**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

**FORM 10-K**

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

**EXCHANGE ACT OF 1934**

**Forthe fiscal year ended December 31, 2006**

**Commission File No. 333-103749**

**Maine & Maritimes Corporation**

(Exact name of registrant as specified in its charter)

**Maine**

(State or otherjurisdiction of incorporation or organization)

**30-0155348**

(I.R.S. EmployerIdentification No.)

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

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

Securities registeredpursuant to Section 12(b) of the Act:

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

Name of each exchange on whichregistered: **American Stock Exchange**

Securities registered pursuant to Section 12(g) ofthe Act:

**None**

Indicate by check mark if awell-known seasoned issuer, as defined in Rule 405 of the Securities ActYes o.   No x.

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o.   No x.

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x.   No o.

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):  Large accelerated filer   o. Accelerated filer  o. Non-accelerated filer  x.

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

Aggregate market value ofthe voting stock held by non-affiliates at June 30, 2006: $25,254,138.

The number of sharesoutstanding of each of the issuer’s classes of common stock as of March 16,2007.

Common Stock, $7.00 parvalue—1,650,849 shares

**DOCUMENTSINCORPORATED BY REFERENCE**

Portionsof the Company’s definitive Proxy Statement to be filed pursuant to Regulation14A no later than 120 days after December 31, 2006, which is the end ofthe fiscal year covered by this report, are incorporated by reference into Part III.

 

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**MAINE & MARITIMES CORPORATION**

**FORM 10-K**

**For the Fiscal YearEnded December 31, 2006**

***For Glossary of Terms, see Page iv***

**TABLEOF CONTENTS**

|           | ** ** | **PART I**                                                                                                        | ** ** | ** ** | ** ** |
|-----------|------------|------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Item 1.   |       | Business                                                                                                               |       | 1          |       |
|      |       | General Description of Parent Company and Subsidiaries                                                                 |       | 2          |       |
|      |       | Employees                                                                                                              |       | 5          |       |
|      |       | Affiliates and Associated Companies                                                                                    |       | 5          |       |
|      |       | Financial Information about Geographic Areas                                                                           |       | 6          |       |
|      |       | Financial Information about Segments                                                                                   |       | 6          |       |
|      |       | Competitive Conditions                                                                                                 |       | 6          |       |
|      |       | Company  Financial Information                                                                                         |       | 6          |       |
| Item  1a. |       | Risk Factors                                                                                                           |       | 6          |       |
| Item 2.   |       | Properties                                                                                                             |       | 11         |       |
| Item  3.  |       | Legal Proceedings                                                                                                      |       | 12         |       |
| Item 4.   |       | Submission of Matters to a Vote of Security Holders                                                                    |       | 15         |       |
|      | ** ** | **PART II**                                                                                                       | ** ** | ** ** | ** ** |
| Item 5.   |       | Market for Registrant’s Common Equity, Related  Shareholder Matters, and Issuer Purchases of Equity Securities    |       | 16         |       |
| Item  6.  |       | Selected  Financial Data                                                                                               |       | 19         |       |
| Item 7.   |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations Annual Performance Summary |       | 20         |       |
|      |       | Overview  of Company Strategy                                                                                          |       | 21         |       |
|      |       | 2006 Operating Results for the Consolidated Entity                                                                     |       | 23         |       |
|      |       | Detailed Analysis of Changes in Financial Condition by  Operating Segment                                              |       | 24         |       |
|      |       | Critical  Accounting Policies                                                                                          |       | 30         |       |
|      |       | Off-Balance  Sheet Arrangements                                                                                        |       | 33         |       |
|      |       | Operating Capital and Liquidity                                                                                        |       | 35         |       |
|      |       | Capital  Resources                                                                                                     |       | 37         |       |
| Item 7a.  |       | Quantitative and Qualitative Disclosures About Market  Risk                                                            |       | 41         |       |
| Item 8.   |       | Financial Statements and Supplementary Data                                                                            |       | 43         |       |
|      |       | Reports of Independent Registered Public Accounting  Firm                                                              |       | 43         |       |
|      |       | Statements of Consolidated Operations                                                                                  |       | 44         |       |
|      |       | Statements of Consolidated Cash Flows                                                                                  |       | 45         |       |
|      |       | Consolidated  Balance Sheets—Assets                                                                               |       | 46         |       |
|      |       | Consolidated Balance Sheets—Capitalization and  Liabilities                                                       |       | 47         |       |
|      |       | Statements of Consolidated Common Shareholders’ Equity                                                            |       | 48         |       |
|      |       | Statements  of Long-Term Debt                                                                                          |       | 49         |       |
|      |       | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                             |       |       |       |
|      |       | 1. Accounting Policies                                                                                                 |       | 50         |       |
|      |       | 2. Income Taxes                                                                                                        |       | 59         |       |
|      |       | 3.  Discontinued Operations                                                                                            |       | 61         |       |
|      |       | 4. Segment Information                                                                                                 |       | 64         |       |
|      |       | 5. Investments in Associated Companies                                                                                 |       | 69         |       |
|           |       | 6. Short-Term Credit Arrangements                                                                                      |       | 71         |       |

 

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|           |       | 7. Accumulated Other Comprehensive Income (Loss)                                                |       | 72         |       |
|-----------|------------|-------------------------------------------------------------------------------------------------|------------|------------|------------|
|      |       | 8. Long-Term Debt                                                                               |       | 73         |       |
|      |       | 9.  Stock Compensation Plan                                                                     |       | 75         |       |
|      |       | 10. Benefit Programs                                                                            |       | 76         |       |
|      |       | 11. Fair Value of Financial Instruments                                                         |       | 84         |       |
|      |       | 12. Commitments, Contingencies and Regulatory Matters                                           |       | 84         |       |
|      |       | 13.  Guarantor Arrangements                                                                     |       | 90         |       |
|      |       | 14. Acquisitions                                                                                |       | 91         |       |
|      |       | 15. Issuance of  Maricor Properties Stock Acquired by Ashford Investments, Inc.                 |       | 94         |       |
|      |       | 16.  Capital Leases                                                                             |       | 95         |       |
|      |       | 17. Quarterly  Information                                                                      |       | 96         |       |
| Item 9.   |       | Changes In and Disagreements With Accountants on  Accounting and Financial Disclosure           |       | 97         |       |
| Item 9A.  |       | Controls and Procedures                                                                         |       | 97         |       |
| Item  9B. |       | Other  Information                                                                              |       | 97         |       |
|      | ** ** | **PART III**                                                                               | ** ** | ** ** | ** ** |
| Item 10.  |       | Directors, Executive Officers and Corporate Governance                                          |       | 98         |       |
| Item 11.  |       | Executive Compensation                                                                          |       | 100        |       |
| Item 12.  |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters |       | 100        |       |
| Item 13.  |       | Certain Relationships and Related Transactions, and  Director Independence                      |       | 100        |       |
| Item 14.  |       | Principal Accountant Fees and Services                                                          |       | 100        |       |
|      | ** ** | **PART IV**                                                                                | ** ** | ** ** | ** ** |
| Item 15.  |       | Exhibits, Financial Statement Schedules                                                         |       | 101        |       |
|      |       | SIGNATURES                                                                                      |       | 102        |       |
|      |       | SCHEDULE I                                                                                      |       | 103        |       |
|      |       | SCHEDULE II                                                                                     |       | 107        |       |
|      |       | CEO / CFO CERTIFICATIONS                                                                        |       |       |       |
|      |       | INDEX TO  EXHIBITS                                                                              |       | 108        |       |

 

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**Glossaryof Terms**
| ABO        |   | Accumulated Benefit Obligation                                                 |
|------------|--------|--------------------------------------------------------------------------------|
| AFUDC      |   | Allowances for the cost of equity and borrowed funds  used during construction |
| AMEX       |   | American Stock Exchange                                                        |
| BHE        |   | Bangor Hydro-Electric Company                                                  |
| CES        |   | Competitive Energy Supplier                                                    |
| CMMS       |   | Computerized Maintenance Management System                                     |
| CMP        |   | Central Maine Power Company                                                    |
| Cornwallis |   | Cornwallis Court Developments Ltd                                              |
| CPCN       |   | Certificate of Public Convenience and Necessity                                |
| DOE        |   | Department of Energy                                                           |
| EA         |   | Energy Atlantic, LLC                                                           |
| Eastcan    |   | Eastcan Consulting Engineers                                                   |
| EMF        |   | Electro-magnetic Fields                                                        |
| EPS        |   | Earnings per Share                                                             |
| FAME       |   | Finance Authority of Maine                                                     |
| FASB       |   | Financial Accounting Standards Board                                           |
| FERC       |   | Federal Energy Regulatory Commission                                           |
| FIN        |   | FASB Interpretation Number                                                     |
| Gould      |   | Gould Electric Company                                                         |
| IBEW       |   | International Brotherhood of Electrical Workers                                |
| ISFSI      |   | Independent Spent Fuel Storage Installation                                    |
| kV         |   | Kilovolt                                                                       |
| LEEDTM |   | Leadership in Energy and Environmental Design                                  |
| LIBOR      |   | London InterBank Offering Rate                                                 |
| LOC        |   | Letter of Credit                                                               |
| MAM        |   | Maine & Maritimes Corporation                                         |
| M&R    |   | Morris & Richards Consulting Engineers                                |
| Me&NB  |   | Maine & New Brunswick Electrical Power  Company, Ltd                  |
| Mecel      |   | Mecel Properties Ltd                                                           |
| MEPCO      |   | Maine Electric Power Company, Inc.                                        |
| MPS        |   | Maine Public Service Company                                                   |
| MPUC       |   | Maine Public Utilities Commission                                              |
| MPUFB      |   | Maine Public Utility Financing Bank                                            |
| MTI        |   | Maricor Technologies, Inc.                                                |
| MW         |   | Megawatt                                                                       |
| MWH        |   | Megawatt hour                                                                  |
| MY         |   | Maine Yankee                                                                   |
| NB Power   |   | New Brunswick Power                                                            |
| NMISA      |   | Northern Maine Independent System Administrator                                |
| NOI        |   | Notice of Inquiry                                                              |
| NPPBC      |   | Net Periodic Postretirement Benefit Cost                                       |
| NPPC       |   | Net Periodic Pension Cost                                                      |
| NRC        |   | Nuclear Regulatory Commission                                                  |
| NRI        |   | Northeast Reliability Interconnect                                             |
| Pace       |   | Pace Engineering Limited                                                       |
| PBO        |   | Projected Benefit Obligation                                                   |
| OATT       |   | Open Access Transmission Tariff                                                |
| PCB        |   | Poly Chlorinated Bi-phenol                                                     |

iv

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| PPA     |   | Power Purchase Agreement                    |
|---------|--------|---------------------------------------------|
| PUHCA   |   | Public Utility Holding Company Act          |
| RES     |   | RES Engineering, Inc.                  |
| SEC     |   | Securities and Exchange Commission          |
| SFAS    |   | Statement of Financial Accounting Standards |
| SOS     |   | Standard Offer Service                      |
| TMG     |   | The Maricor Group                           |
| TMGC    |   | The Maricor Group, Canada Ltd               |
| TMGNE   |   | The Maricor Group New England               |
| VEBA    |   | Voluntary Employee Benefit Association      |
| VERP    |   | Voluntary Employee Retirement Program       |
| WPS     |   | WPS Resources Corporation                   |
| WPS-PDI |   | WPS-Power Development, Inc.            |
| WS      |   | Wheelabrator-Sherman                        |

 

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**PART I**

**Item 1.**                        Business

***General***

Maine &Maritimes Corporation (“MAM” or the “Company”), a Maine corporation, became aholding company effective June 30, 2003, when all shares of Maine PublicService Company (“MPS”) common stock were converted into an equal number ofshares of MAM common stock, which are listed on the American Stock Exchange (“AMEX”)under the symbol “MAM”. MAM is the parent holding company for the followingwholly-owned subsidiaries:

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

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

3.                 The Maricor Group(“TMG”) and its wholly-owned United States subsidiary The Maricor Group NewEngland (“TMGNE”) and TMG’s wholly-owned Canadian subsidiary The Maricor Group,Canada Ltd (“TMGC”), both of which are classified as discontinued operations;

4.                 MaricorTechnologies, Inc. (“MTI”), a wholly-owned United States subsidiaryclassified as discontinued operations.

MAM is also a 50% owner ofMaricor Properties Ltd, (“Maricor Properties”), a Canadian company formerlywholly-owned by MAM, and its wholly-owned Canadian subsidiaries CornwallisCourt Developments, Ltd (“Cornwallis”) and Mecel Properties Ltd (“Mecel”). MAMretained 100% of the economic rights and obligations of Mecel when it sold 50%of Maricor Properties; Mecel remains consolidated in these financialstatements, while the other components are reported under the equity method.Maricor Properties is also a 50% owner of Maricor Ashford, a joint venture withAshford Investments.

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

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*                    Maine &New Brunswick Electrical Power Company, Ltd and Energy Atlantic, LLC areinactive companies.

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***GeneralDescriptions of the Parent Company and its Subsidiaries:***

·       Maine &Maritimes Corporation is a holding company incorporated in the state of Maine,and is the ultimate parent company for all business segments. MAM maintainsinvestments in a regulated electric transmission and distribution utilityoperating within the state of Maine, United States of America and real estateinvestment and development companies in Canada, classified for financialreporting purposes as continuing operations. MAM also has investments inmechanical, electrical and plumbing/fire protection engineering, facility assetlifecycle management and energy efficiency companies within the United States andCanada, and a facilities asset lifecycle management and sustainability softwaredevelopment company in the United States. As of December 31, 2006, theseoperations were reclassified for financial reporting purposes to assets heldfor sale. MAM is headquartered in Presque Isle, Maine.

·       MainePublic Service Company is a regulated electric transmission and distributionutility serving all of Aroostook County and a portion of Penobscot County innorthern Maine. Since March 1, 2000, the date retail electric competitionin Maine commenced, customers in MPS’s service territory have been purchasingenergy from suppliers other than MPS. This energy comes from CompetitiveElectricity Suppliers (“CES”) or, if customers are unable or do not wish tochoose a competitive supplier, the Standard Offer Service (“SOS”) provider. SOSproviders are determined through a bid process conducted by the Maine PublicUtilities Commission (“MPUC”). MPS provides the transportation through itstransmission and distribution wires infrastructure. Its service area coversapproximately 3,600 square miles, with a population of 72,000. The utility isregulated by the Federal Energy Regulatory Commission (“FERC”) and the MPUC.MPS is headquartered in Presque Isle, Maine.

             MPS was originally incorporatedin the United States as the Gould Electric Company (“Gould”) in April 1917,by a special act of the Maine legislature in connection with the purchase andlease of all of the assets of the Maine & New Brunswick ElectricalPower Company, Ltd,  a Canadian company.Following the sale of its assets to Gould, Me&NB remained a subsidiary ofGould, and subsequently MPS. Me&NB was primarily a hydro-electricgenerating company. It owned and operated the Tinker hydro-electric station inNew Brunswick, Canada, until June 8, 1999, when these assets were sold byMPS to WPS Power Development, Inc. (“WPS-PDI”), a subsidiary of WPSResources Corporation (“WPS”), now known as Integrys.

             Following itsincorporation in the United States, Gould changed its name to Maine PublicService Company in August 1929. MPS was a privately held subsidiary of theConsolidated Electric & Gas Company until 1947, when its capital stockwas sold as a result of Consolidated Electric & Gas Company’s forceddivestiture. From 1947 until its corporate reorganization in 2003, MPS was thecorporate parent and traded under the stock symbol “MAP” on the AMEX. Until itsgenerating assets were sold on June 8, 1999, MPS produced electric energyfor retail and wholesale customers. From that date through March 1, 2000,MPS continued to purchase electric energy for sale to these customers. MPScontinues to provide transmission services to former wholesale energy customersand transmission and distribution services to retail customers in the serviceterritory; however, it does not provide electric energy supply.

             MPS’s research andanalyses indicate that its service area’s economy, once heavily influenced by asignificant military presence, continues to be dependent upon agricultural andthe forest products industries. Potato farming and processing and themanufacturing of forest products, principally lumber, plywood, and orientedstrand board, continue to be dominant economic forces within MPS’s servicearea. The growing of broccoli has added diversity to the region’s agriculturaleconomic base. Tourism, particularly related to snowmobiling and skiing,appears to be playing an increasing role in the area’s economy. The medicalindustry also represents a positive and growing 

2

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economic force within theregion, serving as a leading employer and job creation sector. Additionally, a42 megawatt windfarm was commissioned during 2006 in Mars Hill, Maine,representing the possibility for increased renewable energy resources in theservice area. However, data appears to suggest that the northern Maine economycontinues to lag behind national economic trends and is experiencing populationlosses based on the most recent census data and projections, particularly amongthe service area’s youth and young adults. Attracting new businesses and jobsto northern Maine in an effort to reverse out-migration trends appears to be acontinuing challenge to the area’s leaders and businesses, including MPS.

             As a result of itsservice area’s economic challenges, MPS has taken a lead role in forming apublic/private partnership for economic progress in cooperation with theNorthern Maine Development Commission. Managed by a private-sector investors’council, MPS and its staff are serving as private sector leaders in helping toexecute a rational and results-oriented economic development program. Theefforts of Aroostook Partnership for Progress are intended to increase the area’semphasis on economic development through improved focus and funding foreconomic development.

             Electric sales in theCompany’s territory are seasonal, and the Company’s results of operationsreflect this seasonal nature. The highest usage occurs during the five heatingseason months, from November through March, due to heating-relatedrequirements and shorter daylight hours. The rate year is divided into twoperiods, with higher rates in place in the winter months to encourageconservation. Also, due to the climate in the northern Maine area, the majorityof MPS’s construction program is completed during the spring, summer and fallmonths.

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

·       TheMaricor Group is a facilities engineering and solutions company providingmechanical, electrical and plumbing/fire protection engineering consultingdesign services, energy efficiency solutions, facilities condition assessments,lifecycle asset management solutions, and emissions reduction services focusingon sustainability and Leadership in Energy and Environmental Design (“LEEDTM”).TMG operates primarily within the New England region of the United States andthe eastern Canadian provinces, particularly Atlantic Canada. TMG was formed inNovember 2003, and is headquartered in Presque Isle, Maine, with officesin Boston, Massachusetts; Moncton and Saint John, New Brunswick; and Halifax,Nova Scotia. MAM is in the process of divesting its TMG operations, as part ofan overall shift in strategy described more fully in Item 7, “Management’sDiscussion and Analysis.”

·       TheMaricor Group New England is the New England subsidiary of The Maricor Groupoffering its parent company’s defined services primarily within New England,particularly the Commonwealth of Massachusetts with an office in Boston,Massachusetts. TMGNE, formerly RES Engineering, Inc., was acquired by TMGon June 15, 2004.

·       TheMaricor Group, Canada Ltd is the Canadian subsidiary of The Maricor Groupoffering its parent company’s defined services primarily within the easternCanadian provinces, particularly Atlantic Canada. Headquartered in Moncton, NewBrunswick, it maintains offices in Saint John, New Brunswick, as well asHalifax, Nova Scotia. TMGC acquired its first mechanical and electricalengineering services company, Eastcan Consulting Engineers (“Eastcan”), on December 1,2003. On June 1, 2004, TMGC acquired Morris & Richards ConsultingEngineers (“M&R”). On May 12, 2006, TMGC acquired the assets of PaceElectrical Engineering (“Pace”), an electrical engineering firm based inMoncton. All of these companies are now operating divisions of TMGC.

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·       MaricorProperties Ltd, 50% owned by MAM, is a Canadian real estate development,redevelopment and investment company. It seeks to develop or invest in publicand private facility projects involving the renewal or development of buildinginfrastructure within revitalization districts. It utilizes the services of TMGin its development and redevelopment projects. Maricor Properties Ltd wasorganized on May 28, 2004, in Nova Scotia, Canada. On June 30, 2006,Maricor Properties issued stock to Ashford Investments, Inc. (“Ashford”),resulting in 50% ownership for both MAM and Ashford. Prior to this stockissuance, Maricor Properties was a wholly-owned subsidiary of MAM. AshfordInvestments is an Atlantic Canadian real estate development, investment andmanagement firm which provides management services to Maricor Properties andits subsidiaries. As part of the corporate strategy, MAM will seek to divestits 50% share of Maricor Properties.

·       MecelProperties Ltd is a Canadian subsidiary of Maricor Properties Ltd and currentlyowns the office building housing the Halifax, Nova Scotia operating division ofThe Maricor Group, Canada Ltd. It was acquired by Maricor Properties on June 1,2004, in conjunction with the acquisition of M&R by TMGC. Under the termsof the sale of stock of Maricor Properties to Ashford, MAM retained 100% of theeconomic ownership of this subsidiary, with the expectation that either 50% ofMecel would be purchased by Ashford or that Mecel would be transferred to TMGCat a later date. As of December 31, 2006, Mecel remained solely owned byMAM.

·       CornwallisCourt Developments Ltd is a wholly-owned Canadian subsidiary of MaricorProperties, acquired on October 7, 2005. Cornwallis currently owns andoperates the J. Angus MacDonald Building located in Halifax, Nova Scotia,Canada.

·       MaricorProperties is an equal partner in Maricor Ashford Ltd, a joint venture withAshford. Maricor Ashford Ltd is a real estate development and redevelopmentcompany based in Moncton, New Brunswick, Canada. Since August 2006, thisjoint venture has been inactive.

·       MaricorTechnologies, Inc., formed on February 14, 2005, develops informationtechnology and software products for sustainable governance of facilities,infrastructure and buildings. On February 14, 2005, it purchased, througha three-way transaction, the “Strategic Asset Management” software technologyassets of Delinea Corporation of Dallas, Texas, which were formerly owned byHCI Systems Assets Management, LLC. The Maricor Group, which owns achannel market license for certain Atlantic Canadian and New England marketsand vertical sectors, utilizes the software in the delivery of its sustainableasset management services. MAM is in the process of divesting its MTIoperations as part of an overall change in strategy described in Item 7, “Management’sDiscussion and Analysis.”  MTI marketsits products throughout North America and is headquartered in Presque Isle,Maine, with an office in Portland, Maine.

             Maricor Technologies’software products include “iPlanTM” and “Building BlocksTM.”   iPlanTM is a web-based strategic planningtool used to quantify and prioritize capital investments required to maintainand preserve facilities and infrastructure assets. It automates the process ofdefining an organization’s capital needs, and assists in the identification ofcapital projects, quantifying replacement and renovation costs, and assigningpriorities based on various lifecycle, safety, and return-on-investmentmeasures. “Building BlocksTM” is a proactive computerized maintenance managementsystem (“CMMS”) software solution for managing both the total lifecycle ofassets and the daily operation of facilities.

·       Energy Atlantic, LLC is alicensed, but currently inactive, CES of retail electricity, and is classifiedas discontinued operations. EA formerly competed for electric supply customerswithin the northern and southern regions of the state of Maine as a CES from March 1,2000, through February 28, 2004, and also provided the Standard Offersupply for Central Maine Power 

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Company’s (“CMP’s”)territory from March 1, 2000, through February 28, 2002, and 20% ofthe medium non-residential SOS in MPS’s territory from March 1, 2000,through February 28, 2001.

***Employees***

At theend of 2006, the Company and its subsidiaries had the following employees:

| ** **                              | ** ** | **Employees** | ** ** |
|-----------------------------------------|------------|---------------|------------|
| ** **                              | ** ** | **2006**      | ** ** | **2005** | ** ** |
| Maine &  Maritimes Corporation |       |          | —     |   |   |   | 5 |   |   |
| Maine Public  Service Company           |       |          | 135        |   |   |   | 140 |   |   |
| The Maricor Group                       |       |          | 77         |   |   |   | 68 |   |   |
| Maricor  Technologies, Inc.        |       |          | 6          |   |   |   | 6 |   |   |
| **Total**                               | ** ** | ** **    | **218**    |   | ** ** | ** ** | **219** |   |   |

 

The Company’s consolidated payroll costs were $13.0million for 2006 and $12.1 million for 2005. The increase was due to theaddition of the former Pace employees at TMGC, a full year of MTI in 2006versus ten months in 2005, and normal salary increases. With the resignation ofthe former CEO, there were no employees remaining at MAM at December 31,2006; the Vice Presidents of MAM were transferred to the subsidiary for whichthey primarily work. All employees charge their labor dollars and associatedoverheads directly to the company or companies that benefit directly from thetask they are performing.

