Unrecognized transition (asset) obligation                       |   | (16                   | )      | (94                       | )      | 1,415 |   | 2,327 |   |
| Unrecognized prior service costs                                 |   | 658                   |   | 749                       |   | (527 | ) | (588 | ) |
| Unrecognized net actuarial (gain)/loss                           |   | 1,634                 |   | (506                      | )      | 4,708 |   | 3,290 |   |
| **Accrued  benefit cost**                                        |   | $                     | (2,233 | )                         | $      | (1,725 | ) | $ | (992 | ) | $ | (256 | ) |
|                                                             |   |                  |   |                      |   |   |   |   |   |
| Weighted-average assumptions asof December 31 (measurement date) |   |                  |   |                      |   |   |   |   |   |
| Discount rate                                                    |   | 6.50                  | %      | 7.00                      | %      | 6.50 | % | 7.00 | % |
| Expected return on plan assets                                   |   | 8.50                  | %      | 8.50                      | %      | 8.50 | % | 8.50 | % |
| Rate of compensation increase                                    |   | 4.00                  | %      | 4.50                      | %      | N/A |   | N/A |   |
|                                                                  |        |                       |        |                           |        |  |  |  |  |  |  |  |  |

 

The following table sets forth the plans’ netperiodic benefit cost for 2002, 2001, and 2000:

 
| **(Dollars in Thousands)**            |   | **Pension Benefits** |   | **Health Care Benefits** |   |
|---------------------------------------|--------|----------------------|--------|--------------------------|--------|
|                                  |   | **2002**             |   | **2001**                 |   | **2000** |   | **2002** |   | **2001** |   | **2000** |   |
| Service cost                          |   | $                    | 411    |                     | $      | 342 |   | $ | 350 |   | $ | 175 |   | $ | 108 |   | $ | 86 |   |
| Interest cost                         |   | 1,132                |   | 1,105                    |   | 1,072 |   | 577 |   | 431 |   | 381 |   |
| Expected return on plan assets        |   | (1,279               | )      | (1,277                   | )      | (1,229 | ) | (218 | ) | (192 | ) | (182 | ) |
| Amortization of transition obligation |   | (77                  | )      | (77                      | )      | (77 | ) | 213 |   | 213 |   | 213 |   |
| Amortization of prior service cost    |   | 90                   |   | 90                       |   | 90 |   | (60 | ) | (60 | ) | (60 | ) |
| Recognized net actuarial (gain)       |   | —               |   | (65                      | )      | (85 | ) | 176 |   | 29 |   | — |   |
| Net periodic benefit cost             |   | $                    | 277    |                     | $      | 118 |   | $ | 121 |   | $ | 863 |   | $ | 529 |   | $ | 438 |   |
|                                  |   |                 |   |                     |   |   |   |   |   |   |   |   |   |
| Additional FAS 88 Termination Benefit |   | $                    | 231    |                     | — |   | — |   | $ | 171 |   | — |   | — |   |

 

In November, 2002, a Voluntary EarlyRetirement Program (VERP) was offered to employees age 59 and over with 16years of service.  Of the 13 employeeseligible for the program, 10 accepted the program and retired effective January1, 2003.  The impact of the VERP isincluded in “Additional FAS 88 Termination Benefit,” above.

 

**RetirementSavings Plan**

The Company has adopted adefined contribution plan (under Section 401(k) of the Internal Revenue Code)covering substantially all of the Company’s employees.  Participants may elect to defer from 1% to15% of current compensation, and the Company contributes such amounts to theplan.  The Company also matchescontributions, with a maximum matching contribution of 2% of currentcompensation, an increase from 1% effective January 1, 2001.  Participants are 100% vested at all times incontributions made on their behalf.  TheCompany’s matching contributions to the plan were approximately $117,000,$114,000, and $59,000, in 2002, 2001, and 2000, respectively.

 

11.           SFAS No. 133

 

The Company has adoptedStatement of Financial Accounting Standards No. 133 (SFAS No. 133), “Accountingfor Derivative Instruments and Hedging Activities” effective January 1,2001.  The Company has reviewed itsbusiness activities and determined that interest rate caps on the three variablerate long-term debt issues qualify as derivatives in accordance with SFAS133.  On June 1, 1998, the Companypurchased 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 Rate Stabilization Notes, Series1998A, issued on behalf of the Company. On November 20, 2000, the Company purchased an interest cap of 6% at acost of $36,000 to expire November 2003 that applies to the 2000 and 1996Series of Maine Public Utilities Financing Bank’s (MPUFB) bonds issued onbehalf of the Company with outstanding balances of $9.0 million and $13.6million, respectively.  The Companyrecorded the cost of the caps as regulatory assets and is amortizing them overtheir useful lives.  SFAS 133 requirescompanies to 

 

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record derivatives on theirbalance sheet at fair value, with the related changes in fair value recorded aseither income/expense or as a component of other comprehensive income,depending on the intended use of the derivative.  For regulated entities, the amount the fair value is below thecarrying value is recorded as a regulatory asset to the extent the differenceis recoverable in the rate base of the Company.  The Company has adopted a policy under regulatory accounting thatrequires any gain on the sale of these regulatory assets to be recorded asregulatory liabilities and returned to rate payers.  The issuers of the caps related to the Company’s FAME and MPUFBdebt have estimated their fair values as of December 31, 2002 to be$41,590.  The corresponding unamortizedregulatory assets as of December 31, 2002 are $103,271.

 

12.           FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The Company’s financialinstruments consist primarily of cash in banks, receivables, and debt.  The carrying amounts for cash, receivables,and short-term debt approximate their fair value due to the short-term natureof these items.  At December 31, 2002,the Company’s long term debt had a carrying value and a fair value ofapproximately $33.8 million.

 

13.           COMMITMENTS, CONTINGENCIES, AND REGULATORY MATTERS

 

**IndustryRestructuring**

On May 29, 1997, legislationtitled “An Act to Restructure the State’s Electric Industry” was signed intolaw by the Governor of Maine.  Theprincipal provisions with accounting impact on the Company are as follows:

 

1.               Beginning on March 1, 2000, all consumers ofelectricity have the right to purchase generation services directly fromcompetitive electricity suppliers who will not be subject to rate regulation.

 

2.               By March 1, 2000, the Company, Central MainePower Company (CMP), and Bangor Hydro-Electric Company (BHE) must divestthemselves of all generation related assets and business functions except for:

 

a)              contracts with qualifying facilities, such asthe Company’s power contract with Wheelabrator-Sherman (W-S), and conservationproviders;

b)             nuclear assets, namely, the Company’sinvestment in the Maine Yankee Atomic Power Company;

c)              facilities located outside the United States,i.e., the Company’s hydro facility in New Brunswick, Canada; and

d)             assets that the MPUC determines necessary forthe operation of the transmission and distribution services.  The MPUC can grant an extension of thedivestiture deadline if the extension will improve the selling price.  For assets not divested, the utilities arerequired to sell the rights to the energy and capacity from these assets.  For more information about the Company’ssale of its generating assets, see “Capacity Arrangements — Generating AssetSale,” below.

 

3.               The Company will continue to providetransmission and distribution services which will be subject to continued rateregulation by the MPUC.

 

4.               Maine electric utilities will be permitted areasonable opportunity to recover legitimate, verifiable and unmitigable coststhat are otherwise unrecoverable as a result of retail competition in theelectric utility industry (so-called “stranded costs”).  The MPUC shall determine these strandedcosts by considering:

 

a)              the utility’s regulatory assets related togeneration, i.e., the Company’s unrecovered Seabrook investment;

b)             the difference between net plant investment ingeneration assets compared to the market value for those assets; and

c)              the difference between future contractpayments and the market value of the purchased power contracts, i.e., the W-Scontract.