Approximately 37% of MPS’s labor force are members ofthe Local 1837 of the International Brotherhood of Electrical Workers (“IBEW”)and are covered under a collective bargaining agreement. On September 22,2005, the IBEW 1837 Union approved a four-year collective bargaining agreementfor the term of October 1, 2005, through September 30, 2009. Thisagreement was amended October 25, 2006, to reflect the freeze on futuresalary and service accruals in the Company’s Pension Plan. The Company is verypleased with the cooperative relationship between our union membership andManagement.

No employees of theCompany are covered under collective bargaining agreements that will expirewithin one year.

***Affiliates andAssociated Companies***

On June 30, 2006, Maricor Properties sold oneshare of stock representing a 50% ownership interest to Ashford InvestmentsInc. Management reviewed the characteristics of Maricor Properties subsequent tothis transaction in accordance with Financial Accounting Standards BoardInterpretation No. (“FIN”) 46(R), “*Consolidation of VariableInterest Entities, an Interpretation of ARB 51*,” and determined thatMAM remained the primary beneficiary of Mecel, but is not the primarybeneficiary of Maricor Properties, including the Vaughan Harvey building andCornwallis, as of the date of this transaction. Therefore, the assets andliabilities of Mecel remain consolidated in these financial statements, whilethe assets and liabilities of the other components of Maricor Properties are nolonger consolidated as of June 30, 2006. MAM’s investment in MaricorProperties is reported within “Investments in Associated Companies,” andreceivables from and payable to MAM and its wholly-owned subsidiaries fromMaricor Properties and its subsidiaries are presented within the lines “AccountsReceivable from Associated Companies,” and “Accounts Payable to AssociatedCompanies.”

Maricor Properties is an equal partner in Maricor AshfordLtd, a joint venture with Ashford Investments, Ltd., an unaffiliated realestate management company. Maricor Ashford Ltd is a real estate development andredevelopment company based in Moncton, New Brunswick, Canada. Managementreviewed the characteristics of this joint venture in accordance with FIN46(R), and determined that MAM is not the primary beneficiary of this jointventure. Accordingly, the activity of Maricor Ashford Ltd has 

5

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been recorded in thesefinancial statements under the equity method, and Maricor Ashford Ltd is notconsolidated with these financial statements.

MPS owns 5% of the common stock of Maine Yankee, whichoperated an 860 MW nuclear power plant (the “Plant”) in Wiscasset, Maine.On August 6, 1997, the Board of Directors of Maine Yankee voted topermanently cease power operations and to begin decommissioning the Plant. ThePlant experienced a number of operational and regulatory problems and did notoperate after December 6, 1996. The decision to close the Plantpermanently was based on an economic analysis of the costs, risks anduncertainties associated with operating the Plant compared to those associatedwith closing and decommissioning it. The Plant’s operating license from theNuclear Regulatory Commission (“NRC”) was due to expire on October 21,2008.

MPS also owns 7.49% of thecommon stock of Maine Electric Power Company, Inc., (“MEPCO”). MEPCO ownsand operates a 345-KV (kilovolt) transmission line about 180 miles long,which connects the New Brunswick Power (“NB Power”) system with the New EnglandPower Pool (“NEPOOL”).

***FinancialInformation about Geographic Areas***

See Note 4 to the attachedfinancial statements.

***FinancialInformation about Segments***

See Note 4 to the attachedfinancial statements

***CompetitiveConditions***

See Item 1a. below.

***Company FinancialInformation***

The public may read and copy any materials the Companyfiles with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,Washington, D.C. 20549. The public may obtain information on the operation ofthe Public Reference Room by calling the SEC at 1-800-SEC-0330.

The Company is anelectronic filer and the SEC maintains an Internet site that contains reports,proxy and information statements, and other information regarding issuers thatfile electronically with the SEC at http://www.sec.gov. The Company alsomaintains an Internet site containing such reports atwww.maineandmaritimes.com. All such reports, including annual reports on Form 10-K,quarterly reports on Form 10-Q, and current reports on Form 8-K,may be downloaded from such site without charge. Also listed at the Company’ssite under Investor Relations, Corporate Governance, is the Code of Ethics forSenior Financial Officers and all other Principal Executive Officers andManagers, as well as the Company’s policy regarding Insider Trading andDissemination of Inside Information.

**Item 1a.**                 RiskFactors

As with all companies, MAMis exposed to certain risk factors as a result of its operations. MAM hasidentified the following key risk factors for the Company as a whole and alsospecific to the regulated and unregulated industries in which MAM and itssubsidiaries operate.

***Overall Risks***

The following riskspertain to MAM as a whole, regardless of the industry in which a particularsubsidiary is operating.

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***Strategic Risk***

Management and the Boardhave revised the strategic direction of the Company, refocusing on growth ofthe core utility, and as described more fully in Item 7, “Management’sDiscussion and Analysis.”  This corporatestrategy includes many risks, including equity risk associated with changingshareholder base dependent on strategy chosen, the risk of not being able toidentify sufficient growth opportunities within the utility industry and therisks inherent in any change in strategy from redistribution of resources andthe time required to catch traction. In addition, changes in legislation andregulation could impact the success of the strategy as outlined below.

***Liquidity and Capital Formation Risk***

MAM’s current liabilities of $24.71 million as of December 31,2006, exceed its current assets of $13.53 million by $11.18 million, exposingMAM to the risk of being unable to fulfill its obligations in 2007. However, ofthese current liabilities, $12.97 million represents short-term borrowings,including the lines of credit with Bank of America and Katahdin Trust Company.MAM has taken steps to mitigate this short-term risk before and after year-end,including identification of options to reduce or defer costs.

In the long term,Management expects MAM’s cash flow to improve, with MPS’s recovery of deferredfuel costs currently deferred by MPS. Until 2007, the cash expenditures fordeferred fuel exceeded the recovery of stranded costs. With the expiration ofthe Wheelabrator-Sherman contract in December 2006, this position hasreversed, and recovery of stranded costs will exceed the cash outflows. Thesestranded cost free cash flows can be used, in part, to help fulfill theseobligations.

***Resignation of CEO***

MAM’s former ChiefExecutive Officer resigned in August 2006. The Company faces risks ofinstability and uncertainty during the current transition period until theBoard selects a new CEO. The Company has mitigated these risks by reallocatingthe CEO’s work and responsibilities to certain interim officers.

***Interest Rate and Debt Covenant Risk***

MAM, TMG and MPS have financial and other covenants ontheir financing arrangements. In the event of a default, the lenders couldrequire immediate repayment of the debt. This could also trigger increases ininterest rates, difficulty obtaining other sources of financing andcross-default provisions with the debt agreements.

As of December 31, 2006, MAM and TMG did not meetthe interest coverage ratios required by these debt covenants. Both Bank ofAmerica and Katahdin Trust Company provided waivers for compliance with thedebt covenants for the fourth quarter of 2006.

MAM and TMG experienced increases in their interestrates on the $4.0 million line of credit with Bank of America, and the $1.0million line of credit with Katahdin Trust Company, as a result of failing tocomply with the interest coverage ratio required by the debt covenants on theselines in 2006. Management is mitigating the risk of future increases throughthe re-negotiation of the debt covenants to consider the anticipateddivestitures of TMG and MTI.

MAM, TMG, MaricorProperties and MPS each have interest rate risk due to variable interest rateson financing arrangements. The Company has mitigated a portion of this risk byfixing interest rates on three MPS variable rate debt issues with a derivativeinterest rate swap transaction on September 9, 2003. See Item 8 of this Form 10-K,Note 7 to the Consolidated Financial Statements, “Accumulated OtherComprehensive Income (Loss),” which is hereby incorporated by this reference,for a discussion on the impact on MPS’s financial statements and furtherdescription of the interest rate swaps.

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***Attraction and Retention of Qualified Employees***

MAM primarily operates inservice sectors, and is heavily dependent on the attraction and retention ofqualified employees, including engineers and electricians. MAM maintainscompetitive wage and benefits packages for its employees to aid in attractingand retaining staff.

***Equity Price Risk***

The Maricor Group incurred equity price risk when itbought the stock of certain of its subsidiaries. Part of the consideration wasMAM stock. In the event that the price of MAM common stock is below a specifiedprice when the seller wishes to dispose of it, TMGC has agreed to pay thedifference. There were 27,723 shares outstanding pursuant to this kind ofagreement as of December 31, 2006. At a market price of $15.18 per shareon that date, the total exposure was approximately $606,000. A $1 decrease inMAM’s stock price would increase this obligation by approximately $28,000. A $1increase in MAM’s stock price would decrease this obligation by approximately$28,000.

Market price protection ofa different sort was given by Maricor Technologies when it acquired the HCIassets. Part of the consideration for that acquisition was MAM preferredstock which is convertible into 26,000 shares of MAM common stock on February 9,2009, subject to certain adjustments. To the extent that the market price ofMAM common stock is then below $25 per share, the number of shares issuable onconversion is ratably increased, which could result in further dilution of MAM’scommon stock.

***Legislation and Regulation***

Changes in legislation andregulation could impact MAM’s earnings and operations positively or negatively.Such changes could include changes in tax rates, changes in environmental orworkplace laws or changes in regulation of cross-border transactions.

***General Economic Conditions***

MAM, like all otherentities, is exposed to a certain amount of risk as a result of the generaleconomic conditions under which it operates. Such risks include the overalleconomy of the geographic region in which the entity operates and risk ofinflation.

***Collections Risk***

MAM’s subsidiariessometimes extend credit to their customers. This may be regulated, as in thecase of MPS, or under the terms of contracts or leases. In these situations,MAM bears the risk that it may not collect these funds. MAM partly mitigatesthis risk through the use of credit checks and monitoring of the accountsreceivable aging. MAM also maintains an allowance for uncollectible accountsfor accounts receivable that are unlikely to be collected.

***Information Technology***

MAM is subject to systemicrisks associated with information technology systems that could impact thecalculative outcome of billing determinations or the unintended release ofconfidential consumer information. MAM goes to significant lengths to stresstest its systems and protect against such events; however, the Company cannotwarrant that such risks do not exist.

***Regulated Utility***

The following are risksunique to the regulated utility. These risks will continue in the foreseeablefuture, and, in some cases, be more significant risks than experienced in thepast, due to the strategic focus on the regulated entity.

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***Legislation and Regulation***

MPS is a regulated utility, operating its distributionactivity under the jurisdiction of the Maine Public Utilities Commission andtransmission activity under the jurisdiction of the Federal Energy RegulatoryCommission. The MPUC and FERC regulate the rates MPS is allowed to charge itscustomers. MPS was involved in rate cases in 2006 to determine each of itsrates: distribution rates under MPUC Docket No. 2006-024, revisionof the transmission rate formula and establishment of the 2006 transmissionrates under FERC Docket No. ER00-1053, and recovery of strandedcosts for the period from January 1, 2007, through December 31, 2009,under MPUC Docket No. 2006-506. The only rates anticipated to changein 2007 are the transmission rates, which will be determined based on theformula established in FERC Docket No. ER00-1503. The change inthese rates could have a positive or negative impact on earnings and cash flow,but the ultimate impact is unknown at this time.

Further, execution ofcertain components of the Company’s utility-centric strategy is dependent onregulatory approval to participate in certain projects over the next severalyears, including efforts to improve competition in MPS’s northern Maine serviceterritory. Management cannot warrant the Company will be successful inobtaining these approvals.

***Economy of the Region***

MPS operations arerestricted to a territory in Aroostook County and northern Penobscot County,Maine. Limited population growth and economic expansion in the region couldnegatively impact the utility’s ability to maintain this customer base. MPS hasbeen actively involved with the Aroostook Partnership for Progress, anorganization with the mission of enhancing the economy in Aroostook County.

***Environmental Risks***

MAM, and particularly MPS,bear environmental risks associated with the former ownership of nuclear,diesel and oil fired generation, as well as the ownership of transformerscontaining Poly Chlorinated Bi-phenols (“PCB’s”). Further, MPS has potentialrisks concerning claims related to electro-magnetic fields (“EMF’s”). While theCompany takes significant steps to ensure prudent environmental practices, itcannot assure that risks do not exist from past or future environmentalpractices. Additionally, while the Company does not believe EMF’s represent adanger, particularly due to its lack of ownership of bulk transmission, itcannot warrant that claims could not be filed.

***Aging Infrastructure and Reliability***

MPS has risks associatedwith aging infrastructure assets that may in some instances be beyond theuseful life of the asset. The failure of such assets could result in the lossof power that could result in harm to property or person. MPS works diligentlythrough on-site inspection and testing programs to ensure the integrity of itsinfrastructure, but cannot warrant that outages will not occur due to the ageof some infrastructure. MPS does maintain substantial back-up equipment and thecapability to repair or rebuild such assets in a timely manner, including themaintenance of mobile transformers, and has increased its capital budget for2007 to also address this risk.

***Weather***

MPS’s electric wiresinfrastructure is at risk to natural phenomena, especially those caused by theweather. Storms, such as ice storms and major winter snow storms may have animpact on the integrity of MPS’s infrastructure assets in the field.

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***Vandalism, Terrorism and Other Illegal Acts***

MPS is subject to therisks of damage to others’ properties or human harm due to the failure ofinfrastructure. While MPS exercises diligent asset management and assetinspections, it cannot warrant that such risks can be fully eliminated. MPS andits electric wires and information technology infrastructure are alsoparticularly at risk to vandalism and acts of terrorism. While the Companytakes steps to protect against such illegal acts through various risk insurancepolicies and other protective measures, including restricting access to assets,it cannot warrant that they will not happen.

***Alternative Generation Options***

MPS does face technologyand product substitution risks associated with the evolution of distributedgeneration, non-utility generation, and other alternative fuel forms. Theprimary risk in this area is non-utility generation, which the utility hassuccessfully competed with to date. However, as electric commodity pricesincrease, the viability of alternative fuel from non-utility generation maybecome more practical. Such projects could result in reduced usage of MPS’sdelivery system.

***Unregulated Segments***

These risks are specificto the unregulated engineering, software technology and real estate entities,and will be either eliminated or significantly reduced, pending the divestitureof these companies.

***Divestiture of Unregulated Segments***

MAM intends to divest itsunregulated operations. This process involves many risks, including but notlimited to identification of suitable purchasers, completion of due diligence,negotiation of the terms of the sale and the ability to transfer contracts. MAMis attempting to mitigate these risks by engaging a third party to assist inthe divestiture process. The estimated loss recorded in MAM’s 2006 Statement ofOperations is based on the estimated sales price and estimated cost of thesales process. Management used the most reasonable assumptions available atthis time to calculate the estimated loss; however, actual results could differfrom these estimates.

***Legislation and Regulation***

Changes in legislation andregulation could impact TMG’s earnings and operations positively or negatively.For The Maricor Group, public policies related to energy, energy efficiency,asset lifecycle management, and air emissions may impact the overall market,particularly the governmental sectors.

***Foreign Operations***

Several MAM subsidiariessuch as Maricor Properties, including its subsidiaries Mecel Properties Ltd andCornwallis Court Developments Ltd and its joint venture Maricor Ashford Ltd,and The Maricor Group, Canada, operate in Canada. There are a number of risksassociated with operations outside of the United States, including differencesin laws, policies and measures; regulatory requirements affecting trade andinvestment; differences in social, political, labor, and economic conditions,including foreign exchange rates; difficulties in staffing and managing foreignoperations; and potential adverse foreign tax consequences.

***Economy of the Region***

The Maricor Group and itssubsidiaries generally operate within Atlantic Canada and New England. Thenature of work available may differ depending on various economic and politicalconditions, including cost of energy, interest rates, and other factors.

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***Franchises and Competition***

The Maricor Group, Canada Ltd and The Maricor GroupNew England operate in competitive markets and do not have exclusivefranchises. Competition for contracts comes from local, regional and mechanicaland electrical engineering firms, as well as local, regional or national energyservices, energy asset development and energy controls companies.

Maricor Properties Ltd, Cornwallis Court DevelopmentsLtd and Mecel Properties Ltd compete in the open market for tenants forfacilities owned and operated by these subsidiaries. Competition is driven byper square foot lease costs, operating costs, quality of the work environment,availability of parking, management services and other factors that couldinfluence a tenant to lease office space. These companies have greatlymitigated this risk with their existing long-term leases for tenants.

MaricorTechnologies, Inc. competes in the open market and does not have anexclusive franchise. Factors affecting its market include the economic needs offacilities owners, the age of facilities infrastructure, the availability orlack thereof of capital, public policies and other issues. It competes withexisting and potential additional providers and/or developers of similarsoftware solutions. Maintaining the market viability of their software assetsthrough product enhancements and new versions is a critical part of ensuringits market competitiveness. Additionally, its ability to expand its productofferings, to address a more comprehensive array of facility infrastructureinformation management and planning needs, may impact its competitiveness.

***Professional Liability***

The Maricor Group and itssubsidiaries are subject to risks associated with engineering design errorsand/or omissions. The Company carries insurance to address errors and omissionsto mitigate certain risks.

***Technological Obsolescence***

Due to the nature of itsbusiness, Maricor Technologies is subject to risks associated with changingtechnologies and obsolescence of its products. As a result, MTI monitorstechnology and competitor trends to ensure its product offerings remain marketcompetitive.

**Item 2.        Properties**

As of December 31, 2006, MPS owned approximately381 circuit miles of transmission lines and approximately 1,786 miles of distributionlines, all in Aroostook County and a portion of Penobscot County in northernMaine. In addition, MPS owns eight buildings that consist of office, warehouseand/or operating facilities within its service area, as well as various tractsof vacant land. Substantially all of the properties owned by MPS are subject tothe liens of its First and Second Mortgage Indentures and Deeds of Trust.

In response to a Maine environmental regulation tophase out PCB transformers, MPS has implemented a program to eliminatetransformers on its system that do not meet the new State environmentalguidelines. The program is in the process of testing almost 7,400 distributiontransformers over a ten-year period. MPS is currently in its seventh year ofthis ten-year program. In addition, transformers that pass the inspectioncriteria will be refurbished and refitted with lightning arrestors and animalguards. The total cost of the ten-year program is estimated to be $2.6 millionand, as of December 31, 2006, $1.8 million has been spent to remediateapproximately 59% of the transformers in this effort.

In March 2005, the FASB issued FASBInterpretation No. 47, “Accounting for Conditional Asset RetirementObligations” (“FIN 47”), effective for fiscal years ending after December 15,2005. FIN 47 clarifies the term “conditional asset retirement obligation”, usedin FASB Statement No. 143, “Accounting 

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for Asset RetirementObligations”, as referring to a “legal obligation to perform an assetretirement activity in which the timing and/or method of settlement areconditional on a future event that may or may not be within the control of theentity.”  Based on this interpretation,MPS recognized an asset retirement obligation associated of $832,000 with thePCB Transformer phase-out program, described more fully in Note 1 of theseConsolidated Financial Statements.

Additional assets of theCompany include three office buildings owned by Maricor Properties Ltd, ofwhich 50% is owned by MAM, and its subsidiaries Cornwallis Court DevelopmentsLtd and Mecel Properties Ltd. These office buildings are located in Moncton,New Brunswick and Halifax, Nova Scotia. The Moncton, New Brunswick multi-tenantoffice building consists of approximately 40,000 square feet and is locatedalong a downtown thoroughfare. This space is partially occupied by TMGC’sMoncton Division. The facility houses The Maricor Group, Canada Ltd’s Monctonoperations, in addition to third party tenants. The J. Angus MacDonaldBuilding, located in downtown Halifax, is a 60,000 square foot facility, and isfully leased to third parties, primarily Canadian government entities. Theother Halifax office is approximately 10,000 square feet and is located in arevitalization district near the historic downtown Citadel. The facility housesTMGC’s Halifax operations.

**Item 3.**                        LegalProceedings

**Maine PublicUtilities Commission 2006 Distribution Rate Case**

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

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

The stipulation requiredadjustment of the amortization of the Oracle system from a seven-yearamortization period to a ten-year amortization period, retroactive to thecapitalization of the system in 2004. The impact of this retroactive adjustmentof approximately $128,000 was recognized in the second quarter of 2006. Thestipulation also required that one-third of the hosting fee and travel expensesassociated with the Delinea contract for support of the Oracle system remainwith MAM and its unregulated subsidiaries, instead of being charged to MPS. MPSalso agreed to file regular reports indicating its performance under certainservice quality index standards as part of this stipulation.

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

Per agreement with theMaine Public Utilities Commission, the new transmission rates for retailcustomers were put into retail rates on July 15, 2006, to coincide withMPS’s distribution rate increase. These rates were approved by the MPUC onJuly 5, 2006. Per this filing, the DSM mil rate was increased 

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by 20%,or approximately $111,000, and the retail transmission rate was decreased by13.43%, or approximately $534,000.

**Maine PublicUtilities Commission 2006 Stranded Cost Rate Case**

The Company filed its 2006Stranded Cost case on August 31, 2006, in MPUC Docket No. 2006-506.The filing is an update of the Stipulation in the prior Stranded Cost case,MPUC Docket No. 2003-666. MPS proposed that stranded cost ratesremain the same as those agreed to in the prior filing. The initial caseconference was held on September 26, 2006, and the Stipulation wasapproved by the Commission on November 30, 2006, with no impact on ratesfor the period beginning January 1, 2007, and ending December 31,2009. The Stipulation also included an annual reconciliation provision toreconcile actual sales volume to the projections made by MPS.

**Federal EnergyRegulatory Commission 2006 Open Access Transmission Tariff Formula Rate Filing**

On May 31, 2006, pursuant to Section 205 ofthe Federal Power Act, 16 U.S.C. Section 824d, and Title 18 CFRSections 35.11 and 35.13 of the regulations of the FERC, MPS submitted forfiling its proposed revisions to its FERC Open Access Transmission Tariff inDocket No. ER 05 (the “2006 OATT”) to modify its transmission rateformula. MPS filed its updated rates under the 2006 OATT formula onJune 15, 2006, pursuant to Docket ER00-1053, with an effective dateof June 1, 2006, for both wholesale and retail customers, subject to acustomer refund that may occur as a result of the proceeding and potentialsettlement negotiations. The retail transmission revenue requirement wasdecreased by approximately $534,000 on July 15, 2006, under the 2006 OATT.This represented a decrease of 13.43% to the transmission component of retaildelivery rates. The primary reasons for the decrease were a shift in costsbetween transmission and distribution and the settlement of the 2005 OpenAccess Transmission Tariff through rates, as described more fully below.

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

**Federal EnergyRegulatory Commission 2005 Open Access Transmission Tariff Formula Rate Filing**

On May 31, 2005, pursuant to Section 205 ofthe Federal Power Act, 16 U.S.C. Section 824d, and Title 18 CFRSections 35.11 and 35.13 of the regulations of the FERC, MPS submitted forfiling its proposed revisions to its FERC Open Access Transmission Tariff inDocket No. ER 05 (the “2005 OATT”) to modify its transmission rateformula. MPS filed its updated rates under the 2005 OATT formula onJune 15, 2005, pursuant to Docket ER00-1053 with an effective dateof June 1, 2005, for both wholesale and retail customers, subject to acustomer refund that may occur as a result of the proceeding and potentialsettlement negotiations. The retail transmission revenue requirement wasincreased by approximately $289,000 on June 1, 2005, under the 2005 OATT.This represented an increase of 8% to the transmission component of retaildelivery rates or an overall impact on total retail delivery rates of 0.7%. Theprimary reasons for the increase were the increase to costs due to mandatedSarbanes-Oxley requirements, and the purchase of a new Oracle-based accountingsystem.

As part of the settlementdata request process, the Company identified several adjustments to its FERCForm 1 filing for 2004, which flow through the Company’s transmission rateformula. The approximate net impact of these corrections, once implemented, wasto reduce the overall increase to the projected retail transmission revenue andresult in a revised projected net increase to the retail 

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transmissionrevenue requirement of approximately $171,000 instead of the previouslyprojected increase of approximately $289,000. The final Settlement Agreement for the 2005 OATT was filed with theFERC on April 14, 2006, and final approval was received from the FERC onJune 21, 2006. This adjustment flowed through the MPS OATTeffective June 1, 2006, and was passed through retail rates beginning onJuly 15, 2006.

**Requests for Issuance of Certificates of PublicConvenience and Necessity in Connection With the Construction of a ProposedTransmission Line and Various Transmission Service Reservations.**

On October 4, 2004, MPS filed a Petition with theMPUC requesting the issuance of a Certificate of Public Convenience andNecessity (“CPCN”) pursuant to 35-A M.R.S.A. Section 3132 toconstruct a 138 kV transmission line originating at an existing substation inLimestone, Maine and extending to the Canadian Border near Hamlin, Maine.