 

5.               The MPUC shall include in the rates to becharged by the transmission and distribution utility decommissioning expensesfor Maine Yankee.  In 2003, and everythree years  thereafter until the strandedcosts are recovered, the MPUC shall review and adjust the stranded costrecovery amounts and related transition charges.  However, the MPUC may adjust the amounts at any point in timethat they deem appropriate.  Since thelegislation provides for our recovery of stranded costs by the transmission anddistribution company, the Company will continue to recognize existingregulatory assets and plant costs as provided by Emerging Issues Task Force97-4, “Deregulation of the Pricing of Electricity” (EITF 97-4).

 

6.               Billing and metering services will be subjectto competition beginning March 1, 2002, but permits the MPUC to establish anearlier date, no sooner than March 1, 2000. The implementation of this provision was subsequently delayed, and theCompany cannot predict when or if it will begin.

 

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7.               All competitive providers of retailelectricity must be licensed and registered with the MPUC and meet certainfinancial standards, comply with customer notification requirements, adhere tocustomer solicitation requirements and are subject to unfair trade practicelaws.  Competitive electricity providersmust have at least 30% renewable resources in their energy portfolios,including hydro-electric generation.

 

8.               A standard offer service will be available,ensuring access for all customers to reasonably priced electric power.  Unregulated affiliates of CMP and BHEproviding retail electric power are prohibited from providing more than 20% ofthe load within their respective service territories under the standard offerservice, while any unregulated affiliate of the Company does not have a similarrestriction.

 

9.               Employees other than officers, displaced as aresult of retail competition, will be entitled to certain severance benefitsand retraining programs.  These costswill be recovered through charges collected by the regulated transmission anddistribution company.

 

The Company believes that itselectric transmission and distribution operations continue to meet therequirements of SFAS 71 and that regulatory assets associated with thoseoperations, as well as any generation-related costs that the MPUC hasdetermined to be recoverable from ratepayers, also meet the criteria.  At December 31, 2002, $67.2 million ofregulatory assets remain on the Company’s books.  These assets will be amortized over various periods in accordancewith the MPUC approved Phase II filing.

 

For further discussion of thespecific impacts of the industry restructuring on the Company and relatedratemaking activity, see “MPUC Approves Stranded Cost Revenue RequirementsEffective March 1, 2002” and “MPUC Approves Elements of Rates Effective March1, 2000,” below.

 

**MPUCApproves Stranded Cost Revenue Requirements Effective March 1, 2002**

On May 8, 2001, the MPUCissued a notice of investigation to determine whether the Company’s annualrecovery of $12.5 million in stranded investment must be changed, effectiveMarch 1, 2002, to reflect any changes in its stranded costs.  On July 12, 2001, the Company filed itsproposal in which it advocated continuing the $12.5 million annual recovery ofstranded costs and also proposed to begin the recovery of deferred amountsassociated with the discounted rates it had made available to certainindustrial customers.  Also at issue inthe proceeding was an insurance refund associated with Maine Yankee, of whichthe Company’s share is $1,005,000.  Asof December 31, 2001, the Company reflected the refund as a miscellaneousdeferred credit.  In February, 2002, $854,000of the refund was applied to stranded costs and $151,000 of the refund wasapplied to other non-operating revenue. A Stipulation placed before the MPUC in January, 2002 included annualstranded cost recovery of $11,540,000 and a 15% sharing of the Maine Yankeeinsurance refund with the Company’s shareholders, thereby leaving the ratescharged to retail customers the same. This Stipulation was approved by the MPUC on January 7, 2002, and theappropriate order was issued on February 27, 2002.

 

**FERC ApprovesIncrease In Retail Transmission Rates**

The FERC approved wholesaletransmission rates effective June 1, 2002 in FERC Docket No. ER00-1053, aproceeding related to MPS’s Open Access Transmission Tariff (OATT).  On August 6, 2002, the Company notified theMPUC of its intention to implement the associated transmission component of itsretail transmission and distribution (T&D) rates, with the new rateseffective October 1, 2002.  The FERCmaintains jurisdiction over all transmission rates.  This implementation increased overall delivery rates byapproximately 2%.  The Company hasincreased its transmission rates subject to refund and issuance of a finalorder by FERC.  Although the Companyexpects FERC’s final order to support the rate increase without any furtheradjustments, it cannot predict the final outcome of this proceeding.

 

**MPUCApproves Elements of Rates Effective March 1, 2000**

On October 14, 1998, andsubsequently amended on February 9, 1999, August 11, 1999, and December 15,1999, the Company filed its determination of stranded costs, transmission anddistribution costs, and rate design with the MPUC.  The Company’s amended testimony supported its $95.7 millionestimate 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 toWheelabrator-Sherman, the obligation for remaining operating expenses andrecovery of the Company’s remaining investment in Maine Yankee, and therecovery of several other regulatory assets.

 

On October 15, 1999, theCompany filed with the MPUC a Stipulation resolving the revenue requirement andrate design issues for the Company’s transmission and distribution (T&D)utility.  This Stipulation was signed bythe Public Advocate and approval was recommended by the MPUC Staff.  Under the Stipulation, the Company’s totalannual T&D revenue requirement of $16,640,000, went into effect on March 1,2000.  This revenue requirement includesa 10.7% return on equity with a capital structure based on 51% common equity.  The Stipulation further provided that theprecise level of stranded cost recovery could not be determined until finaldetermination of all costs associated with the sale of the Company’s generatingassets, but did set forth some general principles concerning the Company’sultimate stranded costs recovery, including agreement that the major componentsof the Company’s stranded costs are legitimate, verifiable and unmitigable, andtherefore subject to recovery in rates.

 

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On January 27, 2000, the MPUCapproved a Stipulation in Phase II of Docket No. 98-577 that provided for therecovery in rates of the Company’s stranded investment.  The major element of the Phase IIStipulation was the $12.5 million of stranded investment recoverable annuallybeginning March 1, 2000, with that level of recovery set for two years.  This revenue requirement includes a returnon unrecovered stranded investment based on the capital structure approved bythe MPUC in its December 1, 1999 Order. The approved capital structure consists of 51% common equity with anauthorized return on equity of 10.7%. The Phase II Stipulation also allowed the Company to offset itsunrecovered stranded investment in Seabrook by approximately $7 million,(details provided in chart in “Capacity Arrangements­ — Generating AssetSale,” below) representing an amount equal to 35% of the available value fromthe sale of the generation assets.  Theparties to the Phase II Stipulation also resolved several rate design issues,principally the elimination of the inclining block rate for residentialcustomers.  In addition, the Company wasgranted several accounting orders incorporating certain accountingmethodologies used in determining the elements of stranded costs.  On August 4, 2000, the MPUC authorized theCompany to record the difference between the approved contracts for two largeindustrial customers and their current special discount rates, designed forcustomer retention, as revenue and a regulatory asset.  This flexible pricing adjustment resulted inrecognition of $200,000 and $961,000 of revenues and a corresponding regulatoryasset in 2002 and 2001, respectively. The annual revenue requirement associated with the recovery of strandedcosts will be reviewed at least every three years, and was reviewed in late2001.  See “MPUC Approves Stranded CostRevenue Requirements Effective March 1, 2002,” above, for additionalinformation.

 

**AlternativeRate Plan Filing**

On March 6, 2003, following aseries of informal meetings with the Office of Public Advocate and the MPUC,the Company submitted its formal “Request for Approval of Alternate Rate Plan”(MPUC Docket 2003-85).  The proposal(ARP) is a seven-year rate plan for its distribution delivery services with atarget implementation date on or before July 1, 2003.  The ARP is an alternative form of regulating MPS’s distributionassets, similar to the performance rate plans the MPUC has adopted for CentralMaine Power Company and Bangor Hydro-Electric Company.  The ARP has numerous components, all ofwhich have been designed to fit together as an integrated whole that will allowthe Company to continue to meet the unique needs of its Northern Mainecustomers.  Its key components include:an inflation index and productivity offset; an adjustment for the treatment ofextraordinary costs the Company may incur; an interest expense adjustment; aneconomic conditions adjustment; a shareholder earnings sharing mechanism;pricing flexibility; reliability, safety and service quality indices; and asharing mechanism for non-core revenues. The Company believes that the ARP will benefit customers by: (1)ensuring that customer’s electric service does not suffer under the planthrough the use of the above-described mechanisms; (2) providing predictableand stable rates; (3) providing an acceptable risk sharing environment; and (3)encouraging the Company to minimize its costs wherever possible.  At this time the Company cannot predict thenature or the outcome of any decision or ruling by the MPUC in this proceeding.

 

**SeabrookNuclear Power Project**

In 1986, the Company sold its1.46% ownership interest in the Seabrook Nuclear Power Project with a cost ofapproximately $92.1 million for $21.4 million. Both the MPUC and the FERC allowed recovery of the Company’s remaininginvestment in Seabrook Units 1 and 2, adjusted by disallowed costs and saleproceeds, with the costs being amortized over thirty years.

 

Recoverable Seabrook costs atDecember 31, 2002 and 2001 are as follows:

 
|                                            |   | **(Dollars in  Thousands)** |   |
|-------------------------------------------------|--------|-----------------------------|--------|
|                                            |   | **2002**                    |   | **2001** |   |
|                                            |   |                        |   |   |   |
| Recoverable Seabrook Costs                      |   | $                           | 43,136 |   | $ | 43,136 |   |
| Accumulated Amortization                        |   | (28,137                     | )      | (27,027 | ) |
| Recoverable Seabrook Costs, Net of Amortization |   | $                           | 14,999 |   | $ | 16,109 |   |

 

In March 2000, the Companywas allowed to offset $7.0 million of the recoverable Seabrook costs with the availablevalue from its deferred asset sale gain, as detailed in “CapacityArrangements-Generating Asset Sale,” below. The decrease in recoverable Seabrook costs represents monthlyamortization, recorded as amortization expense in January and February, 2000,and then as stranded costs applied to the deferred asset sale gain beginning inMarch, 2000, as described in “MPUC Approves Elements of Rates Effective March1, 2000,” above.

 

**NuclearInsurance**

In 1988, Congress extendedthe Price-Anderson Act for fifteen years and increased the maximum liabilityfor a nuclear-related accident.  In theevent of a nuclear accident, coverage for the higher liability now provided forby commercial insurance coverage will be provided by a retrospective premium ofup to $88.1 million for each reactor owned, with a maximum assessment of $10million per reactor for any year.  MaineYankee is not liable for “events” or “accidents” occurring after January 7,1999, when exemption was received from the Nuclear Regulatory Commission.  These limits are also subject to inflationindexing at five-year intervals as well as an additional 5% surcharge, shouldtotal claims exceed funds available to pay such claims.  Based on the Company’s 5% equity ownershipin Maine Yankee (see Note 5, “Investments in Associated Companies”), theCompany’s share of any retrospective premium would not exceed approximately$2.9 million or $.5 million annually, without considering inflation indexing.

 

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**CapacityArrangements**

 

**GeneratingAsset Sale**

On July 7, 1998, the Companyand WPS Power Development, Inc., (WPS-PDI) signed a purchase and sale agreementfor the Company’s electric generating assets. WPS-PDI agreed to purchase 91.8 megawatts of generating capacity for$37.4 million, which was 3.2 times higher than the net book value of theassets.  The gain from the asset salereduced stranded cost revenue requirements, as discussed in “MPUC ApprovesElements of Rates Effective March 1, 2000,” above.

 

On June 8, 1999, afterreceiving all of the major regulatory approvals, the Company completed the saleto WPS-PDI for $37.4 million.  TheCompany’s 5% ownership in Maine Yankee was not part of the sale, since theplant is being decommissioned.  Afterpaying Canadian, Federal and State income taxes, the remaining proceeds, alongwith interest in the trust account, were used to reduce the Company’sdebt.  The gain from the sale iscurrently deferred, and is being recognized according to the MPUC’s decision onthe Company’s determination of stranded costs, transmission and distributioncosts, and rate design.  The componentsof the deferred gain are 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 |   | (19.0                     | )      |
| Remaining deferred gain                        |   | $                         | .4     |   |

 

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*      Gross proceeds were increased by $1.05 million before tax inSeptember 2001 due to an MPUC approved settlement between CMP and other formerowners of Wyman Unit No. 4, including the Company.  The proceeds increased the deferred gain and further reducedstranded costs.

 

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

 

As part of the generatingasset sale on June 8, 1999, the Company has entered into two indemnityobligations with the purchaser, WPS-PDI. First, the Company 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,the Company 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.

 

**MaineYankee**

The Company owns 5% of theCommon Stock of Maine Yankee, which operated an 860 MW nuclear power plant (the“Plant) in Wiscasset, Maine.  On August6, 1997, the Board of Directors of Maine Yankee voted to permanently ceasepower operations and to begin decommissioning the Plant.

 

On September 1, 1997, MaineYankee estimated the sum of the future payments for the closing,decommissioning and recovery of the remaining investment in Maine Yankee to beapproximately $930 million, of which the Company’s 5% share would beapproximately $46.5 million.  InDecember 1998, June 1999, September 2000, February 2001, December 2001, March2002, May 2002, and again in September, 2002, Maine Yankee updated its estimateof decommissioning costs based on the Settlement.  Legislation enacted in Maine in 1997 calls for restructuring theelectric utility industry and provides for recovery of decommissioning costs,to the extent allowed by federal regulation, through the rates charged by thetransmission and distribution companies. Based on the Maine legislation and regulation precedent established bythe FERC in its opinion relating to the decommissioning of the Yankee Atomicnuclear plant, the Company believes that it is entitled to recoversubstantially all of its share of such costs from its customers and, as ofDecember 31, 2002 is carrying on its consolidated balance sheet a regulatoryasset and a corresponding liability in the amount of $22.15 million, whichreflects the Company’s 5% share of Maine Yankee’s September 2002 revisedestimate of the remaining decommissioning costs less actual decommissioningpayments made since then.

 

The MPUC, on January 27, 2002,approved a Stipulation providing for the recovery of stranded investment, for atwo-year period March 1, 2002 until February 29, 2004, which includes theCompany’s share of Maine Yankee decommissioning expenses, Maine Yankeereplacement power costs, and the remaining Maine Yankee investment.  As of December 31, 2002, deferred fuel of$13.1 million is reflected as a regulatory asset, which includes the MaineYankee replacement power costs, as well as deferred Wheelabrator-Sherman fuelcosts.  Additionally, the Company hasdeferred $22.2 million related to uncollected Maine Yankee decommissioningcosts.

 

In May 2000, Maine Yankeeterminated its decommissioning operations contract with Stone & WebsterEngineering Corporation 

 

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(Stone & Webster) pursuantto terms of the contract.  Stone &Webster disputed Maine Yankee’s grounds for the termination.  In June 2000 Stone & Webster filed a voluntarypetition under Chapter 11 of the United States Bankruptcy Code with the UnitedStates Bankruptcy Court for the District of Delaware.