The project was proposed in order to ensure thereliability and integrity of the MPS transmission grid under scenarios ofreduced on-system generator availability and peak load growth. MPS submittedthat the available firm transfer capability of the transmission system whenadded to the remaining on-system hydro generation was not sufficient to meetpeak load conditions, should existing on-system wood-fired generation becomeunavailable. The proposed line would have addressed this by significantlyincreasing the load-serving capability of the northern Maine region and wouldhave served to reinforce the vital transmission ties between northern Maine andthe New Brunswick transmission grid. Additional benefits of the proposed lineinclude the potential for increasing the number of competitive retail electricsuppliers and increasing the attractiveness of the region for development ofadditional generation, such as wind farms, by providing increased transmissionexport capacity.

The MPUC Commissioners deliberated the Docket onAugust 29, 2005, and denied the petition, determining that there was noimmediate reliability risk in northern Maine. The Commission concluded that therisk of losing on-system wood-fired generation was not sufficient to warrantthe new transmission line. The Commission’s Order denying the certificate,which was issued on October 21, 2005, described actions to be taken by MPSand the Northern Maine Independent System Administrator (“NMISA”) to reducecertain reliability risks identified by MPS. The Company filed forreconsideration of the Order on November 8, 2005, based on the possibilitythat Aroostook Wind Energy Company, LLC (“AWE”) might elect to utilize the CPCNrequested by MPS in this Docket in order to have MPS construct transmissionfacilities necessary to connect their proposed generation project to the MPSelectrical system. On March 30, 2006, the Company filed a status reportwith the Commission with regard to the proposed transmission facilities.Additionally, on November 23, 2005, the Commission granted an MPS requestfor suspension of certain of the specific requirements of the October 21,2005, Order pending Commission consideration of certain proposed marketrule changes which NMISA presented to the Commission on March 1,2006. In total, approximately $844,000 was spent on this transmission project.

As noted above, as aresult of the proposed settlement of its 2006 Open Access Transmission TariffFormula Rate Filing. MPS will recoverapproximately 90% of the expenditures associated with Line 3875 in transmissionrate base to be amortized over three years, with the other 10% expensed during2006.

**Stakeholder Initiative Regarding the Competitivenessand Reliability of the Northern Maine Power Grid .**

In November of 2006, the MPUC issued an Order inthe Docket opened for the purpose of selecting a new standard offer providerfor the Company’s service territory for the period beginning January 1,2007. (The then-existing standard offer arrangement was due to expire onDecember 31, 2006.)  TheCommission’s November 16, 2006 Order stated that it had received two bidsfrom a single supplier. Based on this, the Commission concluded that northernMaine lacked a competitive power market and directed the Company to furnishdefault standard offer service for the fourteen-month period beginningJanuary 1, 

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2007. On December 18,2006, the Commission granted reconsideration of its November 16 Order andawarded the standard offer contract to WPS Energy, Inc,, the incumbentsupplier.

As a result of theCommission’s determination regarding the absence of a competitive power market,and also in an effort to deal with the system reliability issues raised by theCompany’s unsuccessful bid to secure a certificate for the construction of anew transmission line, the MPUC held a three-day stakeholders conference inmid-December, 2006, in an attempt to resolve, on a collaborative basis, theissues raised in these cases. As a result of this effort, two parallelinitiatives have been launched:

(a)          the stakeholders wereasked to develop a protocol allowing for the possibility of generationsuppliers obtaining long-term power delivery commitments through the standardoffer process. This could encourage the construction of new generation in theCompany’s service territory, and/or secure the availability of existingon-system generating sources on a long-term (multi-year) basis. The Companycannot at this time predict whether the stakeholders will reach agreement onany such protocol initiative, or whether it will be finalized and accepted bythe Commission.

(b)         the stakeholders wereasked to address the feasibility of one or more proposals for transmissionprojects interconnecting the northern Maine grid with the ISO New England grid,possibly by means of a tap into the Maine Electric Power Company (“MEPCO”) 345kV transmission line that connects the high voltage systems of Maine and NewBrunswick.

The Company in early 2007 announcedthat it has joined with Central Maine Power Company in a effort to determinethe feasibility of such a line.

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

None.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities

Maine & Maritimes Corporation became aholding company effective June 30, 2003. All 1,574,582 shares of MPScommon stock were converted on that date into an equal number of shares of MAMcommon stock, which are listed and traded on the American Stock Exchange underthe symbol “MAM”. As of March 1, 2007, there were 704 holders of record ofthe Company’s common stock, with 1,650,849 shares outstanding. As ofDecember 31, 2005, the number of outstanding shares was 1,636,779.

Dividend data and marketprice related to the common stock are tabulated as follows for 2006 and 2005:

| ** **      | ** ** | **Market Price** | ** ** | **Dividends** | ** ** |
|-----------------|------------|-----------------------|------------|---------------|------------|
| ** **      | ** ** | **High**              | ** ** | **Low**       | ** ** | **Paid Per Share** | ** ** | **Declared Per Share** | ** ** |
| **2006**        |       |                  |       |          |       |   |   |   |   |   |   |   |   |
| First Quarter   |       | $                     | 17.86      |          | $          | 13.75 |   |   | $ | — |   |   |   | — |   |   |
| Second Quarter  |       | $                     | 16.29      |          | $          | 13.65 |   |   | — |   |   |   | — |   |   |
| Third Quarter   |       | $                     | 19.50      |          | $          | 15.00 |   |   | — |   |   |   | — |   |   |
| Fourth Quarter  |       | $                     | 17.22      |          | $          | 14.15 |   |   | — |   |   |   | — |   |   |
| Total Dividends |       |                  |       |          |       |   | $ | — |   |   |   | — |   |   |
| **2005**        |       |                  |       |          |       |   |   |   |   |   | — |   |   |
| First Quarter   |       | $                     | 27.79      |          | $          | 24.87 |   |   | $ | 0.20 |   |   |   | $ | 0.25 |   |   |
| Second Quarter  |       | $                     | 27.25      |          | $          | 24.04 |   |   | 0.25 |   |   |   | 0.25 |   |   |
| Third Quarter   |       | $                     | 24.85      |          | $          | 19.70 |   |   | 0.25 |   |   |   | 0.25 |   |   |
| Fourth Quarter  |       | $                     | 19.55      |          | $          | 15.25 |   |   | 0.25 |   |   |   | — |   |   |
| Total Dividends |       |                  |       |          |       |   | $ | 0.95 |   |   |   | $ | 0.75 |   |   |

 

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

The Company’s Board of Directors has adopted adividend policy which provides for a dividend based on 55% to 80% of the netincome contribution from MPS, provided that the consolidated Company isprojected to generate net earnings per share and requisite free cash flows fromits regulated and unregulated operations.

To date, the Company’s payment of dividends has beenbased on dividends from MPS, which are limited by restrictions imposed by theMPUC. MPS dividends to MAM are subject to a common dividend payout ratio(dividends per share divided by earnings per share), which cannot exceed 1.0(i.e. 100%) on a two-year rolling average. Subsequent to December 31,2006, in addition to the aforementioned stipulation, additional dividends maybe paid from MPS to MAM up to the amount of the stranded cost free cash flowfor the period.

The current financial andcash flow performance of the Company resulted in no shareholder dividendsduring 2006.  Further, with unregulatedterm debt repayments scheduled and the plan to divest of MAM’s unregulatedoperations, Management does not anticipate sufficient funds will be availablefor a dividend to common shareholders during 2007. Until such performanceimproves, the Company cannot warrant that it will resume paying dividends on aquarter-on-quarter basis.

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*Securities Authorized for Issuance Under EquityCompensation Plans.*

| ** **                                                  | ** ** | ** **                                         | ** ** | ** **                        | ** ** | **Number of securities remaining** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                  | ** ** | **Number of securities to be** | ** ** | **Weighted-average**              | ** ** | **available for**                            | ** ** |
| ** **                                                  | ** ** | **issued upon exercise of**         | ** ** | **exercise price of**   | ** ** | **future issuance under equity**   | ** ** |
| ** **                                                  | ** ** | **outstanding options,**                      | ** ** | **outstanding options,**     | ** ** | **compensation plans (excluding**       | ** ** |
| **Plan Category**                                      | ** ** | ** **                                         | ** ** | **warrants and rights** | ** ** | **warrants and rights**                 | ** ** | **securities reflected in column (a))** | ** ** |
| ** **                                                  | ** ** | **(a)**                                            | ** ** | **(b)**                           | ** ** | **(c)**                                           | ** ** |
| Equity compensation plan  approved by security holders |       |                                               | 3,932      |                              |       |                                              | $          | 30.28 |   |   |   | 152,232 |   |   |
| Equity compensation plan  not approved by security holders  |       |                                               | —     |                              |       |                                              | n/a        |   |   |   | — |   |   |
| Total                                                       |       |                                               | 3,932      |                              |       |                                              |       |   |   |   | 152,232 |   |   |
|                                                             |            |                                                    |            |                                   |            |                                                   |            |  |  |  |  |  |  |  |  |  |

 

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

An additional 20,000 shares were originally availablefor issuance to the Company’s Board of Directors pursuant to the Stock Plan forOutside Directors. Under this plan, 13,836 shares have been issued, with 6,164remaining available for issuance.

In addition to the StockPlan for Outside Directors, the directors’ fees can be paid in any combinationof three forms. Directors can choose to receive their fees in cash, or to deferall or a portion of the fees in two deferral programs. The first provides areturn equal to the 5-year Treasury Note rate. The second deferralprogram is tied to the performance of the Company’s stock. Under this program,the deferred directors’ fees for the quarter are converted to a number ofshares of stock for tracking purposes, and the value of the previous deferralsis adjusted to reflect the stock price as of the end of the quarter. Under thisprogram, the equivalent of 26,096 shares are held by directors.

*Sale ofUnregistered Securities*

In February 2005, MAM issued 9,500 shares ofpreferred stock in conjunction with the acquisition of software now owned byMTI. The entity to which these securities were issued was HCI Systems AssetManagement, LLC. No underwriter was used in this transaction. The securitieswere issued under the exemption provided by Section 4(2) of theSecurities Act of 1933 as a transaction by an issuer not involving a publicoffering. In February 2007, 3,000 shares of preferred stock were convertedinto 12,078 shares of common stock. The remaining 6,500 preferred shares willconvert into a minimum of 26,000 shares of common stock in February 2009.

In June 2004, the Companyissued 54,332 common shares to the former principals of Morris &Richard Consulting Engineers and RES Engineering, Inc. in conjunction withits acquisition of those companies. No underwriter was used in eithertransaction. Refer to Note 14 to the Consolidated Financial Statements,“Acquisitions.” The securities were issued under the exemption provided bySection 4(2) of the Securities Act of 1933 as a transaction by anissuer not involving a public offering.

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*Company Purchasesof Equity Securities*

As mentioned previously,the Company established a stock repurchase program in January 2005 as partof the Dividend Policy announced when the January 3, 2005, dividend wasdeclared. Execution of the share repurchase program will be based on marketconditions and is subject to the MAM cash position and investmentopportunities. There were no stock repurchases by the Company during 2006.

*Stock PerformanceGraph*

The following graphcompares Maine & Maritimes Corporation’s cumulative stockholder returnsince December 31, 2001 with the Peer Group index, comprised of the AMEXComposite and S&P Utility Index. The graph assumes that the value of theinvestment in the Company’s common stock and each index (including reinvestmentof dividends) was $100 on December 31, 2001.

**COMPARISON OF 5YEAR CUMULATIVE TOTAL RETURN*Among Maine & Maritimes Corporation, The AMEX Composite IndexAnd The S & P Utilities Index**

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*       $100invested on 12/31/01 in stock or index-including reinvestment of dividends.Fiscal year ending December 31.

Copyright© 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc.All rights reserved. www.researchdatagroup.com/S&P.htm

| ** **                                  | ** ** | **12/01**  | ** ** | **12/02**  | ** ** | **12/03**  | ** ** | **12/04**  | ** ** | **12/05**  | ** ** | **12/06**  | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Maine &  Maritimes Corporation** | ** ** | **100.00** | ** ** | **113.70** | ** ** | **130.56** | ** ** | **102.63** | ** ** | **62.26**  | ** ** | **61.01**  | ** ** |
| **AMEX  Composite**                         | ** ** | **100.00** | ** ** | **100.08** | ** ** | **144.57** | ** ** | **178.46** | ** ** | **220.35** | ** ** | **262.17** | ** ** |
| **S & P Utilities**                | ** ** | **100.00** | ** ** | **70.01**  | ** ** | **88.39**  | ** ** | **109.85** | ** ** | **128.35** | ** ** | **155.29** | ** ** |

 

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**Item 6.**                        SelectedFinancial Data

Afive-year summary of selected financial data (2002 through 2006) is as follows:

**Five-YearSummary of Selected Financial Data(1)*(The information in the table and its footnotes ispresented in thousands of dollars except per share amounts)***

| ** **                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Income Statement  Data:                                                            |       |     |       |     |       |     |       |     |       |     |       |
| Revenues                                                                           |       | $        | 35,601     |     | $          | 34,299   |       | $        | 33,733     |     | $          | 31,739 |   | $ | 31,401 |   |
| Net Income From  Continuing Operations                                             |       | 804      |       | 848      |       | 2,279    |       | 2,937    |       | 3,090    |       |
| (Loss) Income  From Discontinued Operations                                        |       | (6,725   | )          | (1,068   | )          | (961     | )          | (131     | )          | 3,453    |       |
| Net (Loss) Income  Available for Common Stock                                      |       | $        | (5,921     | )        | $          | (220     | )          | $        | 1,318      |     | $          | 2,806 |   | $ | 6,543 |   |
| Basic Earnings  Per Share of Common Stock From Continuing Operations          |       | $        | 0.49       |     | $          | 0.52     |       | $        | 1.42       |     | $          | 1.86 |   | $ | 1.97 |   |
| Basic (Loss)  Earnings Per Share of Common Stock From Discontinued Operations |       | (4.11    | )          | (0.65    | )          | (0.60    | )          | (0.08    | )          | 2.19     |       |
| Basic (Loss)  Earnings Per Share of Common Stock From Net Income              |       | $        | (3.62      | )        | $          | (0.13    | )          | $        | 0.82       |     | $          | 1.78 |   | $ | 4.16 |   |
| Diluted Earnings  Per Share of Common Stock From Continuing Operations             |       | $        | 0.49       |     | $          | 0.52     |       | $        | 1.40       |     | $          | 1.85 |   | $ | 1.96 |   |
| Diluted (Loss)  Earnings Per Share of Common Stock From Discontinued Operations    |       | (4.11    | )          | (0.65    | )          | (0.60    | )          | (0.08    | )          | 2.19     |       |
| Diluted (Loss)  Earnings Per Share of Common Stock From Net Income                 |       | $        | (3.62      | )        | $          | (0.13    | )          | $        | 0.80       |     | $          | 1.77 |   | $ | 4.15 |   |
| Dividends Paid  per Common Share                                                   |       | $        | —     |     | $          | 0.95     |       | $        | 1.52       |     | $          | 1.48 |   | 1.42 |   |
| Balance Sheet  Data:                                                               |       |     |       |     |       |     |       |     |       |     |       |
| Total Assets(2)                                                                    |       | $        | 148,247    |     | $          | 151,303  |       | $        | 150,676    |     | $          | 141,269 |   | $ | 141,986 |   |
| Capitalization:                                                                    |       |     |       |     |       |     |       |     |       |     |       |
| Long-Term Debt  Outstanding                                                        |       | $        | 32,725     |     | $          | 35,155   |       | $        | 39,380     |     | $          | 30,680 |   | $ | 33,765 |   |
| Less amount due  within one year                                                   |       | 2,703    |       | 2,612    |       | 2,225    |       | 1,450    |       | 3,085    |       |
| Long-Term Debt(3)                                                                  |       | 30,022   |       | 32,543   |       | 37,155   |       | 29,230   |       | 30,680   |       |
| Common  Shareholders’ Equity(4)                                               |       | 41,527   |       | 47,785   |       | 48,140   |       | 46,988   |       | 47,029   |       |
| Total Capitalization                                                               |       | $        | 71,549     |     | $          | 80,328   |       | $        | 85,295     |     | $          | 76,218 |   | $ | 77,709 |   |

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See Item 1a “Risk Factors”and Item 7a, “Quantitative and Qualitative Disclosures about Market Risk,”incorporated in this section by this reference, concerning material risks anduncertainties which could cause the data reflected herein not to be indicativeof the Company’s future financial condition or results of operations.

(1)          Data from periods endingprior to June 30, 2003, is from MPS.

(2)          Total assets reflectassets from Discontinued Operations of $8,136 for 2006, $12,696 for 2005,$8,871 for 2004, $962 for 2003 and $6,324 for 2002.

(3)          Long-term debt reflectslong-term debt owed by Discontinued Operations of $2,182 in 2006 and $2,200 in2005 and 2004. The amount due within one year for 2006 includes $18 owed byDiscontinued Operations.

(4)          Common Shareholders’Equity reflects (deficit) equity from Discontinued Operations of $(4,657) for2006, $161 for 2005, $1,062 for 2004, $1,691 for 2003, and $5,674 for 2002.

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

***Forward-Looking Statements***

This filing contains certain “forward-lookingstatements” as defined in the Private Securities Litigation Reform Act of 1995,related to the expected future performance of our plans and objectives, such asforecasts and projections of expected future performance or statements ofManagement’s plans and objectives. These forward-looking statements may becontained in filings with the SEC and in press releases and oral statements. Weuse words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,”“believe,” and other words and terms of similar meaning in connection with anydiscussion of future operating or financial performance. These statements arebased on the current expectations, estimates or projections of Management andare not guarantees of future performance. Some or all of these forward-lookingstatements may not turn out to be what the Company expected. Actual resultswill differ, and some of the differences may be material.

Factors that could causeactual results to differ materially from our projections include, among othermatters, strategic risk, liquidity and capital formation risk, interest rateand debt covenant risk, attraction and retention of qualified employees, equityprice risk, legislation and regulation, divestiture of unregulated segments,general economic conditions, collections risk, information technology risks,economy of the region, environmental risks, aging infrastructure andreliability, weather, vandalism, terrorism and other illegal acts, alternativegeneration options, foreign operations, franchises and competition,professional liability and technological obsolescence. Therefore, no assurancescan be given that the outcomes stated in such forward-looking statements andestimates will be achieved.

***Annual Performance Summary***

2006 was a pivotal year for Management and the Boardof Directors in determining whether the unregulated growth strategy embarked onin 2002 was going to achieve the desired results. The Company believed that itneeded to achieve sufficient scale in our unregulated operations and to utilizethe platform for growth which had been successfully created during the initialphases of our strategy. This planned growth was deemed necessary by Managementas a means of achieving the targeted margins, expansion in our business lines,and sufficient returns to our shareholders. To this end, during 2006 Managementaggressively pursued additional acquisition opportunities which were criticalto achieving our intended results, while we also continued efforts to controlcost and grow our existing businesses.

It is evident fromour financial results that we were not able to achieve our goals. There wereseveral factors which contributed to the poor financial performance including,but not limited to:

·       Under-performanceof our unregulated engineering & energy efficiency companies;

·       Lackof sufficient revenue growth in our software development company;

·       Inabilityto acquire key companies to achieve scale to support the infrastructurerequired for these operations;

·       Cost of acquisitions not completed;

·  Liquidityissues created by under-performance in unregulated companies;

·       Lowernet income from the utility business due to unseasonable weather and increasesin expense; and

·       Insufficientgrowth in new product and service lines at the unregulated businesses.

As stated in recentfilings, based on these facts, the Board and Management embarked on a processto reassess the strategic options available to the Company to improve overallperformance. Given the 

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operationaland financial challenges we faced, as well as the departure of the CEO whoimplemented the growth strategy, the Company has begun to pursue thedivestiture of the unregulated business lines, which has resulted in thereclassification of these businesses as discontinued operations. As discussedin more detail in the “Overview of Company Strategy” section below, the Companyis formulating a strategy centered on the core utility business and is pursuingplans to divest of all unregulated assets.

***Overview of CompanyStrategy***

Prompted by theunderperformance of our unregulated operations, and the departure of the CEO inAugust 2006, the Board undertook a deliberate and detailed review of itsstrategic options. With the assistance of a third party financial advisor, theBoard reviewed and took into consideration the strengths and weaknesses of theCompany and the financial and operating outlook for each business segment intheir review process. The Board considered a number of options including, butnot limited to the following:

·       Continuedgrowth of unregulated businesses,

·       Continuedoperation of existing unregulated business units coupled with cost reductionmeasures,

·       Sellingof the Company,

·       Privatizationof some or all business segments, and

·       Refocuson the core utility business, Maine Public Service Company.

The Board decided on arefocus on the core utility business as the preferred strategy, based on fivesignificant and compelling reasons:

**1.**                Thefinancial performance of the unregulated businesses was not adequate to warrantcontinued investment.

The unregulatedengineering and software businesses were unable to generate the returns and netcash flows expected by Management and our shareholders. As we indicated inprior filings, we needed to achieve sufficient scale and traction withincertain markets to recognize our long term vision with these subsidiaries.While these companies were able to generate modest revenues, their overallperformance did not justify continued investments in new acquisitions ormaintenance of existing unregulated operations.

**2.**                Theelectric utility, MPS, has a history of solid earnings, cash flows andshareholder returns.

As a transmission anddistribution, or electricity delivery company, the utility has regulated ratesof return which help solidify our ability to maintain a positive financialposition for our shareholders. As a 103-year old company, almost 50 yearspublicly traded, MPS has demonstrated that it is capable of long-term success,controlling costs and maintaining the electric system for our customers in aprudent and effective manner, while providing shareholder value. The Companybelieves that by refocusing its efforts on its core utility practice, theCompany can correct the negative financial performance associated with itsunregulated business operations.

**3.**                Thecurrent political and regulatory environment is increasingly more favorable,allowing for new growth opportunities in regulated operations.

In the late 1990’s the electric utility industryunderwent the process of “deregulation.” In an effort to promote competition and therefore lower energy prices, thestate of Maine passed legislation requiring the sale of all electricitygenerating assets by the State’s three investor-owned electric utilities,including MPS. Seven years later, it has become apparent that these decisionshave not yielded the results sought by lawmakers.

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At the same time, the combination of the need forelectricity in congested areas of New England, the lack of significantgeneration being commissioned, and the related need for investment intransmission assets to alleviate the ever-growing demand for electricity, haveall improved to some extent the opportunity landscape available to our utilitybusiness.

New generation in the formof Maine’s largest wind farm is now located within MPS’s service territory. MPSis pursing the development of a large scale transmission project which has thepotential to produce substantial returns and connect MPS to the New Englandgrid. Further, new legislation has been introduced in the state of Maine toremove the barrier for in-state utilities to once again own electricitygenerating assets. All of these factors, when combined, position MPS to providelong-term shareholder value.

**4.**                TheCompany, Management, and the employee’s core competencies are utility-based.

The Company’s currentexecutive team is well-steeped in utility operations and regulatory affairs. Toensure the proper alignment of skills necessary for the future success of theCompany, the Board is currently considering the revised strategy in its processto hire a new CEO.

**5.**                Mostimportantly, the Board believes returning to the core utility is the beststrategy to preserve, sustain, and grow shareholder value.

The regulated utility segment of our business remainsprofitable with positive expectations for continued profitability in thefuture. We believe that our utility base of operations is well positioned toleverage opportunities as we move forward.

We will, however, not bewithout financial and operating challenges during the transition period betweenthe divestiture of our unregulated operations and re-focusing our efforts onoptimizing the value of our core utility business. Short-term liquidity duringthat period will continue to be strained. In addition, we will have to remaindiligent and steadfast in our efforts to control costs, while making prudentinvestments in the regulated utility business. In the end, we believe a changein strategy is required for us to succeed in providing the necessaryperformance expected by our shareholders.