 

Upon the contracttermination, Maine Yankee temporarily assumed the general contractor role andentered into interim agreements with Stone & Webster and obtainedassignments of several subcontracts in order to allow decommissioning work tocontinue and to avoid the adverse consequences of an abrupt or inefficientdemobilization from the Plant site. Decommissioning of the Plant site continued with major emphasis directedto maintaining the schedule on critical-path projects such as construction ofan independent spent fuel storage installation (ISFSI) and preparation of thePlant’s reactor vessel for eventual shipment to an off-site disposalfacility.  After assessing its long-termalternatives for safely and efficiently completing the decommissioning,including evaluating proposals from prospective successor general contractors,on January 26, 2001, Maine Yankee announced that it would continue to managethe project itself.

 

In June 2000, FederalInsurance Company (Federal), which had provided performance and payment bondsin the amount of approximately $38.5 million each in connection with thedecommissioning operations contract, filed a declaratory-judgment complaintagainst Maine Yankee in the Bankruptcy Court in Delaware, which wassubsequently transferred to the United States District Court in Maine.

 

The complaint alleged thatMaine Yankee had improperly terminated the decommissioning operations contractwith Stone & Webster and had failed to give proper notice of thetermination to Federal under the contract, and that Federal had no furtherobligations under the bonds.

 

After extensive discovery andresolution of certain preliminary issues by the court, in December 2001 MaineYankee and Federal entered into a settlement agreement pursuant to whichFederal paid Maine Yankee $44 million on January 18, 2002.  The settlement was reflected on MaineYankee’s 2001 financial statements. That amount represents full payment under the performance bond, plus anadditional amount under the payment bond reflecting certain payments previouslymade by Maine Yankee to subcontractors and suppliers who had not been fullypaid by Stone & Webster.  MaineYankee deposited the payment in its decommissioning trust fund to offset pastand future expenses resulting from the failures of Stone & Webster.

 

Maine Yankee has continued topursue its claim for damages that was originally filed against Stone &Webster and its parent corporations in August 2000 in the Bankruptcy Court inDelaware.  After recognizing the paymentfrom Federal, Maine Yankee has asserted a right to recover an additional $21million in that court from the bankruptcy estates.  In February 2002, Stone & Webster filed a claim forapproximately $7 million against Maine Yankee in the Bankruptcy Court inDelaware for alleged breaches of contract and to subordinate any Maine Yankee’sclaims.  On May 30, 2002, the courtconcluded extensive hearings and argument by allowing a claim in favor of MaineYankee under section 502 (c) of the Bankruptcy Code, in the estimated amount of$20.8 million against each of the three principal estates (jointly andseverally).  The Court’s ruling alsoeffectively precluded approximately $4 million of Stone & Webster’s February2002 claim against Maine Yankee, while offering no opinion or findings on theremainder, the resolution of which will, if necessary, be the subject offurther motions and proceedings.  Theactual cash amount to be recovered by Maine Yankee on this allowed claimremains contingent on a number of factors beyond Maine Yankee’s control,including without limitation the extent to which the bankruptcy estatesultimately have assets available to pay the claim, the ultimate disposition ofStone & Webster’s February 2002 claim, possible reconsideration of theruling in the future based on actual expenses of completing thedecommissioning, and the effect, if any, of any appeal of the May 30 decisionby the bankruptcy estates.  Maine Yankeetherefore cannot predict the final outcome of the Bankruptcy Court proceeding.

 

Federal legislation enactedin 1987 directed the DOE to proceed with the studies necessary to develop andoperate a permanent high-level waste (spent fuel) repository at Yucca Mountain,Nevada.  The project has encountereddelays, and the DOE has indicated that the permanent disposal site is notexpected to open before 2010, although originally scheduled to open in 1998.

 

In accordance with theprocess set forth in the legislation, in February 2002 the Secretary of Energyrecommended the Yucca Mountain site to the President for the development of anuclear waste repository, and the President then recommended development of thesite to the Congress.  As provided inthe statutory procedure, the State of Nevada formally objected to the site inApril 2002 and in July 2002 the Congress overrode the objection.  Construction of the repository requires theapproval of the NRC, upon application of the DOE and after a publicadjudicatory hearing as well as second NRC approval after completion ofconstruction to operate the facility. Maine Yankee cannot predict the timing or results of those proceedings.

 

In November, 1997, the U.S.Court of Appeals for the District of Columbia Circuit confirmed the obligation ofthe DOE under the Nuclear Waste Policy Act of 1982 to take responsibility forspent nuclear fuel from commercial reactors in January 1998.  After an unsuccessful effort by Maine Yankeein the same court to compel the DOE to take Maine Yankee’s spent fuel, in June1998 Maine Yankee filed a claim for money damages in the U.S. Court of FederalClaims for the costs associate with the DOE’s default.  In November 1998 the Court granted summaryjudgment in favor of Maine Yankee, ruling the DOE had violated its contractualobligations, but leaving the amount of damages incurred by Maine Yankee forlater determination by the Court.  Sincethen the parties have been engaged in extensive discovery and resolution ofpre-trial issues in the damages phase of the proceeding.  Maine Yankee is pursuing its claim fordetermination of damages vigorously, but cannot predict the outcome or timingof the determination.

 

At the same time, as aninterim measure until the DOE meets its contractual obligation to dispose ofMaine Yankee’s spent fuel at Yucca Mountain or elsewhere, Maine Yankeeconstructed an independent spent fuel storage installation (ISFSI), utilizingdry-cask storage, 

 

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on the Plant site and is in theprocess of transferring the spent fuel from the spent-fuel pool to theindividual 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’scurrent decommissioning costs estimate is based on an assumption that itsoperation of the ISFSI will end in 2023, but the actual period of operation andcost may vary.

 

On January 15, 2003, MaineYankee notified NAC International (NAC), the contractor responsible forproviding for the fabrication of the spent-fuel casks and transferring the fuelto the casks and the casks to the ISFSI, that Maine Yankee was terminating itscontract with NAC pursuant to the terms of the contract.  NAC had been experiencing financialdifficulties and had requested relief 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 had indicated that itdisputes Maine Yankee’s basis for terminating the contract and has served MaineYankee with a demand to arbitrate the dispute, while at the same time theparties have been in negotiations to resolve the situation.  In the meantime, Maine Yankee has enteredinto contracts with the major subcontractors and resumed the transfer of fuelto the ISFSI under its own management Maine Yankee believes that itstermination of the NAC contract was legally justified, but cannot predict theoutcome of the negotiations or arbitration proceeding.

 

On February 28, 2003, theNuclear Regulatory Commission approved Maine Yankee’s License TerminationPlan.  The LTP was approved without anyunexpected conditions.

 

In accordance with a planapproved by the Securities and Exchange Commission, Maine Yankee has startedthe redemption of its Common Stock periodically through 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     |             |
|                               |   | 165,500                      |   | 8,275             |   | $                       | 1,099,262 |                 |             |   |

 

**MEPCO**

The Company also owns 7.49%of the Common Stock of Maine Electric Power Company, Inc., (MEPCO).  MEPCO owns and operates a 345-KV (kilovolt)transmission line about 180 miles long which connects the NB Power system withthe New England Power Pool.

 

**Wheelabrator-Sherman**

The Company was ordered intoa Power Purchase Agreement (PPA) with Wheelabrator-Sherman (W-S) in 1986, whichrequired the purchase of the entire output (up to 126,582 MWH per year) of a17.6 MW biomass plant through December 31, 2000.  The PPA was subsequently amended in 1997, with W-S agreeing toprice reductions of $10 million through the end of the original term inexchange for an up-front payment of $8.7 million in May, 1998.  The MPUC’s December, 1997 approval of theamended PPA included a determination that the up-front payment would be treatedas stranded cost and, therefore, recovered in rates of the transmission anddistribution company, as discussed in “MPUC Approves Elements of RatesEffective March 1, 2000,” above.  Totalstranded cost included as a regulatory asset under the caption “deferred fueland purchased energy cost” in the accompanying balance sheet related to thiscontract is $13.1 million and $12.1 million at December 31, 2002 and 2001,respectively.

 

The Company and W-S alsoagreed to renew the PPA for an additional six years at agreed-upon prices andan 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 W-S after March 1, 2000 are reflected as strandedcosts.

 

The Company estimates itsremaining commitment to purchase power under this contract to be $47.2 millionfrom January 1, 2003 through 2006.  TheCompany has entered a contract whereby WPS-PDI takes delivery of the powerthrough February 28, 2002 at market prices, and beginning March 1, 2002, EnergyAtlantic, the Company’s wholly-owned marketing subsidiary, will be takingdelivery of 40% of W-S’s output and WPS-PDI will take the remainder.  The Company estimates that the remainingstranded costs will be $30.0 million through 2006, assuming arrangementssimilar to the one with WPS-PDI and EA will be in place for that period.

 

**WPSComplaint**

On October 30, 2000, WPSEnergy Services (WPS), a Competitive Electricity Provider (CEP) offering retailsales of electricity in the Company’s service territory, filed a Complaint(Docket No. 00-894) against the Company, as well as a Petition to Alter orAmend the MPUC’s September 2, 1998 Order in Docket No. 98-138.

 

57

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The Complaint alleged thatthe Company violated various provisions of Chapter 304 of the MPUC’sRegulations governing relations between the Company and all CEPs, including theCompany’s own marketing subsidiary, Energy Atlantic, LLC (EA).  According to the Complaint, various of theCompany’s employees engaged in conduct that either awards EA a competitiveadvantage over other CEPs or burdened WPS with an unfair disadvantage relativeto EA.  These allegations included suchpractices as denying WPS information made available to EA, or providing EA withinformation about WPS’s customers that is not available publicly.  The Company did not believe it in any wayviolated any provisions of Chapter 304 and so argued to the MPUC.

 

In its September 2, 1998Order in Docket No. 98-138 authorizing the formation of EA, the Commissionallowed the Company and EA to share the services of certain employees undercertain conditions on the grounds that such sharing was in the public interestand would not have any anti-competitive effect on the retail market forelectricity.  WPS claims that thesharing does not conform to the conditions set forth in the Order and that, inany event, the Commission should now find such sharing not in the publicinterest, thereby amending its original September 2, 1998 Order.

 

The Complaint and Petition toAmend the September 2, 1998 Order, in addition to requesting a prohibition onthe sharing of certain employees, particularly Maine Public Service Company’sGeneral Counsel, also seeks a formal investigation of the Complaint, penaltiesfor any violations of the Commission’s rules and certain specific relief forviolations of Chapter 304.

 

In its response, the Companystrongly denied the allegations in the WPS Complaint and asked the Commissionto dismiss the Complaint and for Summary Judgment in its favor.

 

On May 1, 2001, theCommission issued its Order in this matter, finding that some counts in the WPSComplaint should be dismissed but that others raised factual issues that couldbe resolved only through a more formal hearing process.  The Commission declined, however, to takeinitial jurisdiction over the Complaint. Instead, the Commission ordered the parties to submit their dispute tothe informal dispute resolution process set forth in MPS’s Chapter 304Implementation Plan.  Under this Plan,the dispute must be submitted to an independent law firm which must issue itsdecision within 30 days.  Only if thematter is not resolved to both parties’ satisfaction would the Commission thentake jurisdiction over the dispute.  TheCommission also stated that it would open an investigation into the issues ofwhether MPS’s General Counsel’s dual role with MPS and EA is inherentlyproblematic and the standards that should govern any MPS employees who alsoprovide services to EA.

 

The parties submitted thedispute to an independent arbitrator who issued his proposed findings on June29, 2001.  The arbitrator found that MPSdid not violate any provisions of Chapter 304, except for the Company’sunintentional failure to identify WPS as a Standard Offer Service provider onits March and April 2000 bills to customers. The arbitrator recommended that MPS refund to WPS its billing fees forthese two months, approximately $18,000. On July 5, 2001, the Company and WPS informed the Commission of theiracceptance of the arbitrator’s findings. As a result, the Commission, in its July 13, 2001 Order, stated that itwould not be necessary for it to further address the allegations in the WPScomplaint, even though it would continue its investigation into the sharing ofemployee services.

 

On March 6, 2002, theCompany, WPS and the Public Advocate filed with the MPUC a Stipulationresolving all remaining issues in the investigation.  The Stipulation contained several provisions that clarified theextent to which the Company’s senior management could become involved in theaffairs of EA and included restrictions and requirements governing the directcontact between the Company’s senior management and EA personnel for all butone designated executive.  TheStipulation also specifically prohibited one employee, (the “designatedexecutive”) from being involved in certain types of Company activities,knowledge of which could gain EA a competitive advantage in the retailmarket.  Finally, the Stipulation gavethe MPUC the right to conduct an annual audit to determine whether EA and theCompany are complying with Chapter 304. The costs of this audit, up to $10,000, shall be paid for by theCompany.  This Stipulation was approvedby the MPUC in an Order dated April 29, 2002. On February 24, 2003, EA announced its intent to withdraw from theNorthern Maine market due to the lack of profitability in that market.  EA will continue to serve its existingcontracts in Northern Maine until they expire through February 28, 2004.  EA believes that this action substantiallyrelieves the underlying concerns that gave rise to the WPS Complaint,particularly regarding the sharing of employees in connection with EA’s energymarketing within the Company’s service territory.  On February 21, 2003 the Company filed with the MPUC an“Application for Exemption of Chapter 304” and expects a ruling on theapplication during calendar year 2003.

 

**ConstructionProgram**

Expenditures on additions,replacements and equipment for the years ended December 31, 2002, 2001, and2000, along with 2003 estimated expenditures, are as follows:

 
|            |   | **2003**                   |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------|--------|----------------------------|--------|----------|--------|----------|--------|----------|--------|
|            |   | **(Unaudited  Estimates)** |   |     |   |     |   |     |   |
| Parent Company  |   |                       |   |     |   |     |   |     |   |
| Transmission    |   | $                          | 226    |     | $      | 1,007    |   | $        | 759    |   | $ | 1,162 |   |
| Distribution    |   | 3,907                      |   | 4,004    |   | 3,317    |   | 2,660    |   |
| General         |   | 1,267                      |   | 911      |   | 608      |   | 914      |   |
| Total Parent    |   | 5,400                      |   | 5,922    |   | 4,684    |   | 4,736    |   |
| Energy Atlantic |   | —                     |   | 6        |   | 23       |   | 10       |   |
| Total           |   | $                          | 5,400  |     | $      | 5,928    |   | $        | 4,707  |   | $ | 4,746 |   |

 

58

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14.  GUARANTOR ARRANGEMENTS

In November 2002, the FASBissued FIN No. 45 (FIN 45) “Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others aninterpretation of FASB Statements No. 5, 57, and 107 and rescission of FASBInterpretation No. 34.”  FIN 45 requiresthat a guarantor recognize, at the inception of a guarantee, a liability forthe fair value of the obligation undertaken by issuing the guarantee.  FIN 45 also requires additional disclosuresto be made by a guarantor in its interim and annual financial statements aboutits obligations under certain guarantees it has issued.  The accounting requirements for the initialrecognition 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.