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***2006 OperatingResults for the Consolidated Entity***

*Net Income andEarnings per Share*

| ** **                                  | ** ** | **2006**                                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                  | ** ** | **(Dollars in Thousands Except  per Share Amounts)** | ** ** |
| Income (Loss) from  Continuing Operations   |       |                                                                          |       |     |       |     |       |
| Regulated Electric  Utility                 |       | $                                                                             | 2,129      |     | $          | 2,264    |       | $ | 3,042 |   |
| Other*                                      |       | (1,325                                                                        | )          | (1,416   | )          | (763     | )          |
| Income from Continuing  Operations          |       | 804                                                                           |       | 848      |       | 2,279    |       |
| Loss (Income) from  Discontinued Operations |       |                                                                          |       |     |       |     |       |
| Unregulated Engineering  Services           |       | (5,451                                                                        | )          | (754     | )          | (553     | )          |
| Unregulated Software  Technology            |       | (1,275                                                                        | )          | (318     | )          | —   |       |
| Unregulated Energy  Marketing               |       | 1                                                                             |       | (1       | )          | (408     | )          |
| Other*                                      |       | —                                                                        |       | 5        |       | —   |       |
| Loss from Discontinued  Operations          |       | (6,725                                                                        | )          | (1,068   | )          | (961     | )          |
| Net (Loss) Income                           |       | $                                                                             | (5,921     | )        | $          | (220     | )          | $ | 1,318 |   |
| Basic (Loss) Income Per  Share              |       | $                                                                             | (3.62      | )        | $          | (0.13    | )          | $ | 0.82 |   |

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*                    The “Other”line in continuing operations includes activities of the holding company,including corporate costs directly associated with unregulated operations andcommon costs not allocated to the regulated utility, Mecel Properties andinter-company eliminations. In discontinued operations, “Other” isinter-company eliminations.

Net income above is allocated based upon the segmentallocation as presented in Item 8, Note 4 of the Notes to ConsolidatedFinancial Statements, “Segment Information.”

The results by segment areexplained in the Detailed******Analysisof Changes in Financial Condition by Operating Segment below. Overall, thefinancial results for 2004 through 2006 show the evolution of MAM’s strategy,from significant growth in the unregulated businesses during 2004 throughacquisitions, to the unsuccessful expansion of the unregulated operations intohigher value engineering and consulting services in 2005 and 2006, to theultimate decision to divest unregulated operations and re-focus onopportunities within the core regulated electric utility. Discontinuedoperations for 2006 also includes the estimated losses on the probabledivestitures of TMG and MTI, explained more fully in their respective sectionsbelow.

***Consolidated Interest Expense***

Interest Expense isaccrued on the Company’s long-term debt and short-term credit arrangements inaccordance with debt agreements and was $3.02 million, $2.37 million, and$2.24 million for the years ending December 31, 2006, 2005, and 2004,respectively. The increase is a result of a change in the mix of debtoutstanding. During 2005 and 2004, compared to 2006, there were higher balancesof long-term debt outstanding at MPS, which is at a fixed rate due to theinterest rate swaps. From 2004 to 2006, $6.66 million of long-term debt wasrepaid. Over that same period, variable rate short-term debt with higherinterest rates increased by $8.77 million, including the borrowing of $3.97million of short-term debt by MAM.

***Income Tax Expense / Benefit***

Income tax expense for MPSwas $1.58 million, $1.51 million and $1.23 million in 2006, 2005 and 2004. Theunregulated income tax benefit was $1.06 million, $863,000 and $531,000 in2006, 2005 and 2004, respectively.  

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***Taxes Other Than Income***

Taxes other than income,which are primarily property taxes for MPS and payroll taxes for MAM, were$1.81 million in 2006, $1.71 million in 2005, and $1.6 million in 2004.

***Consolidated Capital & Construction Program***

Cashexpenditures on capital improvements, additions, replacements and equipment forthe years ended December 31, 2006, 2005, 2004 and 2003, along withestimated expenditures for 2007 are as follows:

| ** **                  | ** ** | **2007**                   | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|-----------------------------|------------|----------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **(Unaudited  Estimates)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Maine Public  Service       |       |                       | $          | 6,534      |       |       | $          | 3,502      |       | $          | 4,822      |   | $ | 6,276 |   | $ | 4,609 |   |
| The Maricor Group           |       |                       | —     |       |       | 49         |       | 238        |       | 258        |       | 46 |   |
| Maricor  Technologies, Inc. |       |                       | —     |       |       | 244        |       | 446        |       | —     |       | — |   |
| Other  Subsidiaries         |       |                       | —     |       |       | 30         |       | 23         |       | 265        |       | 221 |   |
| Total                       |       |                       | $          | 6,534      |       |       | $          | 3,825      |       | $          | 5,529      |   | $ | 6,799 |   | $ | 4,876 |   |

 

The significant increasein MPS’s projected capital expenditures for 2007 is due to a combination of theavailability of funds from stranded costs and the necessary improvementsidentified by the distribution and transmission inspection programs.

***Detailed Analysisof Changes in Financial Condition by Operating Segment***

***Regulated Utility Operations—Continuing Operations***

Thefollowing discussion includes the operations of MPS and Me&NB:

| ** **                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Income—Regulated  Electric Utility*(in thousands)* |       | $        | 2,129      |     | $          | 2,264    |       | $ | 3,042 |   |
| Earnings Per Share from  Regulated Electric Utilities       |       | $        | 1.30       |     | $          | 1.38     |       | $ | 1.89 |   |

 

MPS’s core T&D earnings were $2.13 million for2006, compared to $2.26 million for 2005. Overall, MPS revenue for 2006increased slightly, due to the net rate increases of $1.33 million effective July 15,2006, offset by a 1% decrease in sales volume, due primarily to warmer weatherin the first quarter of 2006 and decreased sales to two large customers. The changesin revenue are described more fully below in the Regulated Utility OperatingRevenue section.

Expenses increasedat a faster rate than revenue in 2006, primarily within administrative andgeneral expenses. Each of these increases in expense in 2006 are eitheranticipated to bring future savings to the Company, or have provided savings inthe past. The increases in expense include:

·       Severancecosts of $176,000, anticipated to provide savings through a reduction in laborcosts;

·       Healthinsurance contingent premium of $290,000, due to the Company sharing in therisk of the health insurance experience, which has resulted in lower premiumsfor several years;

·       Regulatoryexpenses of $195,000, primarily associated with the distribution andtransmission rate cases in 2006; and

·       Curtailmentexpense for the MPS Pension Plan of $98,000, associated with the freeze offuture service and salary accruals.

These changes in expense,as well as the changes in other expenses of the regulated utility, aredescribed more fully below, in the Regulated Utility Operating Expense section.

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*Regulated UtilityOperating Revenue*

Consolidatedrevenues and Megawatt Hours (“MWH”) for the years ended December 31, 2006,2005 and 2004, are as follows *(in thousandsof dollars)*:

| ** **                         | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004**    | ** ** |
|------------------------------------|------------|-------------|------------|----------|------------|-------------|------------|
| ** **                         | ** ** | **Dollars** | ** ** | **MWH**  | ** ** | **Dollars** | ** ** | **MWH** | ** ** | **Dollars** | ** ** | **MWH** | ** ** |
| Residential                        |       | $           | 14,511     |     | 178,520    |        | $     | 14,220 |   | 180,108 |   | $ | 13,830 |   | 176,407 |   |
| Large Commercial                   |       | 5,094       |       | 169,764  |       | 5,227       |       | 170,906 |   | 5,059 |   | 171,263 |   |
| Medium Commercial                  |       | 5,569       |       | 105,759  |       | 5,521       |       | 106,525 |   | 5,488 |   | 107,607 |   |
| Small Commercial                   |       | 6,996       |       | 91,964   |       | 6,890       |       | 92,960 |   | 6,651 |   | 90,032 |   |
| Other Retail                       |       | 863         |       | 3,380    |       | 829         |       | 3,394 |   | 823 |   | 3,376 |   |
| Total Regulated  Retail            |       | 33,033      |       | 549,387  |       | 32,687      |       | 553,893 |   | 31,851 |   | 548,685 |   |
| Other Regulated  Operating Revenue |       | 2,568       |       |     |       | 1,627       |       |   |   | 1,883 |   |   |   |
| Total Regulated Revenue            |       | $           | 35,601     |     |       |        | $          | 34,314 |   |   |   | $ | 33,734 |   |   |   |

 

Overall, regulated retail revenue increased byapproximately $346,000 or 1% from 2005 to 2006 due to the increase in ratesfrom prior year. Effective July 15, 2006, distribution revenue increasedapproximately $1.75 million, DSM revenue increased $111,000, and transmissionrevenue decreased by $534,000, resulting in a net revenue increase of $1.33million. For more information on regulatory orders approving the most recentrate increases, see Part I, Item 3, “Legal Proceedings.”  The impact of the revenue increase was partlyoffset by the approximately 4,506 MWH or 1% decrease in volume year over year.

Residential customer revenue was the majority of theincrease in revenue dollars, up $291,000. Similarly, medium and general servicecustomer revenue increased $48,000 and $106,000, respectively. In each of theseclasses of customers, the volume decrease was approximately 1%. The decrease involume is due to the warmer weather experienced in the utility’s serviceterritory, primarily during the first quarter of 2006. Large customer revenuedecreased approximately $133,000, due to two large commercial customers thatwere not operating for a portion of 2006. As of the end of 2006, both customersare back in operation.

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

Revenue in all regulated retail customer classesincreased in 2005, compared to 2004. Sales to residential customers in 2005increased $390,000 or 2.8% over 2004. This increase was driven primarily by the3,701 MWH or 2.1% increase in volume, partly due to an increase in the numberof customers, and partly due to an increase in the volume of usage bycustomers.

While large commercial customer sales volume decreasedslightly over 2004, revenue increased from $5.06 million in 2004 to$5.23 million in 2005, an increase of $168,000 or 3.3%. The largestincrease was $183,000 from one large customer which was in business for all of2005, but only three months of 2004.

The volume of sales to medium service customersdecreased approximately 1%, or 1,082 MWH, due to a 1% decrease in the number ofcustomers. Revenue dollars increased slightly, up $33,000. Small commercialsales had the largest increase in volume, up 2,928 MWH or 3.3% in 2005,compared to 2004. The increase in volume is primarily among the local potatogrowers and their higher costs for storage of the 2004 crops in 2005. Thisadditional volume resulted in an increase in revenue of $239,000 or 3.6%.

Other operating revenuedecreased by $256,000 from 2004 to 2005. The largest decreases were inmiscellaneous and other electric revenues, associated with contracted utilitywork.

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*Regulated UtilityExpenses*

Forthe years ended December 31, 2006, 2005 and 2004, regulated operation andmaintenance expenses and stranded costs are as follows *(in thousands of dollars)*:

| ** **                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Regulated  Operation and Maintenance                        |       |     |       |     |       |     |       |
| Transmission and Distribution                               |       | $        | 4,015      |     | $          | 3,985    |       | $ | 3,142 |   |
| Customer Service                                            |       | 1,351    |       | 1,004    |       | 1,346    |       |
| Administrative and General                                  |       | 9,900    |       | 9,363    |       | 9,577    |       |
| Total Regulated Operation and Maintenance                   |       | $        | 15,266     |     | $          | 14,352   |       | $ | 14,065 |   |
| Stranded Costs                                              |       |     |       |     |       |     |       |
| Wheelabrator-Sherman                                        |       | $        | 7,702      |     | $          | 7,045    |       | $ | 7,025 |   |
| Maine Yankee                                                |       | 2,926    |       | 3,215    |       | 3,274    |       |
| Seabrook                                                    |       | 1,538    |       | 1,538    |       | 1,538    |       |
| Amortization of Wheelabrator-Sherman Restructuring  Payment |       | 1,451    |       | 1,451    |       | 1,451    |       |
| Deferred Fuel                                               |       | (3,195   | )          | (2,996   | )          | (3,557   | )          |
| Cancelled Transmission Plant                                |       | 258      |       | —   |       | —   |       |
| Special Discounts                                           |       | 280      |       | 280      |       | 280      |       |
| Total Stranded  Costs                                       |       | $        | 10,960     |     | $     | 10,533   |       | $ | 10,011 |   |

 

Transmission and distribution expenses increased approximately$30,000 or 0.8% from 2005 to 2006. As part of the PCB mitigation program, since2005, testing is now done in the field by taking a sample from the transformer,rather than removing the transformer from the pole and bringing it on-site.While this change reduced the overall time requirement and cost of the project,it also resulted in a shift of costs from capital to expense, increasingtransmission and distribution expenses by approximately $125,000 from 2005 to2006, and $95,000 from 2004 to 2005. Contractor expenses for transmission linetree trimming also increased $117,000 from 2005 to 2006. These increases werepartly offset by a $218,000 reduction in transportation expenses associatedwith transmission and distribution.

Transmission and distribution expenses increased by$843,000 or 26.8% in 2005 compared to 2004. The largest increase in 2005 wastransportation expenses allocated to transmission and distributionactivities, which increased approximately $469,000 over 2004. This was a resultof both an increase in the cost pool of $244,000, which includes fuel costs,repair costs and labor costs for employees working in the garage, and anincrease in the rates at which the dollars are applied. As noted above, thechange in the PCB mitigation program also increased expenses by approximately$95,000. Other significant costs during 2005 include additional labor overheadsof $44,000, and an increase of $57,000 in external tree-trimming costs. Theremaining change is due to other, smaller changes year-over-year.

From 2005 to 2006, customer service expenses increased$347,000 from $1.0 million to $1.35 million, after decreasing from $1.35million in 2004. From deregulation through 2004, MPS reserved for the under-and over-collections on SOS accounts receivable, effectively assuming the riskfor those receivables. However, MPS has the right to increase or decrease thewithholding rate in subsequent SOS contracts to collect or refund thisdifference. Therefore, MPS does not bear risk for these SOS receivables, andthe $310,000 reserve was reversed in 2005. This was a one-time reduction incustomer service expense that accounts for the decrease in expense from 2004 to2005 and the increase from 2005 to 2006.

In 2006, administrative and general expenses increasedto $9.9 million, from $9.36 million in 2005, an increase of $537,000 or 5.7%,as a result of the following changes:

·       Overall,administrative and general labor increased $305,000 from 2005 to 2006,including $176,000 of severance costs for former MPS employees as a result ofthe reduction in force in 

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September 2006. Thisreduction in force is estimated to save Maine & Maritimes and itssubsidiaries a total of approximately $1.0 million per year, beginning in 2007.

·       Vehicleexpenses also increased approximately $344,000, primarily as a result of theshift from transmission and distribution to administrative and generalexpenses.

·       MPS’shealth insurance plan includes a contingent premium provision under which ifthe claims experience is worse than historical rates, MPS may be liable for anadditional premium. Based on the year-to-date experience and historical run-outexperience, an accrual was recorded in 2006. The accrual for the contingentpremium increased expense from 2005 to 2006 by approximately $290,000. Whilethis is a significant increase in 2006, historically the claims experience hasbeen less, and the Company has avoided substantial increases in premium costsfrom this provision.

·       Regulatoryexpenses increased $195,000 year over year. The distribution rate caseincreased regulatory expenses by approximately $136,000 from a combination ofinternal costs that were immediately expensed and amortization of the externallegal costs that were deferred and will be amortized over three years. The 2006OATT process, including the update of the formula calculation, also increasedexpense approximately $37,000, while the assessment for the Power Pact programincreased approximately $44,000.

·       Withthe freeze of pension service and salary accruals, effective December 31,2006, a one-time curtailment expense of approximately $98,000 was recorded in2006 in accordance with SFAS 88. Management believes the freeze of the pensionplan will reduce pension costs in the long-term for the Company, avoidcontinued risk associated with the return on assets and provide employees moreinvestment options and portability through the 401(k) plan.

·       Theseincreases were partly offset by a decrease in the common cost allocation fromMAM to MPS, which dropped approximately $774,000 from 2005 to 2006. Thedecrease was a result of two factors. First, the interpretation of how thecommon cost allocation percentages are calculated was changed as a result ofthe distribution rate case, reducing the percentage allocated to MPS fromapproximately 80% in 2005 to approximately 72% in 2006. Second, the overallcommon cost pool decreased approximately $129,000 from 2005 to 2006, as aresult of decreased labor expense, primarily due to decentralization of thehuman resource, information technology and accounting functions.

Administrative and general expenses were down slightlyfrom $9.58 million in 2004 to $9.36 million in 2005. Legal expensesfor regulatory issues decreased $132,000 year-over-year, primarily due toreduced legal costs associated with the transmission rate filings. The nethealth insurance cost to the Company also decreased by $103,000 from 2004 to2005. Finally, general advertising expenses decreased from $185,000 in 2004 to$80,000 in 2005. These decreases were partly offset by an increase inadministrative and general salaries of approximately $177,000. The remainingchange in administrative and general costs is due to other smaller changes inactivity from 2004 to 2005.

From 2005 to 2006, the increase in stranded costs isprimarily due to the increases in the deferred fuel amortization and the newamortization for the cancelled transmission plant. The impact of the deferredfuel stranded costs is the combination of the Wheelabrator-Sherman payments andthe deferred fuel credit shown in the table above, which represents thedeferral of additional stranded costs. This expense increased from a net of$4.05 million in 2005 to $4.51 million in 2006, as a result of the increase inthe amount allowed for recovery under stranded cost Docket No. 2003-666for those years. The cancelled plant amortization of $258,000 is the first yearof amortization of the costs of the proposed Limestone to St. Andre line.

The increases in stranded costs from 2004 to 2005reflect the increase in revenue requirements approved in MPUC Docket No. 2003-666.The rates per this docket were implemented March 1, 2004.

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The stranded costs effective from January 1,2007, through December 31, 2009, were approved in MPUC Docket No. 2006-506,with no change in rates. However, the stipulation does require reconciliationof the actual revenue volume to projections during the rate period.

The stranded costs forWheelabrator-Sherman as well as $3.2 million, 3.0 million and$3.1 million of the stranded costs for Maine Yankee for 2006, 2005 and2004, respectively, represent actual cash expenses during the year. Other costsrepresent amortization or recognition of regulatory assets and regulatoryliabilities.

***Other ContinuingOperations***

| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net Loss—Other *(in thousands)*             |       | $        | (1,325     | )        | $          | (1,416   | )          | $ | (763 | ) |
| Loss Per Share from  Other Continuing Operations |       | $        | (0.81      | )        | $          | (0.87    | )          | $ | (0.47 | ) |

 

Other continuing operations represents the commoncosts of MAM that cannot be allocated to MPS, the corporate costs of MAM directlyassociated with the unregulated businesses, the operations of Mecel, andintercompany eliminations. The plan to divest the unregulated operations mayslightly reduce the costs included in this segment; however, the majority ofthese costs are expected to continue subsequent to the divestiture of theunregulated operations without other cost reduction or recovery efforts.

The decrease in the net loss from this segment is dueto a combination of the reduction in the common costs incurred, as a result ofdecentralization during 2005 and 2006 and the reduction of in the loss fromequity earnings recognized by MAM, partly offset by increases in interestexpense and costs associated with acquisitions that were not completed.

The decrease in common costs as a result ofdecentralization was partly offset by a decrease in the percentage of commoncosts allocated to MPS and the allocation of one-third of the Oracle hostingfee expenses to MAM as agreed to in the distribution rate case, MPUC Docket No. 2006-024.The net impact of these offsetting changes was a decrease from $2.02 million inoperation and maintenance expenses for 2005 to $1.96 million in 2006.

The allocation of common costs is based on the ratioof certain operating expenses of the subsidiaries to the total of theseexpenses for all subsidiaries. With the acquisition of TMG in 2004 and thecreation of MTI in 2005, the percentage of common costs allocated to theunregulated subsidiaries and reported in this segment increased, resulting inthe increase in the net loss shown above of approximately $653,000 from 2004 to2005.

The reduction in the loss from equity earningsrecognized by MAM also reduced the “Other” loss from 2005 to 2006. In 2005, theequity in loss of Maricor Properties was approximately $232,000. With the saleof one share of stock of Maricor Properties in June 2006, the lossrecorded by MAM was $6,000, a $226,000 improvement.

During October 2005, MAM entered into a $4.0million line of credit with Bank of America. This line, plus the $1.7 millionterm note that began in June 2006, led to the increase in interest expenseyear-over-year.

In August 2006, MAM discontinued due diligence andacquisition negotiations with an engineering firm targeted for potentialpurchase while Management and the Board re-assessed the Company’sstrategic  direction. As a result,$211,000, net of tax, of due diligence expenses previously capitalized wereexpensed.

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***UnregulatedEngineering Services—Discontinued Operations***

| ** **                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Estimated Loss on  Sale                               |       | $        | (4,717     | )        | $          | —   |       | $ | — |   |
| Goodwill  Impairment Loss                             |       | (2,546   | )          | —   |       | —   |       |
| (Loss) Income  From Operations                        |       | (1,666   | )          | (1,264   | )          | (807     | )          |
| Benefit of  (Provision for) Income Taxes              |       | 3,478    |       | 510      |       | 254      |       |
| Net Loss—Unregulated Engineering Services        |       | $        | (5,451     | )        | $          | (754     | )          | $ | (553 | ) |
| Loss Per Share  from Unregulated Engineering Services |       | $        | (3.33      | )        | $          | (0.46    | )          | $ | (0.34 | ) |

 

As of December 31, 2006, in accordance with SFAS144, TMG has been reclassified to discontinued operations. As described morefully above, in the “Overview of Company Strategy,” MAM intends to divestsubstantially all of the assets of TMG. Based on the estimated sales price, TMGrecognized an estimated loss on the sale of $4.72 million in 2006, includingthe estimated costs of the sale. This loss was further increased by thegoodwill impairment loss recorded in the third quarter of 2006 of $2.55million, associated with the RES acquisition.

Theremainder of the loss incurred in 2006, and the losses incurred in 2004 and2005 were a result of the on-going operations of TMG, as follows:

| ** **            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating Revenue     |       | $        | 5,735      |     | $          | 5,291    |       | $ | 3,412 |   |
| Operating  Expenses   |       | (7,125   | )          | (6,173   | )          | (4,121   | )          |
| Interest Expense      |       | (276     | )          | (382     | )          | (98      | )          |
| Loss from  Operations |       | $        | (1,666     | )        | $          | (1,264   | )          | $ | (807 | ) |

 

Operating revenue increased $444,000 or 8.4% from 2005to 2006, the net impact of an increase in TMGC revenue of approximately $1.01million, offset by a decrease in TMGNE revenue of $562,000. The growth at TMGCis partly attributable to securing several larger projects during 2006, andpartly due to the expansion of electrical engineering capabilities in Monctonwith the acquisition of Pace. TMGNE revenue decreased due to limitedavailability of business development resources, and lack of traction in thehigher value service offerings TMG was developing.

The increase in operating revenue from 2004 to 2005 isa result of the acquisitions of RES and M&R in June 2004, with only apartial year of revenue for those divisions included in 2004.

Overall, expensesincreased $952,000 or 15.4%, outpacing the increase in revenue from 2005 to2006. The largest increases in expense year over year were:

·       Costof Sales at TMG increased $545,000 or 10.9% from 2005 to 2006, slightly morethan the increase in revenue. The majority of this increase was within TMGC’sMoncton division, and supported their increase in revenue. The additional costsare primarily composed of the new employees from the Pace acquisition, as wellas an increase in subcontractor expenses.

·       Approximately$174,000 accrued in 2006 for the remaining lease obligations on the space inHudson, Massachusetts, formerly occupied by RES Engineering,

·       Depreciationexpense increased $104,000, due to a full year of amortization of the leaseholdimprovements in the Boston office in 2006, compared to a partial year in 2005,

·       Separationaccruals at TMGNE associated with the reduction in force in September 2006of $78,000, and

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·       Recruitingfees in the third quarter of 2006 of $30,000, incurred to recruit additionalbusiness development resources for TMGNE.

Other smaller increases account for the remainder ofthe change from 2005 to 2006.

The increase in expensesfrom 2004 to 2005 is a result of the timing of the acquisitions of M&R andRES in June 2004.

***UnregulatedSoftware Technology—Discontinued Operations***

| ** **                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Estimated Loss on  Sale                              |       | (1,033   | )          | —   |       |     | —     |   |   |
| Loss From  Operations                                |       | (1,098   | )          | (540     | )          |     | —     |   |   |
| Benefit of Income  Taxes                             |       | 856      |       | 222      |       |     | —     |   |   |
| Net Loss—Unregulated Software Technology        |       | $        | (1,275     | )        | $          | (318     | )          |   | $ | — |   |   |
| Loss Per Share  from Unregulated Software Technology |       | $        | (0.78      | )        | $          | (0.19    | )          |   | $ | — |   |   |

 

MTI was acquired in February 2005. The increasein the loss from operations is a result of a change in the focus of theoperations of the segment from 2005 to 2006. During 2005, development of iPlanTMwas still underway, resulting in the deferral of labor and consulting costs.With the release of iPlanTM in April 2006, the deferral of softwaredevelopment costs ceased, and all labor and consulting expenses incurred werefor on-going support and minor programming, which were immediately expensed.

As of December 31,2006, MTI has been reclassified as discontinued operations. MAM intends todivest MTI’s iPlanTM and Building BlocksTM software assets, and terminate theoperations of this segment. The estimated loss on the sale is the estimateddifference between the sale price expected to be received for the MTI assetsand the unamortized investment in those assets from both the initialacquisition and the additional development work capitalized during 2005 and2006.

***Unregulated EnergyMarketing—Discontinued Operations***

| ** **                                        | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| (Loss) Income  From Operations                    |       | 2        |       | (3       | )          | (678     | )          |
| Benefit of  (Provision for) Income Taxes          |       | (1       | )          | 2        |       | 270      |       |
| Net Loss—Unregulated Energy Marketing        |       | $        | 1          |     | $          | (1       | )          | $ | (408 | ) |
| Loss Per Share  from Unregulated Energy Marketing |       | $        | 0.00       |     | $          | (0.00    | )          | $ | (0.25 | ) |

 

Energy Atlantic, MAM’s discontinued energy marketingsegment, ceased operations in 2004. The loss incurred in 2004 is a result ofthe accruals for buy-out of a software lease of $181,000, employee severanceagreements of $172,000, and a loss on disposal of fixed assets of $69,000, inaddition to the operating results for January and February 2004 forthe run-out of the remaining contracts. The final obligations for terminationof this business were settled in April 2006; accordingly, no furtherincome statement activity is anticipated from Energy Atlantic.

***Critical AccountingPolicies***

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 at thedate of the financial statements and during the reporting period. Some of thosejudgments can be subjective and complex, and actual results could differ fromthose estimates. The Company’s most critical accounting policies includeregulatory assets and liabilities; revenue recognition; and goodwill andintangible assets, and are described in detail below.

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***Regulatory Assets and Liabilities***

Pursuant to Statement of Financial AccountingStandards No. 71 (“SFAS 71”), “Accounting for the Effects of Certain Typesof Regulation,” the Company capitalizes, as regulatory assets, incurred andaccrued costs that are probable of recovery in future electric rates. It alsorecords, as regulatory liabilities, obligations to refund previously collectedrevenue or to spend revenue collected from customers on future costs.

Unfunded future income taxes and deferred income taxesare amortized as the related temporary differences reverse. Unamortized loss ondebt retirements is amortized over the lives of the related debt issues.Nuclear plant obligations, deferred fuel costs, other regulatory assets andother regulatory liabilities are amortized over various periods in accordancewith MPS’s current rate plans. MPS earns a return on substantially allregulatory assets for which funds have been spent.

The Company believes thatMPS’s electric 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 31,2006, $64.4 million of regulatory assets remained on MPS’s books. These assetswill be amortized over various periods in accordance with MPUC approved rateorders.

***Revenue Recognition***

MPS records an estimate for revenue for electricitydelivered, but not yet billed to customers. This estimate requires MPS to makecertain assumptions. A change in those assumptions could cause the amountsreported as revenues to change.

In July 2000, MPS began recording the differencebetween the approved tariff rate for two large industrial customers and theircurrent special discount rates, under contracts approved by the MPUC, asaccrued revenue. The resulting deferred asset will be subsequently collected inrates as approved by the MPUC. During 2006 and 2005, $280,000 was recognized asstranded costs associated with these two contracts. The MPUC approved a thirdspecial discount during 2004 in Docket No. 2004-88, under which MPShas deferred $744,000 and $495,000 as of December 31, 2006 and 2005,respectively. Recovery of this special discount will begin in 2007.

Maricor Technologies, Inc.is engaged as a seller and licensor of software. Generally, revenue will berecognized in accordance with Statement of Position No. 97-2 (“SOP 97-2”),“Software Revenue Recognition,” as amended, and Statement of Position No. 98-9(“SOP 98-9”), “Modification of SOP 97-2, Software RevenueRecognition, with Respect to Certain Transactions.”  For multiple element license arrangements,the license fee is allocated to the various elements based on evidence of fairvalue. When a multiple element arrangement includes rights to post-contractcustomer support, the portion of the license fee allocated to support isrecognized ratably over the term of the arrangement.

***Percentage-of-Completion Accounting for TMG Contracts***

Revenues and profits from The Maricor Group’sengineering contracts are recognized on a percentage completed basis for theperiod. Costs incurred to date are divided by total estimated costs to obtainthe percentage completed. This percentage multiplied by the total estimatedprofit is the gross profit earned to date on the contract. Gross profit earnedto date on the contract plus costs incurred to date on the contract equalsrevenues recognized to date. Revenue recognized to date compared to billings todate results in either under- or over-billings. Losses on contracts arerecognized in full if there is evidence that an overall loss will be sustained.The provision is computed on the basis of the total estimated cost to completethe contract and reflects all elements of costs included in contract costs. Costsincurred on approved change orders are treated as job costs for that particularjob. Costs incurred on 

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unapproved change ordersare treated as costs in the period in which they are incurred if it is notprobable that the costs will be recovered through a change in the contractprice. If it is probable that the cost will be recovered through a change inthe contract price, the costs are deferred until there is an agreed upon changein the contract price.

In accordance with normalpractice in the construction industry, The Maricor Group includes in currentassets and current liabilities amounts related to construction contractsrealizable and payable over a period in excess of one year. Deferred contractrevenue represents the excess of billings to date over the amount of contractcosts and profits (or contract revenue) recognized to date on the percentage ofcompletion accounting method on certain contracts. Deferred contract revenuesrelated to The Maricor Group’s contracts were $139,000 and $132,000 at December 31,2006 and 2005, respectively. Unbilled contract revenue represents the excess ofcontract costs and profits (or contract revenue) recognized to date on thepercentage of completion accounting method over billings to date on theremaining contracts. Unbilled contract revenue results when the appropriatecontract revenue amount has been recognized in accordance with thepercentage-of-completion accounting method, but a portion of the revenuerecorded cannot be billed currently due to the billing terms defined in thecontract and/or costs, recorded at estimated realizable value, related tounapproved change orders or claims incurred. Unbilled contract revenue relatedto The Maricor Group’s contracts was $1.15 million and $816,000 at December 31,2006 and 2005, respectively.

***Goodwill and Acquired Intangibles***

The Company’s business acquisitions may result ingoodwill and other intangible assets, which affect the amount of future periodamortization expense and possible impairment expense that the Company willincur. The Company has adopted Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets,” which requires that theCompany, on an annual basis, calculate the fair value of the reporting unitsthat contain the goodwill and compare that to the carrying value of thereporting unit to determine if impairment exists. Impairment testing must takeplace more often if circumstances or events indicate a change in the impairmentstatus. In calculating the fair value of the reporting units, Management relieson a number of factors including operating results, business plans, economicprojections, anticipated future cash flows, and transactions and market placedata. There are inherent uncertainties related to these factors and Management’sjudgment in applying them to the analysis of goodwill impairment. If actualfair value is less than the Company’s estimates, goodwill and other intangibleassets may be overstated on the balance sheet and a charge would need to betaken against net earnings.

Goodwill resulted from the acquisitions of Eastcan,M&R, Pace and RES. For impairment testing purposes, the reporting unit wasdefined as the acquired operations. For these acquisitions, the operationsacquired became the mechanical and electrical engineering components of TMGCand TMGNE.

MAM selected November 30 as the date for theirannual impairment test. In accordance with SFAS 142, based on theperformance of TMGNE’s mechanical and electrical engineering operations, aninterim impairment test was performed during the third quarter of 2006, and thegoodwill recorded as a result of the RES acquisition of $2.55 million waswritten off.

The annual goodwill impairment test was performed asof November 30, 2006, for TMGC. Based on the mechanical and electricalengineering service line of TMGC, Management has concluded that no impairmentexisted as of November 30, 2006. The losses incurred to date by TMGC havebeen a result of new service lines outside the scope of the core mechanical andelectrical engineering business acquired, plus the additional costs associatedwith operating as part of a publicly traded company, as opposed to being anindependent, private organization.

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The probable sale of TMGincludes the overall operations of the segment, including both the reportingunit valued in the November 30 impairment test and the other business lines.Due to the loss incurred in these other lines, the estimated sales priceoverall is lower than the estimated value of the reporting unit, and anestimated loss on the sale is probable. Therefore, the goodwill associated withTMGC was largely written off as of December 31, 2006. This write-off was themajority of the estimated loss on the sale, shown under discontinued operationsin the Consolidated Statement of Operations.

***Pension and Other Post-Retirement Benefit Plans***

MPS has pension and otherpost-retirement benefit plans, principally healthcare benefits, coveringsubstantially all of its employees and retirees. In accordance with Statementof Financial Accounting Standards No. 87 (“SFAS 87”), “Employer’sAccounting for Pensions,” Statement of Financial Accounting Standards No. 106(“SFAS 106”), “Employer’s Accounting for Post-retirement Benefits Other ThanPensions,” and Statement of Financial Accounting Standards No. 158 (“SFAS158”), “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans,” the valuation of benefit obligations and the performanceof plan assets are subject to various assumptions. The primary assumptionsinclude the discount rate, expected return on plan assets, rate of compensationincrease, health care cost inflation rates, expected years of future serviceunder the pension benefit plans and the methodology used to amortize gains orlosses. Changes in those assumptions could also have a significant effect onthe Company’s non-cash pension income or expense or the Company’spost-retirement benefit costs. For additional information on the Company’sbenefit plans, see Note 10 to the Consolidated Financial Statements, “BenefitPrograms.”

***Income Taxes***

Statement of Financial Accounting Standards No. 109(“SFAS 109”), “Accounting for Income Taxes,” requires an asset and liabilityapproach to accounting and reporting income taxes. SFAS 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. For the years ended December 31, 2006, and 2005,Management evaluated the deferred tax asset valuation and determined that novaluation allowance was needed.

In June 2006, the FASB issued FASB InterpretationNo. 48 (“FIN 48”), *“Accounting forUncertainty in Income Taxes,”*effective on a “catch-up” basis forfiscal years beginning after December 15, 2006. This guidance interpretsSFAS 109, *“Accounting for Income Taxes,”*andclarifies the existing guidance regarding recognition of uncertain taxpositions. Under FIN 48, a tax benefit from an uncertain tax position can onlybe recognized if it is more likely than not that the position is sustainablebased on its technical merits and relevant administrative practices. The amountof the tax benefit allowed to be recognized is limited to the greatest amountof benefit that is cumulatively greater than 50% likely of being realized. Theguidance also notes that these tax benefits can become recognized or “derecognized”as new information becomes available. The Company has performed a preliminaryassessment under FIN 48, and does not anticipate a significant impact to thefinancial statements as a result of this guidance.

MPS has deferredinvestment tax credits and amortizes the credits over the remaining estimateduseful life of the related utility plant. MPS records regulatory assets orliabilities related to certain deferred tax liabilities or assets, representingits expectation that, consistent with current and expected ratemaking, thesetaxes will be recovered from or returned to customers through future rates.

***Off-Balance SheetArrangements***

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

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“Accounting for Leases”and noted in Note 12 to these financial statements, the Company has no otheroff-balance sheet arrangements. See Item 8 of this Form 10-K, Note12 to Consolidated Financial Statements, “Commitments, Contingencies andRegulatory Matters,” under “Off-Balance Sheet Arrangements” for a summarizationof payments for leases for a period in excess of one year for the years ended December 31,2006 and 2005.

On June 30, 2006, Maricor Properties sold oneshare of stock representing a 50% ownership interest to Ashford Investments Inc.Management reviewed the characteristics of Maricor Properties subsequent tothis transaction in accordance with Financial Accounting Standards BoardInterpretation No. (“FIN”) 46(R), “*Consolidationof Variable Interest Entities, an Interpretation of ARB 51*,” anddetermined that MAM remained the primary beneficiary of Mecel, but is not theprimary beneficiary of Maricor Properties, including the Vaughan Harveybuilding and Cornwallis, as of the date of this transaction. Therefore, theassets and liabilities of Mecel remain consolidated in these financialstatements, while the assets and liabilities of the other components of MaricorProperties are no longer consolidated as of June 30, 2006.  MAM’s investment in Maricor Properties isreported within “Investments in Associated Companies,” and receivables from andpayable to MAM and its wholly-owned subsidiaries from Maricor Properties andits subsidiaries are presented within the lines “Accounts Receivable fromAssociated Companies,” and “Accounts Payable to Associated Companies.”

MAM is an equal partner inMaricor Ashford Ltd, a joint venture with Ashford Investments, Ltd., anunaffiliated real estate management company. Maricor Ashford Ltd is a realestate development and redevelopment company based in Moncton, New Brunswick,Canada. Management reviewed the characteristics of this joint venture inaccordance with FIN 46(R), and determined that MAM is not the primarybeneficiary of this joint venture. Accordingly, the activity of Maricor AshfordLtd has been recorded in these financial statements under the equity method,and Maricor Ashford Ltd is not consolidated with these financial statements.

***Table of Contractual Obligations***

The following tablesummarizes our contractual obligations as of December 31, 2006 (*in thousands of dollars*):

| ** **                         | ** ** | **Payments Due By Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| **Contractual Obligations**   | ** ** | ** **                                | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
| Long-Term Debt  Obligations        |       | $                                         | 32,725     |   |   | $ | 2,703 |   |   |   | $ | 3,495 |   |   |   | $ | 3,927 |   |   |   | $ | 22,600 |   |   |
| Interest Payments(1)               |       | 16,329                                    |       |   | 1,093 |   |   |   | 2,048 |   |   |   | 2,018 |   |   |   | 11,170 |   |   |
| Operating Lease  Obligations(2)    |       | 789                                       |       |   | 229 |   |   |   | 416 |   |   |   | 144 |   |   |   | — |   |   |
| Capital Lease  Obligations         |       | 312                                       |       |   | 70 |   |   |   | 154 |   |   |   | 88 |   |   |   | — |   |   |
| Financial System Hosting  Contract |       | 3,763                                     |       |   | 538 |   |   |   | 1,075 |   |   |   | 1,075 |   |   |   | 1,075 |   |   |
| Employment Agreements              |       | 530                                       |       |   | 515 |   |   |   | 15 |   |   |   | — |   |   |   | — |   |   |
| **Total**                          |       | $                                         | 54,448     |   |   | $ | 5,148 |   |   |   | $ | 7,203 |   |   |   | $ | 7,252 |   |   |   | $ | 34,845 |   |   |
|                                    |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

(2)          MPShas one lease for a right-of-way with an undefined term. Because the amount ofthe liability cannot be determined, this lease has been excluded from the “Morethan 5 years” column. This lease payment is approximately $30,000 per year.

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***Operating Capitaland Liquidity***

MAM’s current liabilities of $24.71 million as of December 31,2006, exceed its current assets of $13.53 million by $11.18 million, exposingMAM to liquidity concerns and the risk of being unable to fulfill itsobligations in 2007.  Of these currentliabilities, $12.97 million represents short-term borrowings, including thelines of credit with Bank of America and Katahdin Trust Company. MAM has takensteps to mitigate this short-term risk before and after year-end, includingidentification of options to reduce or defer costs. Based on these steps andcurrent financial projections, MAM has sufficient cash flow for the foreseeablefuture.

In the long term, Management expects MAM’s cash flowto improve, with MPS’s recovery of deferred fuel costs currently deferred byMPS. Until 2007, the cash expenditures for deferred fuel exceeded the recoveryof stranded costs. With the expiration of the Wheelabrator-Sherman contract in December 2006,this position has reversed, and recovery of stranded costs will exceed the cashoutflows. These stranded cost free cash flows can be used, in part, to helpfulfill these obligations.

The Company’s cash and cash equivalents increased from$363,000 at December 31, 2005, to $905,000 at December 31, 2006. NetCash Flow Provided by Operating Activity decreased by approximately $282,000from 2005 to 2006, largely the result of increased net losses in unregulatedoperations.

The Company’s “Statements of Consolidated Cash Flows,”of the Company’s Consolidated Financial Statements as presented in Item 8 ofthis Form 10-K, reflects the Company’s liquidity and sources ofoperating capital. Cash flow provided by operating activities in 2006 was $3.63million, while the net loss for the year was $5.92 million, due to the lossesin discontinued operations. The change in deferred regulatory and debt issuancecosts was $5.1 million, principally due to the deferral of additional WSstranded cost, which was partially offset by an increase in deferred incometaxes of $915,000 million. Net cash flow provided by financing activitiestotaled $140,000. During 2006, the Company had debt retirements of $2.43million, including MPS bond repayments, and other note repayments, as well asMPS’s refinancing of its short-term borrowings. In 2006, the Company increasedshort-term borrowings by $2.57 million. In 2006, $3.22 million of net cash flowwas used for investing activities. The Company invested $3.53 million in fixedassets. During 2006, $850,000 was received for the partial redemption of MaineYankee common stock.

Cash flow provided by operating activities in 2005 was$3.91 million, while the net loss for the year was $220,000. The change indeferred regulatory and debt issuance costs was $4.13 million, principally fromthe deferral of additional WS stranded cost, was partially offset by anincrease in deferred income taxes of $1.06 million. Net cash flow provided byfinancing activities totaled $959,000. In 2005, the Company paid $1.23 millionin dividends, used $4.23 million for sinking fund payments to retire long-termdebt and increased short-term borrowings by $6.2 million. In 2005, $5.43million of net cash flow was used for investing activities. The Companyinvested $4.85 million in Fixed Assets. Finally, restricted investmentsincreased $8,000 due to interest earned on the capital reserve fund associatedwith the FAME bonds and the insurance proceeds held in trust. During 2005, $350,000was received for the partial redemption of Maine Yankee common stock.

When MAM divests its unregulated operations, theproceeds from the sales, after settlement of any remaining obligations of theunregulated operations, will be applied toward the debt owed by TMG to KatahdinTrust Company. Management cannot warrant that the proceeds from the anticipatedsales will be sufficient to repay all of the outstanding debt.

MAM and MPS have a deferred income tax liability ofapproximately $26.37 million as of December 31, 2006, $13.84 million ofwhich is associated with the deferred fuel stranded costs. As the stranded costfree cash flow commences in 2007, this deferred tax liability will begin toreverse, triggering 

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higher income taxliabilities in the years these funds are recovered. A portion of the strandedcost free cash flow will be required to settle these liabilities.

On June 13, 2006, MAM entered into an agreementto borrow up to $1.7 million from Bank of America. This loan has interestpayable on the last day of each month beginning at June 30, 2006, untilfull payment of any outstanding principal at a rate of the Bank’s prime rateplus 1%. The rate at December 31, 2006, was 9.25%. This term loan wasavailable to the Company until December 31, 2006, or earlier if the loanprincipal was paid down. Minimum principal payments in the amount of $140,000at the end of each month began on January 31, 2007, and end the earlier ofDecember 31, 2007, or until the loan is fully repaid. As of December 31,2006, there was $1.7 million outstanding on this term note, with no additionalamounts available.

On October 7, 2005, MPS arranged a three-year,$10 million revolving, working capital line of credit with Bank of America asAgent, secured by $6.0 million of first mortgage bonds. This line of creditreplaces the former $6 million line of credit with Bank of New York as Agent. Interestrates on the new facility are 30-, 60-, or 90-day LIBOR plus1.375% or Bank of America’s prime rate. This line of credit is subject tocertain financial covenants, measured quarterly beginning December 31,2005. These covenants include a minimum tangible net worth, a minimum debtservice coverage ratio and a maximum debt-to-total capital ratio. As of December 31,2006, there was $8.0 million outstanding on this line of credit, with $2.0million available.

On October 21, 2005, MAM arranged a new,three-year $4.0 million revolving line of credit with Bank of America forworking capital, letters of credit and the repayment of the $750,000 KatahdinTrust Company ninety-day line of credit. Of this $4.0 million line of credit,$1.73 million is in the form of a letter of credit (“LOC”) securing a loan fromRoyal Bank of Canada which loan was used as a portion of the funds to acquireCornwallis Court Developments. The MAM line of credit is secured by a generalsecurity interest in the business assets of MAM, excluding the assets of MPS. Theinterest rate is 30-, 60- or 90-day LIBOR plus 2.5% or Bankof America’s prime rate. The loan agreement contains certain financialcovenants, measured quarterly beginning December 31, 2005, which requireMAM to maintain a minimum tangible net worth, a minimum debt service coverageratio and a maximum debt-to-total capital ratio. At December 31, 2006,there was $2.27 million outstanding on this line of credit, with no additionalavailability.

The Maricor Group has a revolving credit arrangementwith Katahdin Trust Company for borrowings up to $1 million. Thisrevolving credit arrangement was arranged on November 29, 2005, is for aterm of one year and is subject to extension with the consent of the bank. Thisfacility was renewed on November 29, 2006, with an amendment of theinterest rate margin from 2.75% to 3.25%, and effective June 30, 2007, theavailability of the revolving line of credit will be reduced to $800,000. Allother terms and conditions remained the same. As of December 31, 2006,there was $1 million outstanding under the revolving credit arrangement at avariable interest rate of three month LIBOR plus 3.25%. Under the terms of thecredit agreement with Katahdin Trust Company, the $1 million TMG line of creditmust be repaid in full for at least one 30-day period during each year. OnJuly 19, 2006, Katahdin Trust Company waived this requirement for 2006. Thisfacility replaced the $1 million revolving credit facility previously with TDBankNorth N.A.

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

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addition, MAM hasguaranteed a TMG facility with Katahdin Trust Company, and a Maricor Propertiesterm loan with Royal Bank of Canada.

MAM did not meet the interest coverage ratio requiredunder the MAM Credit Agreement with Bank of America or the TMG facility withKatahdin Trust Company for the third quarter of 2006 and the fourth quarter of2006. Bank of America and Katahdin Trust Company granted waivers fromcompliance with the interest coverage ratio requirements for both the third andfourth quarters. The waivers included three provisions. First, waiver feestotaling $56,000 were assessed.  Second,a modification was made to the interest coverage ratio requirements for 2007for the Bank of America $1.7 million term note, the Bank of America $4.0million line of credit and the Katahdin Trust Company $1.0 million line ofcredit.  For the three, six and twelvemonths ended March 31, June 30 and December 31, 2007, MAM must meet a 1.75:1interest coverage ratio, calculated as earnings before interest and incometaxes divided by interest expense.  Forthe nine months ended September 30, 2007, 1.25:1 is the minimum ratio required.The third provision is the conversion of the Bank of America $4.0 million lineof credit from a revolving credit agreement to a term note, effective March 13,2007. With this conversion, the principal balances must be repaid at a rate of$40,000 per month, beginning January 31, 2008.

Due to negative cash flowsfrom stranded cost deferrals for MPS and cash requirements for TMG, MaricorProperties and MTI, Management worked to ensure the Company had adequate creditfacilities for 2006 to cover sinking fund payments, construction activities andother financial and working capital obligations.

***Capital Resources***

The Company has the ability to raise capital throughthe issuance of common and preferred stock. The Company is authorized by itsArticles of Incorporation to issue up to 5,000,000 shares of common stock and500,000 shares of preferred stock. MPS can also issue $2.5 million of firstmortgage bonds and $15.8 million of second mortgage bonds without bondableproperty additions.

On November 22,2004, MPS entered into a $6.0 million, unsecured, 7-year term loan withFleet National Bank (now Bank of America). The proceeds of the loan were usedto repay and refinance a portion of the amounts outstanding under MPS’srevolving credit arrangement associated with the Company’s prior capitalexpenditures. The loan agreement contains certain covenants requiring themaintenance of a minimum Tangible Net Worth, maximum Ratio of Indebtedness forBorrowed Money to Total Capital and a minimum Ratio of Net Income to FixedCharges. Interest is payable monthly at a variable interest rate of LIBOR plus1.5%. The loan is to be repaid in scheduled monthly principal payments asfollows:

| December 1,  2004 through November 1, 2007 |   | $50,000 |   |
|------------------------------------------------------|--------|---------|--------|
| December 1,  2007 through November 1, 2009 |   | $80,000 |   |
| December 1, 2009  through November 1, 2011 |   | $95,000 |   |

 

On November 29, 2005, The Maricor Group enteredinto a $2.2 million, secured, five-year term loan with Katahdin Trust Company.The proceeds of the loan were used to repay and refinance the $2.2 million termloan from TD BankNorth N.A. The loan requires interest-only payments at avariable interest rate of Three-Month LIBOR, plus 2.75% through November 29,2007. Monthly, principal payments of approximately $18,300 commence December 29,2007, with a final payment of $1.54 million at maturity on December 29, 2010.This loan is guaranteed by MAM and by The Maricor Group, Canada Ltd. The loanagreement contains certain financial covenants, measured quarterly beginning December 31,2005, which require MAM to maintain a minimum tangible net worth, a minimumdebt service coverage ratio and a maximum debt-to-total capital ratio andrequire The Maricor Group to maintain a minimum debt service coverage ratio.