 

As permitted under Maine law,we have agreements whereby we indemnify our officers and directors for certainevents or occurrences while the officer or director is, or was serving, at ourrequest in such capacity.  The term ofthe indemnification period is for the officer’s or director’s lifetime.  The maximum potential amount of futurepayments we could be required to make under these indemnification agreements isunlimited; however, we have a Director and Officer insurance policy that limitsour exposure and enables us to recover a portion of any future amountspaid.  As a result of our insurancepolicy coverage, we believe the estimated fair value of these indemnificationagreements is minimal.  All of theseindemnification agreements were grandfathered under the provisions of FIN 45 as they were in effect prior toDecember 31, 2002.  Accordingly, we haveno liabilities recorded for these agreements as of December 31, 2002.

 

15.  QUARTERLY INFORMATION (unaudited)

 

 Quarterly financial data for the two years ended December 31, 2002 is asfollows:

 
|                      |   | **(Dollars in Thousands Except Per Share Amounts)** |   |
|---------------------------|--------|-----------------------------------------------------|--------|
|                      |   | **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-net          |   | 115                                                 |   | 51 |   | 44 |   | (265 | ) |
| Net income                |   | $                                                   | 2,105  |   | $ | 398 |   | $ | 3,522 |   | $ | 518 |   |
|                      |   |                                                |   |   |   |   |   |   |   |
| Earnings per common share |   | $                                                   | 1.34   |   | $ | .25 |   | $ | 2.24 |   | $ | .33 |   |

 
|                      |   | **2001 by Quarter** |   |
|---------------------------|--------|---------------------|--------|
|                      |   | **1st**             |   | **2nd** |   | **3rd** |   | **4th** |   |
|                      |   |                |   |   |   |   |   |   |   |
| Operating Revenues        |   |                |   |   |   |   |   |   |   |
| Maine Public Service      |   | $                   | 9,863  |   | $ | 6,458 |   | $ | 6,557 |   | $ | 8,902 |   |
| Energy Atlantic           |   | 12,206              |   | 1,331 |   | 2,491 |   | 1,890 |   |
| Total Revenues            |   | 22,069              |   | 7,789 |   | 9,048 |   | 10,792 |   |
|                      |   |                |   |   |   |   |   |   |   |
| Operating expenses        |   | 18,713              |   | 8,038 |   | 8,074 |   | 8,513 |   |
| Operating income (loss)   |   | 3,356               |   | (249 | ) | 974 |   | 2,279 |   |
| Interest charges          |   | 429                 |   | 367 |   | 299 |   | 196 |   |
| Other income-net          |   | 112                 |   | (67 | ) | 28 |   | 95 |   |
| Net income (loss)         |   | $                   | 3,039  |   | $ | (683 | ) | $ | 703 |   | $ | 2,178 |   |
|                      |   |                |   |   |   |   |   |   |   |
| Earnings per common share |   | $                   | 1.93   |   | $ | (.43 | ) | $ | .44 |   | $ | 1.39 |   |
|                           |        |                     |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

59

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(2)                                  Financial Statement Schedules

 

Included in Part IV of thisreport:

 

ScheduleII - Valuation of Qualifying Accounts and Reserves

 

Schedules other than thoselisted above are omitted for the reason that they are not required or are notapplicable, or the required information is shown in the financial statements ornotes thereto.

 

(3)                                  Exhibits

 

Exhibits for Maine PublicService Company are listed in the Index to Exhibits E-1 to E-7.

 

The MPUC Order approving theReorganization of the Company into a Holding Company Structure, Docket No.02-676, (Exhibit 99(an) of the Company’s 2002 Form 10-K) is also included onPages O-1 to O-21.

 

(b)         A Form 8-K was filed on:

 

•                                          October 18, 2002, covering the boardauthorization for reorganization described under Item 5, Other Events.

 

•                                          January 23, 2003, covering the election ofDavid N. Felch as a Director, described under Item 5, Other Events.

 

•                                          February 14, 2003, press release datedFebruary 14, 2003 reporting the Company’s financial results for the fourthquarter of 2002 and for the year 2002, under Item 7, Financial Statements andExhibits.

 

•                                          February 28, 2003, reporting the filing of anew alternative rate plan and performance based rate structure and EnergyAtlantic’s focus on Southern Maine markets and the cessation of marketing inNorthern Maine, under Item 5, Other Events.

 

60

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Signatures

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis report to be signed on its behalf by the undersigned, hereunto dulyauthorized, on the 28th of March, 2003.

 

MAINE PUBLIC SERVICE COMPANY

 

 
| By:                                                | /s/ Michael A. Thibodeau |   |
|----------------------------------------------------|--------------------------|--------|
| Michael A. Thibodeau                               |
| Vice President, Controller  and Chief Risk Officer |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons in the capacities and on the date indicated.

 
| **Signature**          |   | **Title**                           |     | **Date** |   |
|------------------------|--------|-------------------------------------|----------|----------|--------|
|                   |   |                                |
| /s/ G. Melvin Hovey    |   | Chairman of the Board and  Director | 3/7/2003 |
| (G. Melvin Hovey)      |   |                                |
|                   |   |                                |
| /s/ J. Nicholas Bayne  |   | President and Director              | 3/7/2003 |
| (J. Nicholas Bayne)    |   |                                |
|                   |   |                                |
| /s/ Robert E. Anderson |   | Director                            | 3/7/2003 |
| (Robert E. Anderson)   |   |                                |
|                   |   |                                |
| /s/ D. James Daigle    |   | Director                            | 3/7/2003 |
| (D. James Daigle)      |   |                                |
|                   |   |                                |
| /s/ Richard G. Daigle  |   | Director                            | 3/7/2003 |
| (Richard G. Daigle)    |   |                                |
|                   |   |                                |
| /s/ David N. Felch     |   | Director                            | 3/7/2003 |
| (David N. Felch)       |   |                                |
|                   |   |                                |
| /s/ J. Gregory Freeman |   | Director                            | 3/7/2003 |
| (J. Gregory Freeman)   |   |                                |
|                   |   |                                |
| /s/ Deborah L. Gallant |   | Director                            | 3/7/2003 |
| (Deborah L. Gallant)   |   |                                |
|                   |   |                                |
| /s/ Nathan L. Grass    |   | Director                            | 3/7/2003 |
| (Nathan L. Grass)      |   |                                |
|                   |   |                                |
|                   |   | Director                            | 3/7/2003 |
| (J. Paul Levesque)     |   |                                |
|                   |   |                                |
| /s/ Lance A. Smith     |   | Director                            | 3/7/2003 |
| (Lance A. Smith)       |   |                                |
|                        |        |                                     |          |          |        |  |  |  |  |  |

 

61

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Schedule II

**Maine Public Service Company &Subsidiary**

**Valuation of Qualifying Accounts& Reserves**

**For the Years Ended December 31,2002, 2001 and 2000**

 
|                                             |   |                                 |   | **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             |   |                                 |   |                       |   |                                                  |   |   |   |   |   |
|                                             |   |                                 |   |                       |   |                                                  |   |   |   |   |   |
| 2002                                             |   | 216,500                              |   | 377,774                    |   | 123,082                                               |   | 503,474 |   | 213,882 |   |
|                                             |   |                                 |   |                       |   |                                                  |   |   |   |   |   |
| 2001                                             |   | 334,690                              |   | 78,820                     |   | 108,598                                               |   | 305,608 |   | 216,500 |   |
|                                             |   |                                 |   |                       |   |                                                  |   |   |   |   |   |
| 2000                                             |   | 215,000                              |   | 352,739                    |   | 102,444                                               |   | 335,493 |   | 334,690 |   |