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On July 5, 2006, Maricor Properties borrowed$2.45 million CDN from Merrill Lynch Mortgage Lending to refinance temporarydebt at the Royal Bank of Canada. The new debt is a 10-year mortgageloan, with monthly payments of principal and interest based on a 25-yearamortization schedule throughout the term of the loan, and the remaining loanbalance payable at the end of the term. The interest rate is variable,calculated as the greater of (a) 135 basis points over the yield on theGovernment of Canada mortgage benchmark bond most closely approximating theterm of the loan or (b) a floor of 5.20%. As of the date of borrowing, theinterest rate was 6.011%. This loan is secured by the Vaughan Harvey Blvd.property in Moncton, New Brunswick, and is guaranteed by Ashford InvestmentsInc., which is a 50% equity owner of Maricor Properties.

On August 4, 2006, Maricor Properties alsoborrowed $4.05 million CDN from Merrill Lynch Mortgage Lending to refinance theJ. Angus MacDonald Building. The proceeds were used to repay the Standard Lifemortgage. The debt is a 10-year mortgage loan, with monthly payments ofprincipal and interest based on a 25-year amortization schedulethroughout the term of the loan, and the remaining loan balance payable at theend of the term. The interest rate is variable, calculated as the greater of (a) 135basis points over the yield on the Government of Canada mortgage benchmark bondmost closely approximating the term of the loan or (b) a floor of 5.20%. Asof the date of borrowing, the interest rate was 5.695%. This loan is secured bythe J. Angus MacDonald building, and is guaranteed by Ashford Investments Inc.and Maricor Properties.

The Maine Public Utility Financing Bank (“MPUFB”) hasissued its tax-exempt bonds on behalf of MPS for the construction of qualifyingdistribution property. Originally issued for $15 million and reduced withgenerating asset sale proceeds, the 1996 Refunding Series had $13.6million outstanding at December 31, 2006, and is due in 2021. On October 19,2000, the 2000 Series of bonds was issued in the amount of $9 million,with these bonds due in 2025. The proceeds of the 2000 Series were placedin trust to be drawn down for the reimbursement of issuance costs and for theconstruction of qualifying distribution property. For both tax-exempt bondseries, a long-term note was issued under a loan agreement between MPS and theMPUFB, with MPS agreeing to make payments to the MPUFB for the principal andinterest on the bonds. Concurrently, pursuant to a letter of credit andreimbursement agreement, the Bank of New York had separately issued its directpay letter of credit (“LOC”) for the benefit of the holders of each series ofbonds. Both LOC’s were due to expire in June 2006.

On February 28, 2006, Bank of America issued LOC’sto replace those of Bank of New York. The new LOC’s are due to expire on January 31,2009. To secure MPS’s obligations under the letter of credit and reimbursementagreement for the 1996 Refunding Series, MPS issued second mortgage bonds inthe amount of $14.4 million in June 2002. For the 2000 series, MPS issuedfirst and second mortgage bonds, in the amounts of $5 million and $4.53million, respectively, to secure MPS’s obligation under the letter of creditand reimbursement agreement for this series. For both series, MPS has theoption of selecting weekly, monthly, annual or term interest rate periods. For bothseries, MPS has continued to use the weekly interest rate period. Sinceissuance, the average of these weekly rates was 2.85% and 2.22% for the 1996Refunding Series and the 2000 Series, respectively. In September 2003,MPS executed an interest rate swap agreement with Fleet National Bank, now Bankof America, for the remaining terms of the issues with an effective fixed rateof 4.57% for the 1996 series and 4.68% for the 2000 series. By its rate orderin Docket No. 2003-85, the MPUC approved the execution of theagreements and allowed recovery of the additional interest costs.

On May 29, 1998, FAME issued $11.54 million ofits Taxable Electric Rate Stabilization Revenue Notes, Series 1998A (MPS)(the “Notes”) on behalf of MPS. The Notes were issued pursuant to, and aresecured under, a Trust Indenture by and between FAME and TD BankNorth N.A.(previously Peoples Heritage Bank), Portland, Maine, as Trustee (“the Trustee”),for the purpose of: (i) financing the up-front payment toWheelabrator-Sherman of approximately $8.7 million, as required under anamended purchase power agreement; (ii) for the Capital Reserve Fund, asrequired by FAME under their Electric Rate 

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Stabilization Program; and(iii) for issuance costs. The Notes are limited obligations of FAME,payable solely out of the trust estate available under the Indenture,principally the Loan Note and Loan Agreement with MPS and the Capital ReserveFund held by the Trustee. MPS issued $4 million of its first mortgage bonds and$7.54 million of second mortgage bonds. The MPUC also approved the execution ofan interest rate swap agreement with Fleet National Bank (now Bank of America)for the remaining term of the issue with an effective fixed rate of 2.79%.

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

In the orderapproving the reorganization of MPS and the formation of Maine &Maritimes Corporation, the parties stipulated to the following conditions. Thefollowing relate to the availability of capital resources for MAM via itsrelationship with MPS:

·       MPSwill not make any loan to, or guarantee or assume any obligation of, MAM or anyof its affiliates without prior MPUC approval.

·       TheMPUC will not place additional restrictions, in advance, on the dividend policyof MPS. The Board of Directors of MPS will continue to set dividend policy forMPS with due regard for the financial performance, needs and health of MPS andthe maintenance of a safe, efficient and reasonable capital structure.Commencing on July 1, 2003, if at any time MPS’s common dividend payoutratio (dividends per share divided by earnings per share) exceeds 1.0 (i.e.100%) on a two-year rolling average basis, MPS will notify the MPUC in writingwithin thirty (30) days of the end of the calendar quarter (the initial twoyear period shall be April 1, 2001 through March 31, 2003.) Therequired notification should explain the circumstances (extraordinary or not)of this event and the financial condition of MPS. Moreover, the MPUC reservedthe right in the future, should financial circumstances warrant, to imposelimitations on the dividend policy of MPS. As of December 31, 2006, thislimitation has not been exceeded; therefore, such notification to the MPUC hasnot been required.

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

·       MAM’stotal non-utility investment, excluding accumulated unregulated retainedearnings, will not exceed fifty million dollars (US$50,000,000) and such amountwill exclude retained earnings from Energy Atlantic (now inactive), providedthat MPS may at any time seek an enlargement of this limitation for good causeshown.

·       Withoutprior MPUC approval, MAM will not sell, pledge or otherwise transfer any commonstock of MPS.

·       To protect and maintain thefinancial integrity of the regulated utility, MPS and MAM agreed to maintainthe common equity ratio of MPS at a level of not less than forty eight percent(48%) of the total capital at all times, provided that the MPUC may establish,for good cause shown, a lower ratio in connection with its authorization of afuture debt issuance proposed by MPS. Total capital is defined as the sum ofthe following components: common equity, preferred equity, long-term debt,current maturities long-term debt, long-term capital leases, current maturitieslong-term capital leases, and short-term debt.

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***Maine Yankee***

MPS owns 5% of the common stock of Maine Yankee AtomicPower Company (“MY”), which operated an 860 MW nuclear power plant inWiscasset, Maine, that has ceased power operations and is now in the finalstages of decommissioning.

Based on the decommissioning of the Maine YankeeAtomic nuclear plant, MPS believes it is entitled to recover substantially allof its share of such costs from its customers and, as of December 31,2006, is carrying on its consolidated balance sheet a regulatory asset and acorresponding liability in the amount of $7.74 million, which reflects MPS’s 5%share of Maine Yankee’s most recent estimate of the remaining decommissioningcosts, less actual decommissioning payments made since then, and discounted bya risk-free interest rate.

In accordance with its 1999 FERC rate case settlement,on October 20, 2003, MY filed a revised formula rate schedule with theFERC, proposing an effective date of January 1, 2004, when majordecommissioning activities were expected to be nearing completion. The filingcontained a revised decommissioning cost estimate and collection schedule toassure that adequate funds are available to safely and promptly decommissionthe Plant and operate and manage the independent spent fuel storageinstallation (“ISFSI”). In the filing, MY also requested a change in itsbilling formula and an increase in the level of collection for certainpost-retirement benefits. To meet these needs, MY proposed to collect anadditional $3.77 million per year through October 2008, over currentdecommissioning collection levels, exclusive of any income-tax liability, forthe decommissioning and spent-fuel management expense, and to collect the amountsneeded to replenish its Spent Fuel Trust for funds previously used for ISFSIconstruction from November 2008 through October 2010. On September 16,2004, the FERC approved the new rates pursuant to a settlement reached by theactive parties the reflected substantially similar terms to those proposed byMY in its October 2003 filing. MPS’s share of this increase, approximately$189,000, will be recovered as stranded costs.

Federal legislation enacted in 1987 directed theDepartment of Energy (“DOE”) to proceed with the studies necessary to developand operate a permanent high-level waste repository at Yucca Mountain in Nevada.The project has encountered significant delays, and the DOE indicated that thepermanent disposal site was not expected to open before 2012, althoughoriginally scheduled to open in 1998. Maine Yankee cannot predict when orwhether the Yucca Mountain project or any other project that would provideinterim storage will be completed.

As an interim measure until the DOE meets its contractualobligation to dispose of its spent fuel, MY constructed an ISFSI, utilizingdry-cask storage, on the Plant site and completed the transfer of the spentfuel and a comparatively small amount of greater-than-Class C waste to theISFSI in February 2004. MY’s current cost estimate is based on anassumption of long-term on-site storage.

In accordance with a planapproved by the Securities and Exchange Commission, Maine Yankee has startedthe redemption of its common stock periodically through 2008.

***Regulatory Proceedings***

For regulatoryproceedings, see Part I, Item 3, “Legal Proceedings,” which isincorporated in this section by this reference.

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**Item 7a.**                 Quantitativeand Qualitative Disclosures about Market Risk

The followingrepresents Maine & Maritimes Corporation’s more significant risks. Whileevery effort is made to describe the character of the organization’s risks, itcannot warrant that this list is all inclusive. The Company, where possible,does take steps in each of the following areas to attempt to mitigate suchrisks.

(a)          MAM and its subsidiariesare faced with interest rate risk on the MAM $4.0 million Bank of America lineof credit, the TMG $2.0 term note and $1.0 million line of credit with KatahdinTrust Company, and the MPS line of credit.

The Company also had material interest rate risk untilMPS fixed interest rates on three variable rate debt issues on September 9,2003, with a derivative interest rate swap transaction. Upon execution of theinterest rate swaps on September 9, 2003, MPS effectively fixed throughmaturity the rates on the 1996 Series due in 2021 and the 2000 Series duein 2025 at 4.42% and 4.53%, respectively. The rate on the 1998 Notes due in2008 was also fixed at 2.79% through maturity. As of December 31, 2006,the 1996 and 2000 Series and the 1998 FAME Notes had outstanding balancesof $13.6 million, $9.0 million and $3.18 million, respectively. The fixed ratesare higher than the previous floating rates and continue to be as of the dateof this filing. Although incurring no up-front cost to execute the swaps, MPSis currently incurring increased interest expenses. However, Managementbelieves that the fixing of interest rates over the terms of the debt willserve to protect both shareholders and consumers from what it believes to beupward variable interest rate pressures. See Item 8 of this Form 10-K,Note 7 to the Consolidated Financial Statements, “Accumulated OtherComprehensive Income (Loss),” which is hereby incorporated by this reference,for a discussion on the impact on MPS’s financial statements and furtherdescription of the interest rate swaps.

As discussed in previous Form 8-K, 10-Kand 10-Q quarterly filings, MPS had partially mitigated its risk bypurchasing a 6% interest rate cap on its two tax-exempt bonds, the 1996 Series andthe 2000 Series, issued on MPS’s behalf by the Maine Public Utility FinancingBank. The interest rate cap on the 1996 and 2000 Series expired in November 2003.MPS also purchased a 7% interest rate cap, which expires in 2008, for MPS’sTaxable Electric Rate Stabilization Revenue Notes issued in 1998 on its behalfby the Finance Authority of Maine (“FAME”). Further discussion on these debtissues and the associated interest rate caps is contained in Item 8 to theConsolidated Financial Statements, “Long-Term Debt,” and is hereby incorporatedby this reference.

(b)         The Company’s unregulatedreal estate development and investment subsidiary, Maricor Properties Ltd, andits subsidiaries, Cornwallis Court Developments Ltd and Mecel Properties Ltd,are subject to certain risks and uncertainties including, but not necessarilylimited to interest rate risks associated with variable interest rates, shiftsin local real estate market conditions; market-based competition; the inabilityto fully lease rental properties; facility performance related to unforeseen orunknown structural, mechanical and/or electrical systems failures; unexpectedincreases in property rehabilitation costs; new government regulations; andtenant credit and default risks.

(c)          Transactions withMe&NB; The Maricor Group, Canada Ltd; and MAM’s investment in MaricorProperties Ltd are subject to foreign currency translation risk. Income andexpenses are translated at average rates of exchange for the period of time theincome is earned or the expenses are incurred. Assets and liabilities aretranslated at year-end exchange rates.

(d)         The Maricor Group and itssubsidiaries incurred equity price risk when it bought the stock of certain ofits subsidiaries. Part of the consideration was MAM stock. In the eventthat the price of MAM common stock was below a specified price when the sellerwished to dispose of it, The 

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Maricor Group (or theapplicable subsidiary) agreed to pay the difference. There are currently 27,723shares outstanding pursuant to this kind of agreement. At a market price of$15.18 per share at December 31, 2006, the total exposure is approximately$606,000. A $1 decrease in MAM’s stock price would increase this obligation byapproximately $28,000. A $1 increase in MAM’s stock price would decrease thisobligation by approximately $28,000.

Market price protection of a different sort was givenby Maricor Technologies when it acquired the HCI assets. Part of theconsideration there was MAM preferred stock which is convertible into 26,000shares of MAM common stock on February 9, 2009, subject to some otherconditions. To the extent that the market price of MAM common stock is thenbelow $25 per share, the number of shares issuable on conversion is ratablyincreased, which could result in further dilution of MAM’s common stock.

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**Item 8.**         FinancialStatements and Supplementary Data

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

To the Board of Directors and Shareholders ofMaine & Maritimes Corporation:

We have audited the accompanying consolidated balancesheets and consolidated statements of long-term debt of Maine &Maritimes Corporation (the “Company”) as of December 31, 2006 and 2005,and the related consolidated statements of operations, common shareholder’sequity and cash flows for each of the three years in the period ended December 31,2006. Our audits also included the financial statement schedules for the yearsended December 31, 2006, 2005 and 2004, listed in the Index at Item15(a)(2). These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements and financial statement schedules based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of the Company as of December 31, 2006 and 2005, and the resultsof its operations and its cash flows for each of the three years in the periodended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.

Our audits were performedfor the purpose of forming an opinion on the consolidated financial statementstaken as a whole. The schedules listed in the index at Item 15(a)(2) arepresented for purposes of complying with the Securities and Exchange Commission’srules and are not part of the basic financial statements. In our opinion,the schedules referred to above presents fairly, in all material respects, thefinancial data required to be set forth therein in relation to the basicfinancial statements taken as a whole for the years ended December 31,2006, 2005 and 2004.

**Vitale, Caturano & Co., Ltd.**Boston, MAMarch 7, 2007

43

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**MAINE &MARITIMES CORPORATION AND SUBSIDIARIESStatements of Consolidated Operations (In thousands of dollars, except shareinformation)**

| ** **                                                                    | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating Revenues**                                                        |       |                                       |       |   |   |   |   |
| Regulated Revenues                                                            |       | $                                          | 35,601     |   | $ | 34,299 |   | $ | 33,733 |   |
| **Operating Expenses**                                                        |       |                                       |       |   |   |   |   |
| Regulated Operation & Maintenance                                         |       | 15,266                                     |       | 14,352 |   | 14,065 |   |
| Unregulated Operation & Maintenance(1)                                    |       | 1,960                                      |       | 2,019 |   | 1,254 |   |
| Depreciation                                                                  |       | 2,908                                      |       | 2,782 |   | 2,636 |   |
| Amortization of Stranded Costs                                                |       | 10,960                                     |       | 10,533 |   | 10,011 |   |
| Amortization of Intangibles                                                   |       | 155                                        |       | 365 |   | 194 |   |
| Taxes Other Than Income                                                       |       | 1,807                                      |       | 1,705 |   | 1,603 |   |
| Provision for Income Taxes—Regulated                                     |       | 1,575                                      |       | 1,506 |   | 1,234 |   |
| Benefit of Income Taxes—Unregulated(1)                                   |       | (1,057                                     | )          | (863 | ) | (531 | ) |
| **Total Operating Expenses**                                                  |       | 33,574                                     |       | 32,399 |   | 30,466 |   |
| **Operating Income**                                                          |       | 2,027                                      |       | 1,900 |   | 3,267 |   |
| **Other Income (Deductions)**                                                 |       |                                       |       |   |   |   |   |
| Equity in Income (Loss) of Associated Companies                               |       | 283                                        |       | (50 | ) | 218 |   |
| Interest and Dividend Income                                                  |       | 20                                         |       | 24 |   | 1 |   |
| Allowance for Equity Funds Used During Construction                           |       | —                                     |       | 23 |   | 42 |   |
| Provision for Income Taxes                                                    |       | (1                                         | )          | (2 | ) | (7 | ) |
| Other—Net                                                                |       | (139                                       | )          | (112 | ) | (306 | ) |
| **Total**                                                                     |       | 163                                        |       | (117 | ) | (52 | ) |
| **Income Before Interest Charges**                                            |       | 2,190                                      |       | 1,783 |   | 3,215 |   |
| **Interest Charges**                                                          |       |                                       |       |   |   |   |   |
| Long-Term Debt and Notes Payable                                              |       | 3,021                                      |       | 2,370 |   | 2,240 |   |
| Less Stranded Costs Carrying Charge                                           |       | (1,635                                     | )          | (1,427 | ) | (1,289 | ) |
| Less Allowance for Borrowed Funds Used During  Construction                   |       | —                                     |       | (8 | ) | (15 | ) |
| **Total**                                                                     |       | 1,386                                      |       | 935 |   | 936 |   |
| **Net Income from Continuing Operations**                                     |       | 804                                        |       | 848 |   | 2,279 |   |
| **Discontinued Operations (Note  3)**                                         |       |                                       |       |   |   |   |   |
| Estimated Loss on Sales of Discontinued Operations                            |       | (5,750                                     | )          | — |   | — |   |
| Loss from Operations                                                          |       | (5,308                                     | )          | (1,802 | ) | (1,485 | ) |
| Benefit of Income Taxes                                                       |       | 4,333                                      |       | 734 |   | 524 |   |
| **Loss from Discontinued Operations**                                         |       | (6,725                                     | )          | (1,068 | ) | (961 | ) |
| **Net (Loss) Income Available for Common  Stockholders**                      |       | $                                          | (5,921     | ) | $ | (220 | ) | $ | 1,318 |   |
| **Average Shares Outstanding**                                                |       | 1,637,815                                  |       | 1,636,322 |   | 1,612,696 |   |
| **Basic Earnings Per Share of Common Stock From  Continuing Operations**      |       | $                                          | 0.49       |   | $ | 0.52 |   | $ | 1.42 |   |
| **Basic Loss Per Share of Common Stock From Discontinued  Operations**        |       | (4.11                                      | )          | (0.65 | ) | (0.60 | ) |
| **Basic (Loss) Earnings Per Share of Common Stock  From Net (Loss) Income**   |       | $                                          | (3.62      | ) | $ | (0.13 | ) | $ | 0.82 |   |
| **Diluted Earnings Per Share of Common Stock From  Continuing Operations**    |       | $                                          | 0.49       |   | $ | 0.52 |   | $ | 1.40 |   |
| **Diluted Loss Per Share of Common Stock From  Discontinued Operations**      |       | (4.11                                      | )          | (0.65 | ) | (0.60 | ) |
| **Diluted  (Loss) Earnings Per Share of Common Stock From Net (Loss) Income** |       | $                                          | (3.62      | ) | $ | (0.13 | ) | $ | 0.80 |   |

----

(1)           Unregulated operation and maintenance expense and incometax benefit included in continuing operations is the activity of the holdingcompany, including corporate costs directly associated with unregulatedoperations and common costs not allocated to the regulated utility, and MecelProperties.

 See Notes to Consolidated Financial Statements 

44

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIESStatements of Consolidated Cash Flows (In thousands of dollars)**

| ** **                                                                      | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flow From Operating  Activities**                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net (Loss) Income                                                               |       | $                                          | (5,921     | ) | $ | (220 | ) | $ | 1,318 |   |
| Adjustments  to Reconcile Net (Loss) Income to Net Cash Provided by Operations: |       |                                       |       |   |   |   |   |
| Depreciation                                                                    |       | 2,908                                      |       | 2,782 |   | 2,636 |   |
| Amortization of Intangibles                                                     |       | 155                                        |       | 365 |   | 194 |   |
| Amortization of Seabrook Costs                                                  |       | 1,110                                      |       | 1,110 |   | 1,110 |   |
| Write-off of Unrecoverable Cancelled Transmission  Plant                        |       | 81                                         |       | — |   | — |   |
| Amortization of Cancelled Transmission Plant                                    |       | 254                                        |       | — |   | — |   |
| Bad Debt Expense                                                                |       | 139                                        |       | (105 | ) | 329 |   |
| Deferred Income Taxes—Net                                                  |       | 915                                        |       | 1,058 |   | 956 |   |
| Deferred Investment Tax Credits                                                 |       | (25                                        | )          | (25 | ) | (28 | ) |
| Loss on Disposal of Fixed Assets                                                |       | —                                     |       | — |   | 69 |   |
| Allowance for Funds Used During Construction                                    |       | —                                     |       | (31 | ) | (57 | ) |
| Change in Deferred Regulatory and Debt Issuance Costs                           |       | (5,100                                     | )          | (4,128 | ) | (4,594 | ) |
| Amortization of Wheelabrator-Sherman Upfront Payment                            |       | 1,451                                      |       | 1,451 |   | 1,451 |   |
| Change in Benefit Obligations                                                   |       | 475                                        |       | 304 |   | 1,143 |   |
| Change  in Current Assets and Liabilities:                                      |       |                                       |       |   |   |   |   |
| Accounts Receivable and Unbilled Revenue                                        |       | (300                                       | )          | 699 |   | (1,976 | ) |
| Other Current Assets                                                            |       | 37                                         |       | 74 |   | 202 |   |
| Accounts Payable                                                                |       | 1,799                                      |       | (756 | ) | 974 |   |
| Other Current Liabilities                                                       |       | (543                                       | )          | 557 |   | 13 |   |
| Other—Net                                                                  |       | 730                                        |       | 1,465 |   | 180 |   |
| Adjustments to Operating Cash Flows from Continuing  Operations                 |       | 4,086                                      |       | 4,820 |   | 2,602 |   |
| Adjustments Relating to Discontinued  Operations—Operating Activiites      |       | 2,011                                      |       | (692 | ) | (1,332 | ) |
| Adjustments Relating to Discontinued Operations—Estimated  Loss on Sale    |       | 3,450                                      |       | — |   | — |   |
| Adjustments to Operating Cash Flows from Discontinued  Operations               |       | 5,461                                      |       | (692 | ) | (1,332 | ) |
| **Net Cash Flow Provided By Operating Activities**                              | ** ** | $                                          | 3,626      |   | $ | 3,908 |   | $ | 2,588 |   |
| **Cash  Flow From Financing Activities**                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Dividend Payments                                                               |       | —                                     |       | (1,227 | ) | (1,834 | ) |
| Retirements of Long-Term Debt                                                   |       | (2,430                                     | )          | (4,225 | ) | (1,500 | ) |
| Additions of Long-Term-Debt                                                     |       | —                                     |       | — |   | 8,000 |   |
| Short-Term Borrowings (Repayments), Net                                         |       | 2,570                                      |       | 6,200 |   | (2,481 | ) |
| Borrowings of Discontinued Operations                                           |       | —                                     |       | 211 |   | 2,200 |   |
| **Net Cash Flow Provided By Financing Activities**                              | ** ** | $                                          | 140        |   | $ | 959 |   | $ | 4,385 |   |
| **Cash  Flow From Investing Activities**                                        | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Stock Redemption from Associated Company                                        |       | 850                                        |       | 350 |   | 200 |   |
| Cash Paid for Stock Contingencies from Acquisition  Agreements                  |       | (244                                       | )          | (203 | ) | — |   |
| Change in Restricted Investments                                                |       | (5                                         | )          | (8 | ) | (66 | ) |
| Investment in Fixed Assets                                                      |       | (3,532                                     | )          | (4,845 | ) | (6,541 | ) |
| Investing Activities and Acquisitions of Discontinued  Operations               |       | (293                                       | )          | (728 | ) | (3,908 | ) |
| **Net Cash Flow Used For Investing Activities**                                 | ** ** | $                                          | (3,224     | ) | $ | (5,434 | ) | $ | (10,315 | ) |
| **Increase (Decrease) in Cash and Cash Equivalents**                            |       | 542                                        |       | (567 | ) | (3,342 | ) |
| **Cash and Cash Equivalents at Beginning of Period**                            |       | 363                                        |       | 930 |   | 4,272 |   |
| **Cash and Cash Equivalents at End of Period**                                  | ** ** | $                                          | 905        |   | $ | 363 |   | $ | 930 |   |
| **Supplemental Disclosure of Cash Flow Information:**                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash Paid During the Period  for:**                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest                                                                        |       | $                                          | 3,135      |   | $ | 2,884 |   | $ | 2,064 |   |
| Income Taxes                                                                    |       | $                                          | 70         |   | $ | 4 |   | $ | 303 |   |
| **Non-Cash Investing Activities:**                                              | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Value of Common Stock Issued for Acquisition                                    |       | $                                          | —     |   | $ | — |   | $ | 1,677 |   |
| Value of Preferred  Stock Issued for Acquisition                                |       | $                                          | —     |   | $ | 950 |   | $ | — |   |

 

See Notes to Consolidated Financial Statements

45

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIESConsolidated Balance Sheets (In thousands of dollars)**

| ** **                                                                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **ASSETS**                                                                                        | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Plant**                                                                                         | ** ** | ** **            | ** ** | ** ** | ** ** |
| Electric Plant in Service                                                                         |       | $                     | 101,085    |   | $ | 98,998 |   |
| Non-Utility Plant                                                                                 |       | 542                   |       | 489 |   |
| Less Accumulated Depreciation                                                                     |       | (41,980               | )          | (40,148 | ) |
| Net Plant in Service                                                                              |       | 59,647                |       | 59,339 |   |
| Construction Work-in-Progress                                                                     |       | 499                   |       | 1,588 |   |
| Plant Assets of Continuing Operations                                                             |       | 60,146                |       | 60,927 |   |
| Plant Assets of Discontinued Operations, net                                                      |       | 428                   |       | 1,935 |   |
| **Total**                                                                                         |       | 60,574                |       | 62,862 |   |
| **Investments  in Associated Companies**                                                          |       | 1,500                 |       | 1,956 |   |
| **Net  Plant and Investments in Associated Companies**                                            |       | 62,074                |       | 64,818 |   |
| **Current Assets:**                                                                               | ** ** | ** **            | ** ** | ** ** | ** ** |
| Cash and Cash Equivalents                                                                         |       | 905                   |       | 363 |   |
| Accounts Receivable (less allowance for  uncollectible accounts of $155 in 2006 and $162 in 2005) |       | 6,709                 |       | 6,386 |   |
| Accounts Receivable from Associated Companies                                                     |       | 364                   |       | 604 |   |
| Unbilled Revenue from Utility                                                                     |       | 1,150                 |       | 1,071 |   |
| Inventory                                                                                         |       | 646                   |       | 600 |   |
| Prepayments                                                                                       |       | 278                   |       | 359 |   |
| Current Assets of Discontinued Operations                                                         |       | 3,475                 |       | 4,271 |   |
| **Total**                                                                                         |       | 13,527                |       | 13,654 |   |
| **Regulatory Assets:**                                                                            | ** ** | ** **            | ** ** | ** ** | ** ** |
| Uncollected Maine Yankee Decommissioning Costs                                                    |       | 7,743                 |       | 10,795 |   |
| Recoverable Seabrook Costs                                                                        |       | 10,559                |       | 11,669 |   |
| Regulatory Assets—Deferred Income Taxes                                                      |       | 5,923                 |       | 5,794 |   |
| Regulatory Assets—Post-Retirement Medical Benefits                                           |       | 2,205                 |       | 115 |   |
| Deferred Fuel and Purchased Energy Costs                                                          |       | 34,689                |       | 29,906 |   |
| Regulatory Asset—Power Purchase Agreement  Restructuring                                     |       | —                |       | 1,451 |   |
| Cancelled Transmission Plant                                                                      |       | 508                   |       | — |   |
| Unamortized Premium on Early Retirement of Debt                                                   |       | 1,100                 |       | 1,308 |   |
| Deferred Regulatory Costs                                                                         |       | 1,677                 |       | 1,334 |   |
| **Total**                                                                                         |       | 64,404                |       | 62,372 |   |
| **Other Assets**                                                                                  | ** ** | ** **            | ** ** | ** ** | ** ** |
| Unamortized Debt Issuance Costs                                                                   |       | 502                   |       | 397 |   |
| Restricted Investment (at cost, which approximates  market)                                       |       | 2,458                 |       | 2,453 |   |
| Miscellaneous                                                                                     |       | 1,049                 |       | 1,119 |   |
| Other Assets of Discontinued Operations                                                           |       | 4,233                 |       | 6,490 |   |
| **Total**                                                                                         |       | 8,242                 |       | 10,459 |   |
| **Total Assets**                                                                                  |       | $                     | 148,247    |   | $ | 151,303 |   |

 

See Notes to Consolidated Financial Statements

46

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**MAINE & MARITIMES CORPORATION ANDSUBSIDIARIESCapitalization and Liabilities (In thousands of dollars)**

| ** **                                                        | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                        | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Capitalization (see  accompanying statements):**                | ** ** | ** **            | ** ** | ** ** | ** ** |
| Shareholders’ Equity                                         |       | $                     | 41,527     |   | $ | 47,785 |   |
| Long-Term Debt                                                    |       | 27,840                |       | 30,343 |   |
| Long-Term Debt of Discontinued Operations                         |       | 2,182                 |       | 2,200 |   |
| **Total**                                                         |       | 71,549                |       | 80,328 |   |
| **Current Liabilities:**                                          | ** ** | ** **            | ** ** | ** ** | ** ** |
| Long-Term Debt Due Within One Year                                |       | 2,685                 |       | 2,612 |   |
| Notes Payable to Banks                                            |       | 11,970                |       | 9,400 |   |
| Accounts Payable                                                  |       | 5,024                 |       | 3,667 |   |
| Accounts Payable—Associated Companies                        |       | 247                   |       | 250 |   |
| Accrued Employee Benefits                                         |       | 1,424                 |       | 979 |   |
| Customer Deposits                                                 |       | 149                   |       | 36 |   |
| Taxes Accrued                                                     |       | —                |       | 827 |   |
| Interest Accrued                                                  |       | 246                   |       | 123 |   |
| Other Current Liabilities                                         |       | 47                    |       | — |   |
| Current Liabilities of Discontinued Operations                    |       | 2,921                 |       | 1,938 |   |
| **Total**                                                         |       | 24,713                |       | 19,832 |   |
| **Deferred Credits and Other  Liabilities:**                      | ** ** | ** **            | ** ** | ** ** | ** ** |
| Accrued Removal Obligations                                       |       | 5,572                 |       | 5,683 |   |
| Carrying Value of Interest Rate Hedge                             |       | 1,636                 |       | 1,387 |   |
| Uncollected Maine Yankee Decommissioning Costs                    |       | 7,743                 |       | 10,795 |   |
| Other Regulatory Liabilities                                      |       | 382                   |       | 458 |   |
| Deferred Income Taxes                                             |       | 26,372                |       | 26,833 |   |
| Accrued Postretirement Benefits and Pension Costs                 |       | 8,631                 |       | 4,656 |   |
| Investment Tax Credits                                            |       | 81                    |       | 106 |   |
| Miscellaneous                                                     |       | 1,241                 |       | 563 |   |
| Other Liabilities of Discontinued Operations                      |       | 327                   |       | 662 |   |
| **Total**                                                         |       | 51,985                |       | 51,143 |   |
| **Commitments, Contingencies, and  Regulatory Matters (Note 12)** | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Total Capitalization and  Liabilities**                         | ** ** | $                     | 148,247    |   | $ | 151,303 |   |

 

See Notes to Consolidated Financial Statements

47

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**MAINE & MARITIMESCORPORATION AND SUBSIDIARIESStatements of Consolidated Common Shareholders’ Equity (In thousands of dollars, except shareinformation)**

| ** **                                                                             | ** ** | **Number of Shares** | ** ** | ** **          | ** ** | ** **     | ** ** | ** **    | ** ** | ** **        | ** **    | ** **  | ** ** | ** **   | ** **   | ** **             | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------|------------|----------------|------------|---------------|------------|-------------------|---------------|-------------|------------|--------------|--------------|------------------------|------------|
| ** **                                                                             | ** ** | **Common**                | ** ** | **Preferred**       | ** ** | **Common**     | ** ** | **Preferred** | ** ** | ** **        | ** **    | ** **  | ** ** | ** **   | ** **   |
| ** **                                                                             | ** ** | **Issued and**       | ** ** | **Issued and** | ** ** | ** **     | ** ** | ** **    | ** ** | ** **        | ** **    | ** **  | ** ** | ** **   | ** **   | ** **             | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **Outstanding**           | ** ** | **Outstanding**     | ** ** | **Par**        | ** ** | ** **    | ** ** | **Par**           | ** **    | ** **  | ** ** | ** **   | ** **   | **Accumulated**        | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **(5,000,000**            | ** ** | **(500,000**        | ** ** | **Value***     | ** ** | ** **    | ** ** | **Value***        | ** **    | ** **  | ** ** | ** **   | ** **   | **Other**              | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **shares**                | ** ** | **shares**          | ** ** | **Issued**     | ** ** | **Paid-In**   | ** ** | **Issued**        | ** **    | **Paid-In** | ** ** | **Retained** | ** **   | **Comprehensive**      | ** ** | ** ** | ** ** |
| ** **                                                                             | ** ** | **authorized)**           | ** ** | **authorized)**     | ** ** | **($7/Share)** | ** ** | **Capital**   | ** ** | **($0.01/Share)** | ** **    | **Capital** | ** ** | **Earnings** | ** **   | **Income (Loss)** | ** ** | **Total** | ** ** |
| **Balance,  December 31, 2003**                                                        |       |                      | 1,580,512  |                |       |           | —     |          |       |              | $ 11,064 |        |       |         | $ 165   |                   |       |   | $ — |   |   |   | $ — |   |   |   | $ 36,476 |   |   |   | $ (717 | ) |   | $ 46,988 |   |
| New Stock Issued                                                                       |       |                      | 55,142     |                |       |           |       |          |       |              | 386           |        |       |         | 1,319        |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,705 |   |
| Net Income                                                                             |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   | 1,318 |   |   |   |   |   |   | 1,318 |   |
| Other Comprehensive  Income (Loss):                                                    |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Changes in Value  of Foreign Exchange Translation Gain, Net of Tax   Provision of $319 |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 478 |   |   | 478 |   |
| Interest Rate  Hedge, Net of Tax Benefit of $114                                       |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (172 | ) |   | (172 | ) |
| Total Other  Comprehensive Income                                                      |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 306 |   |
| Total  Comprehensive Income                                                            |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,624 |   |
| Dividend ($1.34 per  common share)                                                     |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   | (2,160 | ) |   |   |   |   |   | (2,160 | ) |
| **Balance,  December 31, 2004**                                                        |       |                      | 1,635,654  |                |       |           | —     |          |       |              | $ 11,450 |        |       |         | $ 1,484 |                   |       |   | $ — |   |   |   | $ — |   |   |   | $ 35,634 |   |   |   | $ (411 | ) |   | $ 48,157 |   |
| New Stock Issued                                                                       |       |                      | 1,125      |                |       |           | 9,500      |          |       |              | 8             |        |       |         | 25           |                   |       |   | — |   |   |   | 950 |   |   |   |   |   |   |   |   |   |   | 983 |   |
| Stock Contingency  from Acquisitions (see Note 14)                                     |       |                      |       |                |       |           |       |          |       |              |          |        |       |         | (122         | )                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (122 | ) |
| Net Loss                                                                               |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   | (220 | ) |   |   |   |   |   | (220 | ) |
| Other Comprehensive  Income:                                                           |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |
| Changes in Value  of Foreign Exchange Translation Gain, Net of Tax   Provision of $98  |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 153 |   |   | 153 |   |
| Unrealized Gain on  Investments Available for Sale, net of Tax Provision of $7         |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 11 |   |   | 11 |   |
| Interest Rate  Hedge, Net of Tax Provision of $33                                      |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 51 |   |   | 51 |   |
| Total Other  Comprehensive Income                                                      |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 215 |   |
| Total  Comprehensive Loss                                                              |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (5 | ) |
| Dividend ($0.75  per common share)                                                     |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   | (1,227 | ) |   |   |   |   |   | (1,227 | ) |
| **Balance,  December 31, 2005**                                                        |       |                      | 1,636,779  |                |       |           | 9,500      |          |       |              | 11,458        |        |       |         | $ 1,387 |                   |       |   | $ — |   |   |   | $ 950 |   |   |   | $ 34,187 |   |   |   | $ (196 | ) |   | $ 47,786 |   |
| New Stock Issued                                                                       |       |                      | 1,600      |                |       |           |       |          |       |              | 11            |        |       |         | 14           |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 25 |   |
| Stock Contingency  from Acquisitions (see Note 14)                                     |       |                      |       |                |       |           |       |          |       |              |          |        |       |         | (147         | )                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (147 | ) |
| Net Loss                                                                               |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   | (5,921 | ) |   |   |   |   |   | (5,921 | ) |
| Other Comprehensive  (Loss) Income:                                                    |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |
| Changes in Value  of Foreign Exchange Translation Loss, Net of   Tax Benefit of $49    |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (73 | ) |   | (73 | ) |
| Unrealized Gain on  Investments Available for Sale, Net of Tax Provision of $3         |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 6 |   |   | 6 |   |
| Interest Rate  Hedge, Net of Tax Benefit of $100                                       |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (149 | ) |   | (149 | ) |
| Total Other  Comprehensive Loss                                                        |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (216 | ) |
| Total  Comprehensive Loss                                                              |       |                      |       |                |       |           |       |          |       |              |          |        |       |         |         |                   |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (6,137 | ) |
| **Balance,  December 31, 2006**                                                        |       |                      | 1,638,379  |                |       |           | 9,500      |          |       |              | $ 11,469 |        |       |         | $ 1,254 |                   |       |   | $ — |   |   |   | $ 950 |   |   |   | $ 28,266 |   |   |   | $ (412 | ) |   | $ 41,527 |   |

 

See Notes to ConsolidatedFinancial Statements.

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**MAINE &MARITIMES CORPORATION AND SUBSIDIARIESStatements of Long-Term Debt**

| ** **                                                                                                                                                                                        | ** ** | **December 31,**                        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| ** **                                                                                                                                                                                        | ** ** | **(In thousands of dollars)** | ** ** |
| **Maine  Public Service Company**                                                                                                                                                                 |       |                                         |       |   |   |   |   |   |   |
| Maine Public  Utility Financing Bank, Public Utility Revenue Bonds:                                                                                                                               |       |                                         |       |   |   |   |   |   |   |
| Refunding Series 1996: Due 2021—Variable Interest  Payable Monthly (4.0% as of December 31, 2006)                                                                                            |       |                                         | $          | 13,600 |   |   |   | $ | 13,600 |   |   |
| Series 2000: Due 2025—Variable Interest Payable  Monthly (4.0% as of December 31, 2006)                                                                                                      |       |                                         | 9,000      |   |   |   | 9,000 |   |   |
| Finance Authority  of Maine:                                                                                                                                                                      |       |                                         |       |   |   |   |   |   |   |
| 1998 Taxable Electric Rate Stabilization Revenue  Notes: Due 2008—Variable Interest Payable Monthly (5.4% as of December 31,  2006)                                                          |       |                                         | 3,175      |   |   |   | 5,005 |   |   |
| Bank of America,  N.A. (Formerly Fleet National Bank)                                                                                                                                             |       |                                         |       |   |   |   |   |   |   |
| $6,000,000, 7 Year Term Loan Due November 1,  2011—Variable Interest Payable Monthly (6.85% as of December 31, 2006)                                                                         |       |                                         | 4,750      |   |   |   | 5,350 |   |   |
| Total Outstanding                                                                                                                                                                                 |       |                                         | 30,525     |   |   |   | 32,955 |   |   |
| Less—Amount Due Within One Year                                                                                                                                                              |       |                                         | 2,685      |   |   |   | 2,612 |   |   |
| **Total—Continuing Operations**                                                                                                                                                              |       |                                         | 27,840     |   |   |   | 30,343 |   |   |
| **The  Maricor Group**                                                                                                                                                                            |       |                                         |       |   |   |   |   |   |   |
| Katahdin Trust Company $2,200,000, 5 Year Term Loan  Due December 29, 2010—Variable Interest Rate, Payable Monthly, Interest Only  Through November 29, 2007 (8.12% as of December 31, 2006) |       |                                         | 2,200      |   |   |   | 2,200 |   |   |
| Total Outstanding                                                                                                                                                                                 |       |                                         | 2,200      |   |   |   | 2,200 |   |   |
| Less—Amount Due Within One Year                                                                                                                                                              |       |                                         | 18         |   |   |   | — |   |   |
| **Total—Discontinued Operations**                                                                                                                                                            |       |                                         | 2,182      |   |   |   | 2,200 |   |   |
| **Total  Long-Term Debt**                                                                                                                                                                         |       |                                         | $          | 30,022 |   |   |   | $ | 32,543 |   |   |

 

Currentmaturities and redemption requirements for the succeeding five years andthereafter are as follows *(in thousands ofdollars)*:

| ** ** | ** ** | **Continuing** | ** ** | **Discontinued** | ** ** | ** ** | ** ** |
|------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** ** | ** ** | **Operations** | ** ** | **Operations**   | ** ** | **Total**  | ** ** |
| 2007       |       |           | $          | 2,685            |       |       |       | $ | 18 |   |   | $ | 2,703 |   |
| 2008       |       |           | 2,080      |             |       |       | 220        |   |   | 2,300 |   |
| 2009       |       |           | 975        |             |       |       | 220        |   |   | 1,195 |   |
| 2010       |       |           | 1,140      |             |       |       | 1,742      |   |   | 2,882 |   |
| 2011       |       |           | 1,045      |             |       |       | —     |   |   | 1,045 |   |
| Thereafter |       |           | 22,600     |             |       |       | —     |   |   | 22,600 |   |
|       |       |           | $          | 30,525           |       |       |       | $ | 2,200 |   |   | $ | 32,725 |   |

 

See Notes to Consolidated Financial Statements.

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**NOTESTO CONSOLIDATED**

**FINANCIALSTATEMENTS**

**1.**                 ACCOUNTINGPOLICIES

**Consolidation andBasis of Presentation**

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

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

2.                TheMaricor Group and its wholly-owned United States subsidiary The Maricor GroupNew England and wholly-owned Canadian subsidiary The Maricor Group, Canada Ltd,classified as discontinued operations;

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

4.                Energy Atlantic,LLC, an inactive subsidiary.

MAM is also a 50% owner of Maricor Properties Ltd, aCanadian company formerly wholly-owned by MAM, and its wholly-owned Canadiansubsidiaries, Cornwallis Court Developments Ltd and Mecel Properties Ltd. MAMretained 100% “economic ownership” of Mecel with the sale of 50% of the rest ofMaricor Properties in June 2006. Maricor Properties is a 50% owner ofMaricor Ashford Ltd, a joint venture with Ashford Investments Ltd. MAM is notthe primary beneficiary of Maricor Properties under FIN 46(R), and, therefore,its investment in Maricor Properties, excluding Mecel, is accounted for underthe equity method in these financial statements. Because MAM remained primarybeneficiary of Mecel, this entity is consolidated in these financialstatements.

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

All inter-companytransactions between MAM and its direct and indirect subsidiaries have beeneliminated in consolidation.

**Labor Agreements**

Approximately 37% of theMPS labor force are members of the Local 1837 Unit 11 of the InternationalBrotherhood of Electrical Workers (“IBEW”) and are covered under a collectivebargaining agreement. On September 22, 2005, the IBEW 1837 Unit 11 Unionapproved a four-year collective bargaining agreement for the term of October 1,2005, through September 30, 2009. The key provisions of this contractinclude wage increases of 4.0% for the first year and 3.25% for each yearthereafter, increases in contributions to health insurance premiums,deductibles, medical and prescription co-payments to be paid by the employees,and ineligibility for pension and post-retirement benefits for new unionemployees hired on or after January 1, 2006, and October 1, 2005,respectively. To compensate new employees covered under the collectivebargaining agreement for their ineligibility for the pension plan, they receivea 4.0% match under the Company’s 401(k) plan. This agreement was amended October 25,2006, to reflect the freeze on future salary and service accruals effective December 31,2006, for current employees in the Company’s Pension Plan. Refer to Note 10 ofthese financial statements for more information regarding the terms of thepension freeze.

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**Regulations**

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

**Use of Estimates**

The preparation offinancial statements in conformity with U.S. generally accepted accountingprinciples requires Management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

**Deferred Fuel and PurchasedEnergy Costs**

CertainWheelabrator-Sherman (“WS”) fuel costs and the sharing provisions for MaineYankee replacement power costs were deferred for future recovery as defined inMPS’s rate plan until March 1, 2000. All other fuel and purchased powercosts were expensed as incurred. These costs are currently being recovered inrates and the related deferred asset is being amortized, accordingly. BeginningMarch 1, 2002, and until the WS contract terminated in December 2006,the excess of the cost over the sales price of WS fuel was deferred. Theresulting deferred asset is expected to be collected in future rates asapproved by the MPUC.

**Regulatory Assetsand Liabilities**

Pursuant to Statement of Financial AccountingStandards No. 71 (“SFAS 71”), “Accounting for the Effects of Certain Typesof Regulation,” the Company capitalizes, as regulatory assets, incurred andaccrued costs that are probable of recovery in future electric rates. It alsorecords, as regulatory liabilities, obligations to refund previously collectedrevenue or to spend revenue collected from customers on future costs.

Unfunded future income taxes and deferred income taxesare amortized as the related temporary differences reverse. Unamortized loss ondebt retirements is amortized over the lives of the related debt issues.Nuclear plant obligations, deferred fuel costs, other regulatory assets andother regulatory liabilities are amortized over various periods in accordancewith MPS’s current rate plans. MPS earns a return on substantially allregulatory assets for which funds have been spent.

The Company believes thatMPS’s electric 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 31,2006, $64.4 million of regulatory assets remained on MPS’s books. These assetswill be amortized over various periods in accordance with MPUC approved rateorders.

**Revenue Recognition**

MPS records an estimate for revenue for electricitydelivered, but not yet billed to customers. This estimate requires MPS to makecertain assumptions. A change in those assumptions could cause the amountsreported as revenues to change.

In July 2000, MPS began recording the differencebetween the approved tariff rate for two large industrial customers and theircurrent special discount rates, under contracts approved by the MPUC, asaccrued revenue. The resulting deferred asset will be subsequently collected inrates as approved by the 

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MPUC. During 2006 and2005, $280,000 was recognized as stranded costs associated with these twocontracts. The MPUC approved a third special discount during 2004 in Docket No. 2004-88,under which MPS has deferred $744,000 and $495,000 as of December 31, 2006and 2005, respectively. Recovery of this special discount will begin in 2007.

Maricor Technologies, Inc.is engaged as a seller and licensor of software. Generally, revenue will berecognized in accordance with Statement of Position No. 97-2 (“SOP 97-2”),“Software Revenue Recognition,” as amended, and Statement of Position No. 98-9(“SOP 98-9”), “Modification of SOP 97-2, Software RevenueRecognition, with Respect to Certain Transactions.”  For multiple element license arrangements,the license fee is allocated to the various elements based on evidence of fairvalue. When a multiple element arrangement includes rights to post-contractcustomer support, the portion of the license fee allocated to support isrecognized ratably over the term of the arrangement.