 

62

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**CERTIFICATIONS**

 

I, J. Nicholas Bayne, certify that:

 

1.                                       I have reviewed this annual report on Form10-K of Maine Public Service Company (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 with respectto 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’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; 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  28, 2003 |   |
|-------------------------|-----------------|--------|
|                    |
| /s/ J. Nicholas Bayne   |            |
| J. Nicholas Bayne       |
| Chief Executive Officer |
|                         |                 |        |  |

 

63

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I, Larry E. LaPlante, certifythat:

 

1.               I have reviewed this annual report on Form10-K of Maine Public Service Company (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 the registrant’sinternal 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  28, 2003 |   |
|---------------------------------------------------------|-----------------|--------|
|                                                    |
|                                                    |
| /s/ Larry E. LaPlante                                   |            |
| Larry E. LaPlante                                       |
| Vice President, Treasurer,  and Chief Financial Officer |
|                                                         |                 |        |  |

 

64

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**INDEX TO EXHIBITS**

 

Certain of the following exhibits are filed herewith.  Certain other of the following exhibits haveheretofore been filed with the Commission and are incorporated herein byreference.  (* indicates filed herewith)

 
| 3(a)   |   | Restated  Articles of Incorporation with all amendments through May 8, 1990.  (Exhibit 3(a) to 1990 Form 10-K)                                              |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                             |
| 3(b)   |   | By-laws  of the Company, as amended through May 12, 1987.  (Exhibit 3(b) to 1987 Form 10-K)                                                                 |
|   |   |                                                                                                                                                             |
| 4(a)   |   | Indenture  of Mortgage and Deed of Trust defining the rights of the holders of the  Company’s First Mortgage Bonds.   (Exhibit 4(a) to 1980 Form 10-K) |
|   |   |                                                                                                                                                             |
| 4(b)   |   | First  Supplemental Indenture.  (Exhibit 4(b)  to 1980 Form 10-K)                                                                                           |
|   |   |                                                                                                                                                             |
| 4(c)   |   | Second  Supplemental Indenture.  (Exhibit 4(c)  to 1980 Form 10-K)                                                                                          |
|   |   |                                                                                                                                                             |
| 4(d)   |   | Third  Supplemental Indenture.  (Exhibit 4(d)  to 1980 Form 10-K)                                                                                           |
|   |   |                                                                                                                                                             |
| 4(e)   |   | Fourth  Supplemental Indenture.  (Exhibit 4(e)  to 1980 Form 10-K)                                                                                          |
|   |   |                                                                                                                                                             |
| 4(f)   |   | Fifth  Supplemental Indenture.  (Exhibit A to  Form 8-K dated May 10, 1968)                                                                                 |
|   |   |                                                                                                                                                             |
| 4(g)   |   | Sixth  Supplemental Indenture.  (Exhibit A to  Form 8-K dated April 10, 1973)                                                                               |
|   |   |                                                                                                                                                             |
| 4(h)   |   | Seventh  Supplemental Indenture.  (Exhibit A to  Form 8-K dated November 7, 1975)                                                                           |
|   |   |                                                                                                                                                             |
| 4(i)   |   | Eighth  Supplemental Indenture.  (Exhibit 4(i)  to 1980 Form 10-K)                                                                                          |
|   |   |                                                                                                                                                             |
| 4(j)   |   | Ninth  Supplemental Indenture.  (Exhibit B to  Form 10-Q for the second quarter of 1978)                                                                    |
|   |   |                                                                                                                                                             |
| 4(k)   |   | Tenth  Supplemental Indenture.  (Exhibit 4(k)  to 1980 Form 10-K)                                                                                           |
|   |   |                                                                                                                                                             |
| 4(l)   |   | Eleventh  Supplemental Indenture.  (Exhibit 4(l)  to 1982 Form 10-K)                                                                                        |
|   |   |                                                                                                                                                             |
| 4(m)   |   | Indenture  defining the rights of the holders of the Company’s 9 7/8% debentures.  (Exhibit A to Form 8-K, dated June 10,  1970)                       |
|   |   |                                                                                                                                                             |
| 4(n)   |   | Indenture  defining the rights of the holders of the Company’s 14% debentures.  (Exhibit 4(n) to 1982 Form 10-K)                                       |
|   |   |                                                                                                                                                             |
| 4(o)   |   | Twelfth  Supplemental Indenture.  (Exhibit 4(o)  to Form 10-Q for the quarter ended September 30, 1984)                                                     |
|   |   |                                                                                                                                                             |
| 4(p)   |   | Thirteenth  Supplemental Indenture.  (Exhibit 4(p)  to Form 10-Q for the quarter ended September 30, 1984)                                                  |
|   |   |                                                                                                                                                             |
| 4(q)   |   | Fourteenth  Supplemental Indenture, Dated July 1, 1985.   (Exhibit 4(q) to 1985 Form 10-K)                                                                  |
|   |   |                                                                                                                                                             |
| 4(r)   |   | Fifteenth  Supplemental Indenture, Dated March 1, 1986.   (Exhibit 4(r) to 1985 Form 10-K)                                                                  |
|   |   |                                                                                                                                                             |
| 4(s)   |   | Sixteenth  Supplemental Indenture, Dated September 1, 1991.  (Exhibit 4(s) to the Company’s 1991 Form 10-K)                                            |
|   |   |                                                                                                                                                             |
| 4(t)   |   | Seventeenth  Supplemental Indenture, Dated April 1, 1997.   (Exhibit 4(t) to the Company’s 1998 Form 10-K)                                             |

 

E-1

----

 
| 4(u)     |   | Eighteenth  Supplemental Indenture, Dated April 1, 1998.   (Exhibit 4(u) to the Company’s 1998 Form 10-K)                                                                                                                                                                                                                                       |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4(v)     |   | Nineteenth  Supplemental Indenture, Dated May 1, 1998.   (Exhibit 4(v) to the Company’s 1998 Form 10-K)                                                                                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                      |
| 4(w)     |   | Twentieth  Supplemental Indenture, Dated October 1, 2000.  (Exhibit 4(w) to the Company’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 the Company’s 1980 Form 10-K)                                                                                      |
|     |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10(a)(2) |   | Twentieth  Amendment to Joint Ownership Agreement.   (Exhibit 10(a)(6) to the Company’s 1986 Form 10-K)                                                                                                                                                                                                                                         |
|     |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10(a)(3) |   | Twenty-Second  Amendment to Joint Ownership Agreement.   (Exhibit 10(a)(3) to the 1988 Form 10-K)                                                                                                                                                                                                                                                    |
|     |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10(b)(1) |   | Capital  Funds Agreement, dated as of May 20, 1968 between Maine Yankee Atomic Power  Company and the Company.  (Exhibit  10(b)(1) to 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 the Company.  (Exhibit 10(b)(2) to  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 Form 10-Q for the  quarter ended March 31, 1983)                                                                                                                                                                                        |
|     |   |                                                                                                                                                                                                                                                                                                                                                      |
| 10(c)(2) |   | Agreement,  as of June 20, 1969, among the Company and the other Maine Participants.  (Exhibit 10(c)(2) to 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 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 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 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 the Company.  (Exhibit 10(c)(6) to 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 the Company.   (Exhibit 10(c)(7) to Form 10-Q for the quarter ended March 31, 1983) |

 

E-2

----

 
| 10(c)(8) |   | Assignment  Agreement as of January 1, 1981, between Central Maine Power Company and the  Company.  (Exhibit 10(c)(8) to Form  10-Q for the quarter ended March 31, 1983)                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 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 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 Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(f)    |   | Credit  Agreement, dated as of October 8, 1987 among the Registrant 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 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 the Registrant 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 Form 8-K dated September  22, 1989)                                                                                                                                                                                                                                                           |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(h)    |   | Amendment  No. 2, dated as of June 5, 1992, to the Revolving Credit Agreement, among the  Registrant 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 the Company’s 1992 Form  10-K)                                                                                                                                                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(i)    |   | Indenture  of Second Mortgage and Deed of Trust, dated as of October 1, 1985, made by  the Registrant to J. Henry Schroder Bank and Trust Company, as Trustee.  (Exhibit 10(i) to 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 the  Company’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  the Company’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 the Registrant 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 the Registrant to Continental Illinois National Bank and Trust  Company, as Trustee.  (Exhibit 10(j)  to Form 8-K dated November 1, 1985) |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(m)    |   | Employment  Contract between Frederick C. Bustard and Maine Public Service Company dated  August 22, 1989.  (Exhibit 10(h) to  1989 Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(n)    |   | Employment  Contract between Paul R. Cariani and Maine Public Service Company dated  November 5, 1999.  (Exhibit 10(n) to  1999 Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(o)    |   | Employment  Contract between Stephen A. Johnson and Maine Public Service Company dated  November 5, 1999.  (Exhibit 10(o) to  1999 Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(p)    |   | Employment  Contract between Larry E. LaPlante and Maine Public Service Company, dated  November 5, 1999.  (Exhibit 10(p) to  1999 Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|     |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10(q)    |   | Employment  Contract between William L. Cyr and Maine Public Service Company, dated  November 5, 1999.  (Exhibit 10(q) to  1999 Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

E-3

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| 10(r)  |   | Employment  Contract between Michael A. Thibodeau and Maine Public Service Company, dated  December 11, 2000.  (Exhibit 10(r) to  the Company’s 2000 Form 10-K)                                                                                                                                                                                                                                                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10(s)  |   | Maine  Public Service Company, Prior Service Executive Retirement Plan, dated May  12, 1992.  (Exhibit 10(s) to 1992 Form  10-K)                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10(t)  |   | Maine  Public Service Company Pension Plan.   (Exhibit 10(t) to 1992 Form 10-K)                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10(u)  |   | Maine  Public Service Company Retirement Savings Plan.  (Exhibit 10(u) to 1992 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 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 the Registrant 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 the Company’s  1998 Form 10-K)                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10(y)  |   | Fifth  Supplemental Indenture of the Second Mortgage and Deed of Trust dated October  1, 2000.(Exhibit 10(y) to the Company’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 the  Company’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 the Company’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 the Company’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 the Company’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 the Company’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.   (Exhibit 10(ae) to the Company’s 2001 Form 10-K) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10(af) |   | Master  Power Purchase & Sale Agreement between Energy Atlantic, LLC and Duke  Energy Trading and Marketing, LLC dated September 19, 2001.  (Exhibit 10(af) to the Company’s 2001 Form  10-K)                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10(ag) |   | Sixth  Supplemental Indenture of the Second Mortgage and Deed of Trust dated June 1,  2002.  (Exhibit 10.1 to the Company’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 the Company’s Form 10-Q for the quarter ended June  30, 2002.)                                                                                                                                                                                                                                                                                                                                              |

 

E-4

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| 10(ai) |   | Employee  Continuity Agreement between James Nicholas Bayne and Maine Public Service  Company dated July 25, 2002.  (Exhibit  10.3 to the Company’s Form 10-Q for the quarter ended June 30, 2002.)                                   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                            |
| 11     |   | Not  applicable.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                            |
| 12     |   | Not  applicable.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                            |
| 16     |   | March  8, 1996 Letter regarding change in certifying accountant from Deloitte &  Touche LLP. (Exhibit 16 to the Company’s 1996 Form 10-K)                                                                                              |
|   |   |                                                                                                                                                                                                                                            |
| 18     |   | Not  applicable.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                            |
| 19     |   | Not  applicable.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                            |
| 21     |   | Maine  and New Brunswick Electrical Power Company, Limited, a Canadian corporation.                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                            |
| 22     |   | Not  applicable.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                            |
| 23     |   | Not  applicable.                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                            |
| 99(a)  |   | Agreement  of Purchase and Sale between Maine Public Service and Eastern Utilities  Associates, dated April 7, 1986.   (Exhibit 28(a) to 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 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 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 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 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 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 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 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 Form 10-K)                                                                             |

 

E-5

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| 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  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  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 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 the Registrant, 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 Form  10-K) |
|   |   |                                                                                                                                                                                                                                                                                           |
| 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 the Registrant, the signatory Banks  thereto and The Bank of New York, as Agent.   (Exhibit 99(n) to 1997 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 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 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 the Company’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 the Company’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 the Company’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 the Company’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 the Company’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  the Company’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 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 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 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 Form 10-K)                                                                                                                                          |

 

E-6

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| 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 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 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 the Company’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 the Company’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 the Company’s 2000 Form 10-K)                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                               |
| 99(af)  |   | Agreement  between the Maine Public Utilities Commission, the Company, Central Maine  Power Company and Bangor Hydro-Electric Company dated January 10, 2001  regarding Maine Yankee Power Costs.   (Exhibit 99(af) to the Company’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)   (Exhibit 99(ag) to the Company’s 2001 Form 10-K)                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                               |
| 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 Company’s May 24, 2001 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.)  (Exhibit 99(ai) to the Company’s 2001 Form 10-K) |
|    |   |                                                                                                                                                                                                                                                                               |
| 99(aj)  |   | Order  of the Maine Public Utilities Commission dated November 20, 2001 in Docket  No. 01-384 (Entitlement Agreements).   (Exhibit 99(aj) to the Company’s 2001 Form 10-K)                                                                                               |
|    |   |                                                                                                                                                                                                                                                                               |
| 99(ak)  |   | Further  Settlement Agreement between the Maine Public Utilities Commission, the  Public Advocate and the Company dated January 24, 2002 regarding Maine Yankee  Power costs. (Exhibit 99(ak) to the Company’s 2001 Form 10-K)                                                |
|    |   |                                                                                                                                                                                                                                                                               |
| 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).  (Exhibit 99(al) to the  Company’s 2001 Form 10-K)                                                         |
|    |   |                                                                                                                                                                                                                                                                               |
| 99(am)  |   | 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 the Company’s Form 10-Q  for the quarter ended March 31, 2002.)                                    |
|    |   |                                                                                                                                                                                                                                                                               |
| *99(an) |   | Order  of the Maine Public Utilities Commission dated March 26, 2003, (with attached  Stipulation) in Docket No. 02-676, Request for Approval of Reorganization of  the Company into a Holding Company Structure, Pages O-1 through O-21.                                          |
|    |   |                                                                                                                                                                                                                                                                               |
| *99(ao) |   | Letter  to Shareholders and Q&A with President from the 2002 Annual Report.  (See Pages 2 to 4 and 13 to 15,  respectively.)                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                               |
| *99(ap) |   | Certification  of Financial Reports of Company’s 2002 Form 10-K, dated March 28, 2003.                                                                                                                                                                                        |

 

 

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