**Percentage-of-CompletionAccounting for TMG Contracts**

Revenues and profits from The Maricor Group’sengineering contracts are recognized on a percentage completed basis for theperiod. Costs incurred to date are divided by total estimated costs to obtainthe percentage completed. This percentage multiplied by the total estimatedprofit is the gross profit earned to date on the contract. Gross profit earned todate on the contract plus costs incurred to date on the contract equalsrevenues recognized to date. Revenue recognized to date compared to billings todate results in either under- or over-billings. Losses on contracts arerecognized in full if there is evidence that an overall loss will be sustained.The provision is computed on the basis of the total estimated cost to completethe contract and reflects all elements of costs included in contract costs. Costsincurred on approved change orders are treated as job costs for that particularjob. Costs incurred on unapproved change orders are treated as costs in theperiod in which they are incurred if it is not probable that the costs will berecovered through a change in the contract price. If it is probable that thecost will be recovered through a change in the contract price, the costs aredeferred until there is an agreed upon change in the contract price.

In accordance with normalpractice in the construction industry, The Maricor Group includes in currentassets and current liabilities amounts related to construction contractsrealizable and payable over a period in excess of one year. Deferred contractrevenue represents the excess of billings to date over the amount of contractcosts and profits (or contract revenue) recognized to date on the percentage ofcompletion accounting method on certain contracts. Deferred contract revenuesrelated to The Maricor Group’s contracts were $139,000 and $132,000 at December 31,2006 and 2005, respectively. Unbilled contract revenue represents the excess ofcontract costs and profits (or contract revenue) recognized to date on thepercentage of completion accounting method over billings to date on theremaining contracts. Unbilled contract revenue results when the appropriatecontract revenue amount has been recognized in accordance with thepercentage-of-completion accounting method, but a portion of the revenuerecorded cannot be billed currently due to the billing terms defined in thecontract and/or costs, recorded at estimated realizable value, related tounapproved change orders or claims incurred. Unbilled contract revenue relatedto The Maricor Group’s contracts was $1.15 million and $816,000 at December 31,2006 and 2005, respectively.

**Goodwill andAcquired Intangibles**

The Company’s business acquisitions may result ingoodwill and other intangible assets, which affect the amount of future periodamortization expense and possible impairment expense that the Company willincur. The Company has adopted Statement of Financial Accounting Standards No. 142(“SFAS 142”), “Goodwill and Other Intangible Assets,” which requires that theCompany, on an annual basis, calculate the fair value of the reporting unitsthat contain the goodwill and compare that to the carrying value of thereporting unit to determine if impairment exists. Impairment testing must takeplace more often if 

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circumstances or eventsindicate a change in the impairment status. In calculating the fair value ofthe reporting units, Management relies on a number of factors includingoperating results, business plans, economic projections, anticipated futurecash flows, and transactions and market place data. There are inherentuncertainties related to these factors and Management’s judgment in applyingthem to the analysis of goodwill impairment. If actual fair value is less thanthe Company’s estimates, goodwill and other intangible assets may be overstatedon the balance sheet and a charge would need to be taken against net earnings.

Goodwill resulted from the acquisitions of Eastcan,M&R, Pace and RES. For impairment testing purposes, the reporting unit wasdefined as the acquired operations. For these acquisitions, the operationsacquired became the mechanical and electrical engineering components of TMGC andTMGNE.

MAM selected November 30 as the date for theirannual impairment test. In accordance with SFAS 142, based on the performanceof TMGNE’s mechanical and electrical engineering operations, an interimimpairment test was performed during the third quarter of 2006, and thegoodwill recorded as a result of the RES acquisition of $2.55 million waswritten off.

The annual goodwill impairment test was performed asof November 30, 2006, for TMGC. Based on the mechanical and electricalengineering service line of TMGC, Management has concluded that no impairmentexisted as of November 30, 2006. The losses incurred to date by TMGC havebeen a result of new service lines outside the scope of the core mechanical andelectrical engineering business acquired, plus the additional costs associatedwith operating as part of a publicly traded company, as opposed to being anindependent, private organization.

The probable sale of TMGincludes the overall operations of the segment, including both the reportingunit valued in the November 30 impairment test and the other  business lines. Due to the loss incurred inthese other lines, the estimated sales price overall is lower than theestimated value of the reporting unit, and an estimated loss on the sale isprobable. Therefore, the goodwill associated with TMGC was largely written offas of December 31, 2006. This write-off was the majority of the estimated losson the sale, shown under discontinued operations in the Consolidated Statementof Operations.

**AmortizableIntangible Assets**

The Company hadidentifiable intangible assets from the acquisition of unregulated mechanicaland electrical engineering companies. These intangible assets were identifiedas the expected profit from the backlog of projects in progress as of the dateof acquisition and from the value derived from the client lists from theseservice firms. These assets were amortized over their estimated useful lives,which are approximately one year for the backlog and three years for the clientlists. The remaining intangible assets of $67,000 were written off and includedin the estimated loss on sale.

**Pension and OtherPost-Retirement Benefit Plans**

MPS has pension and other post-retirement benefitplans, principally healthcare benefits, covering substantially all of itsemployees and retirees. In accordance with Statement of Financial AccountingStandards No. 87 (“SFAS 87”), “Employer’s Accounting for Pensions,”Statement of Financial Accounting Standards No. 106 (“SFAS 106”), “Employer’sAccounting for Post-retirement Benefits Other Than Pensions,” and Statement ofFinancial Accounting Standards No. 158 (“SFAS 158”), “Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans,” thevaluation of benefit obligations and the performance of plan assets are subjectto various assumptions. The primary assumptions include the discount rate,expected return on plan assets, rate of compensation increase, health care costinflation rates, expected years of future service under the pension benefitplans and the methodology used to amortize unrecognized gains or losses.Changes in those assumptions could also have 

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a significant effect onthe Company’s non-cash pension income or expense or the Company’spost-retirement benefit costs.

With the adoption of SFAS 158 at December 31,2006, MPS was required to recognize a liability for the under-funded status ofits pension and post-retirement medical plans based on the projected benefitobligation, instead of accumulated benefit obligation. This resulted in anadditional liability, net of tax, of approximately $2.11 million. MPS received permissionfrom the MPUC on March 12, 2007, in Docket No. 2007-057, todefer this obligation as a regulatory asset.

For additional informationon the Company’s benefit plans, see Note 10 to the Consolidated FinancialStatements, “Benefit Programs.”

**Income Taxes**

Statement of Financial Accounting Standards No. 109(“SFAS 109”), “Accounting for Income Taxes,” requires an asset and liabilityapproach to accounting and reporting income taxes. SFAS 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. For the years ended December 31, 2006, and 2005,Management evaluated the deferred tax asset valuation and determined that novaluation allowance was needed.

MPS has deferredinvestment tax credits and amortizes the credits over the remaining estimateduseful life of the related utility plant. MPS records regulatory assets orliabilities related to certain deferred tax liabilities or assets, representingits expectation that, consistent with current and expected ratemaking, thesetaxes will be recovered from or returned to customers through future rates.

**Asset RetirementObligations**

In June 2001, the FASB issued Statement ofFinancial Accounting Standards No. 143 (“SFAS 143”), “Accounting for AssetRetirement Obligations.” SFAS 143 requires an entity to record the fair valueof a liability for an asset retirement obligation in the period in which it isincurred and to capitalize the cost by increasing the carrying amount of therelated long-lived asset. The liability is adjusted to its present valueperiodically over time, and the capitalized cost is depreciated over the usefullife of the related asset. Upon settlement, the entity either settles theobligation at its recorded amount or incurs a gain or a loss. Forrate-regulated entities, any timing differences between rate recovery and bookexpense would be deferred as either a regulatory asset or a regulatoryliability. The Company’s adoption of SFAS 143 as of January 1, 2003, didnot have a material effect on its financial position or results of operations.SFAS 143 provides that if the requirements of SFAS 71 are met, a regulatoryliability should be recognized for the difference between removal costscollected in rates and actual costs incurred. Based on the cost of removalinherent in MPS’s depreciation rates from the depreciation study in effect, asof December 31, 2006 and 2005, accrued removal obligations totalingapproximately $4.7 million and $4.4 million, respectively, which had previouslybeen embedded within accumulated depreciation, were reclassified as aregulatory liability.

In March 2005, theFASB issued FASB Interpretation No. 47, “Accounting for Conditional AssetRetirement Obligations” (“FIN 47”), effective for fiscal years ending after December 15,2005. FIN 47 clarifies the term “conditional asset retirement obligation,” usedin FASB Statement No. 143, “Accounting for Asset Retirement Obligations,”as referring to  “legal obligation toperform an asset retirement activity in which the timing and/or method ofsettlement are conditional on a future event that may or may not be within thecontrol of the entity.”  Based on thisinterpretation, as of December 31, 2006 and 2005 MPS recognized a specificasset retirement obligation of $832,000 and $1.30 million, respectively,associated with the Poly Chlorinated Bi-Phenol Transformer phase-out programmandated by the state of Maine, by reducing accumulated depreciation and increasingthe accrued removal obligation. This adjustment did not impact net income.

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**FinancialInstruments**

MPS has certain financialinstruments, interest rate caps and swaps, on three variable-rate long-termdebt issues that qualify as derivatives. Interest rate caps involve theexchange of cash for a cap on the interest rate MPS can be charged. Interestrate swaps involve the exchange of cash and the exchange of a variable-ratepayment for a fixed-rate payment. On January 1, 2001, the Company adoptedStatement of Financial Accounting Standards No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”), as amended by SFAS137, 138 and 149, which establishes accounting and reporting standards forderivative instruments and for hedging activities. SFAS 133 requires that anentity recognize derivatives as either assets or liabilities on the balancesheet and measure those instruments at fair value. The accounting for changesin the fair value of the derivative depends on the intended use of thederivative and the resulting designation. See Note 7, “Accumulated OtherComprehensive Income (Loss)” for additional disclosure regarding the treatmentof these interest rate instruments.

**Foreign Exchange**

MAM accounts for theoperations of its Canadian subsidiaries in accordance with Statement ofFinancial Accounting Standards No. 52 (“SFAS 52”), “Foreign CurrencyTranslation.”  Income statement activityis translated at the average rate for the period. The balance sheet istranslated at the exchange rate as of the end of the period. During 2006 and2005, this impact (decreased) increased other comprehensive income by $(73,000)and $153,000, respectively, net of income tax.

**Accounts Receivable &Reserve**

The Company maintainsallowances for doubtful accounts for estimated losses resulting from theinability of the Company’s customers to make required payments. The Companyestimates its anticipated losses from doubtful accounts based on historicalcollection history, as well as by specifically reserving for known doubtfulaccounts. Estimating losses from doubtful accounts is inherently uncertainbecause the amount of such losses depends substantially on the financialcondition of the Company’s customers, and the Company typically has limitedvisibility as to the specific financial state of its various individualcustomers. If the financial condition of the Company’s customers were todeteriorate beyond estimates, resulting in an impairment of their ability tomake payments, the Company would be required to write off additional accountsreceivable balances, which would adversely impact the Company’s net earnings,cash flows and balance sheet.

**Utility Plant**

Utility plant for MPS is stated at original cost ofcontracted services, direct labor and materials, as well as related indirectconstruction costs including general engineering, supervision, and similaroverhead items and allowances for the cost of equity and borrowed funds usedduring construction (“AFUDC”). The cost of utility plant which is retired andthe related cost of removal, less salvage, are charged to accumulateddepreciation, consistent with utility industry practice. The cost ofmaintenance and repairs, including replacement of minor items of property, arecharged to maintenance expense as incurred. MPS’s property, with minorexceptions, is subject to first and second mortgage liens.

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

**Long-Lived Assets**

The Company reviews itslong-lived assets for impairment whenever events or changes in circumstancesindicate the carrying amount of an asset may not be recoverable. Recoverabilityof assets to be held and used is measured by a comparison of the carryingamount of the assets to the future net cash 

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flowsexpected to be generated by the assets. If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds their fair value. Judgments made bythe Company relate to the expected useful lives of long-lived assets and itsability to realize any undiscounted cash flows in excess of the carryingamounts of such assets and are affected by factors such as the ongoing maintenanceand improvements of the assets, changes in the expected use of the assets,changes in economic conditions, changes in operating performance andanticipated future cash flows. Since judgment is involved in determining thefair value of long-lived assets, there is risk that the carrying value of theCompany’s long-lived assets may require adjustment in future periods. If actualfair value is less than the Company’s estimates, long-lived assets may beoverstated on the balance sheet and a charge would need to be taken against netearnings.

**Depreciation andAmortization**

Most of the utility plant depreciation is provided ona composite basis using the straight-line method, while computer equipment andvehicles are depreciated on a single unit basis. Both types of rates areapproved by the MPUC and the FERC, and were most recently updated with the 2006distribution and transmission rate cases. The composite depreciation rate,expressed as a percentage of average depreciable plant in service, was approximately3.05%, 3.22% and 3.21% for 2006, 2005 and 2004, respectively.

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

Bond issuance costs andpremiums paid upon early retirements are amortized over the terms of therelated debt. Recoverable Seabrook costs and other deferred regulatory expensesare amortized over the period allowed by regulatory authorities in the relatedrate orders. Recoverable Seabrook costs are being amortized principally overthirty years (See Note 12, “Commitments, Contingencies and Regulatory Matters—SeabrookNuclear Power Project”).

**Investments inAssociated Companies**

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

**Pledged Assets**

The assets of MPS,including the common stock of Me&NB, is pledged as collateral for the firstand second mortgage and collateral trust bonds of MPS. Substantially all of theassets of MAM, excluding those of MPS, are pledged as collateral for the Bankof America financing. All of the asset of TMG are pledged as collateral for theKatahdin Trust Company debt.

**Inventory**

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

**Cash and CashEquivalents**

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

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The Company maintainsdeposits with reputable national banks in excess of the $100,000 FDIC insurancelimit, but Management believes the risk that access to these deposits could berestricted is remote.

**RestrictedInvestments**

At December 31, 2006,the Company had $2.46 million of restricted investments. MPS was required toestablish a Capital Reserve Fund held by the Trustee of MPS’s 1998 TaxableElectric Stabilization Revenue Notes, which accounted for $2.39 million of therestricted investments. Approximately $69,000 of insurance proceeds on an MPSsubstation incident is also held by the Trustee of MPS’s first and secondmortgage bonds. At December 31, 2005, the Company’s restricted investmentsbalance of $2.45 million represented the $2.39 million Capital Reserve Fund and$66,000 of insurance proceeds.

**Stock Option Plan**

At December 31, 2006,the Company had a stock-based employee compensation plan, which is described morefully in Note 9, “Stock Compensation Plan.” The Company accounts for this planin accordance with the expense provisions of Statement of Financial AccountingStandards No. 123(R) (“SFAS 123(R)”), “Accounting for Stock BasedCompensation.”

**Stock Plan forOutside Directors**

An additional 20,000shares were originally available for issuance to the Company’s Board ofDirectors pursuant to the Stock Plan for Outside Directors. Under this plan,13,836 shares have been issued, with 6,164 remaining available for issuance.

**Preferred Shares**

In February 2005, MAMissued 9,500 shares of convertible preferred stock in conjunction with theacquisition of software now owned by MTI. The entity to which these securitieswere issued was HCI Systems Asset Management, LLC. In February 2007, 3,000shares of preferred stock were converted into 12,078 shares of common stock. Theremaining 6,500 preferred shares will convert into a minimum of 26,000 sharesof common stock in February 2009.

**Earnings per Share**

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

**Reclassifications**

The reclassification ofthe unregulated engineering services and unregulated software technologysegments from continuing operations to discontinued operations have been madeto the 2005 and 2004 financial statement amounts in order to conform to the2006 presentation. Further, the unregulated real estate segment reported in the2005 and 2004 financial statements has been reclassified to the equity method,instead of consolidated, also to conform to the 2006 presentation.

**New Accounting Pronouncements**

**Employers’ Accounting for Defined Benefit Pension andOther Post—Retirement Plans**

In September 2006, the Financial Accounting StandardBoard (“FASB”) issued FASB Statement of Financial Accounting Standards No. 158(“SFAS 158”), *“Employers’ Accounting for Defined BenefitPension*

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*and OtherPostretirement Plans—An Amendment of FASB Statements No. 87, 88, 106 and132(R).” * This statement requires employers to recognizeon their Balance Sheet an asset for a pension or other postretirement plan’sover-funded status, and a liability for an underfunded plan. The assets andobligations of the plans must be measured at the end of the fiscal year. Changesin the funded status of a defined benefit postretirement plan must berecognized in the year in which the changes occur, and will be reported inother comprehensive income (“OCI”). This guidance became effective to theCompany on December 31, 2006.

Management notes that the Maine Public Service Company(“MPS”) Pension Plan and Postretirement Medical Plan are both within the scopeof this guidance. Due to the adjustments to service cost arising from the December 31,2006 pension service and salary freeze, the accumulated benefit obligation andprojected benefit obligation are now the same for that plan. As a result, noadditional accrual beyond the amount accrued under the guidance in SFAS 87 isrequired. Under the Post-Retirement Medical Plan, an additional liability of$3.52 million was recorded, offset by a $2.11 million regulatory asset anddeferred income taxes.

Under Docket No. 2007-057,MPS sought an accounting order allowing the Company to reclassify the offset tothis liability from Other Comprehensive Income in Shareholders’ Equity to aRegulatory Asset. This approval was granted on March 12, 2007, and the$2.11 million offset, net of deferred income taxes, was recorded on the BalanceSheet within the line “Regulatory Asset—Postretirement Medical Benefits.”

**Fair ValueMeasurements**

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

**Accounting forUncertainty in Income Taxes**

In June 2006, the FASB issued FASB InterpretationNo. 48 (“FIN 48”), *“Accounting forUncertainty in Income Taxes,”*effective on a “catch-up” basis forfiscal years beginning after December 15, 2006. This guidance interpretsSFAS 109, *“Accounting for Income Taxes,”*andclarifies the existing guidance regarding recognition of uncertain tax positions.Under FIN 48, a tax benefit from an uncertain tax position can only berecognized if it is more likely than not that the position is sustainable basedon its technical merits and relevant administrative practices. The amount ofthe tax benefit allowed to be recognized is limited to the greatest amount ofbenefit that is cumulatively greater than 50% likely of being realized. Theguidance also notes that these tax benefits can become recognized or “derecognized”as new information becomes available. The Company has performed a preliminaryassessment under FIN 48, and does not anticipate a significant impact to thefinancial statements as a result of this guidance.

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**2.**                   INCOMETAXES

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

Theforeign income taxes include only the Canadian income taxes for Maine &New Brunswick and Mecel. The Canadian operations of TMG are consolidated in theMAM US tax return as a division and are included in Federal income taxes.

| ** **                   | ** ** | **2006**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------------------------------------------|------------|----------|------------|----------|------------|
| ** **                   | ** ** | **(In thousands of dollars)** | ** ** |
| Current income taxes         |       |                                         |       |     |       |     |       |
| Federal                      |       | $                                            | —     |     | $          | (732     | )          | $ | (493 | ) |
| State                        |       | —                                       |       | (87      | )          | 68       |       |
| Foreign                      |       | 17                                           |       | (138     | )          | (45      | )          |
| Total current  income taxes  |       | 17                                           |       | (957     | )          | (470     | )          |
| Deferred income taxes        |       |                                         |       |     |       |     |       |
| Federal                      |       | $                                            | (3,654     | )        | $          | 813      |       | $ | 585 |   |
| State                        |       | (152                                         | )          | 80       |       | 99       |       |
| Total deferred  income taxes |       | (3,806                                       | )          | 893      |       | 684      |       |
| Investment  credits, net     |       | (25                                          | )          | (25      | )          | (28      | )          |
| Total income taxes           |       | $                                            | (3,814     | )        | $          | (89      | )          | $ | 186 |   |
| Allocated to:                |       |                                         |       |     |       |     |       |
| Operating income             |       |                                         |       |     |       |     |       |
| —Regulated              |       | $                                            | 1,575      |     | $          | 1,506    |       | $ | 1,234 |   |
| —Unregulated            |       | (1,057                                       | )          | (863     | )          | (531     | )          |
| Subtotal                     |       | 518                                          |       | 643      |       | 703      |       |
| Discontinued  Operations     |       | (4,333                                       | )          | (734     | )          | (524     | )          |
| Total Operating              |       | (3,815                                       | )          | (91      | )          | 179      |       |
| Other income                 |       | 1                                            |       | 2        |       | 7        |       |
| Total                        |       | $                                            | (3,814     | )        | $          | (89      | )          | $ | 186 |   |

 

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

| ** **                                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Statutory Rate                                              |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State Income  Taxes                                         |       | 6.0      |       | 4.6      |       | 5.1      |       |
| Carrying Charge                                             |       | 0.0      |       | 0.0      |       | (5.3     | )          |
| Book to Accrual  Adjustments                                |       | (2.6     | )          | 3.8      |       | (12.6    | )          |
| Equity Earnings  in Joint Venture Companies, less Dividends |       | 0.6      |       | 5.6      |       | (1.6     | )          |
| Depreciation  Flow-through on Property                      |       | 0.0      |       | (19.3    | )          | (3.8     | )          |
| Investment Tax  Credit Amortization                         |       | 0.3      |       | 8.0      |       | (1.9     | )          |
| Other                                                       |       | 0.9      |       | (7.9     | )          | (1.2     | )          |
| Effective Rate                                              |       | 39.2     | %          | 28.8     | %          | 12.7     | %          |

 

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The stranded cost carrying charges item of (5.3)% in2004 relates to January and February 2004 only. During the course ofDocket No. 2003-666, the MPUC reviewed the manner in which MPS wasrecovering and accounting for its carrying charges associated with the deferredfuel element of stranded cost. Under the Stipulation approved in Docket No, 2003-666,MPS records deferred income tax expense associated with the deferred fuelcarrying charges during the rate effective period from March 1, 2004,through December 31, 2006, as compared to past treatment where suchexpense was deferred for future recovery.

The book to accrual adjustments of (2.6)%, 2.8%, and(12.6)% in 2006, 2005 and 2004, respectively, represent tax true-up items associatedwith revised tax estimates. These items are an empowerment zone credit wageadd-back, true-up of the tax amortization of goodwill, a true-up of taxabledividends received from a joint venture company, and the recognition of 2001and 2002 income tax reserves in 2004.

The equity earnings in joint venture companies itemsof 0.6%, 3.8%, and (1.6)% in 2006, 2005 and 2004, respectively, relate to MPS’sinterest in two joint venture companies, Maine Yankee and MEPCO. MPS’s netincome includes the equity earnings from these two companies, which areaccounted for under the equity method. Their equity earnings are excluded fromMPS taxable income, and the dividends received are included in taxable income. Deferredtaxes are not provided on the equity earnings or the dividends since thesecompanies dividend substantially all of their earnings on a quarterly basis.

According to regulated utility income tax accountingrules, MPS does not provide deferred income tax on certain timing differencesrelated to accelerated depreciation on Asset Depreciation Range property whichwas originally placed in service during the years 1971 through 1980. Thedepreciation flow-through on ADR property items of (19.3)% in 2005 and (3.8)%in 2004 relate to tax depreciation on this property. In 2006, the impact on theeffective rate was minimal, as most of this property is now fully depreciated.

Theelements of deferred income tax expense (credit) are as follows (*in thousands of dollars*):

| ** **                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Temporary  Differences at Statutory Rates:                 |       |     |       |     |       |     |       |
| Seabrook                                                   |       | $        | (613       | )        | $          | (613     | )          | $ | (614 | ) |
| Liberalized Depreciation                                   |       | 88       |       | 262      |       | 478      |       |
| Deferred Fuel                                              |       | 1,908    |       | 1,740    |       | 1,808    |       |
| Deferred Regulatory Expenses                               |       | 90       |       | (146     | )          | (36      | )          |
| Flexible Pricing Revenue                                   |       | 12       |       | 51       |       | 58       |       |
| Accrued Pension & Post-Retirement Benefits        |       | 355      |       | 7        |       | (335     | )          |
| Wheelabrator-Sherman Power Purchase Restructuring          |       | (579     | )          | (579     | )          | (579     | )          |
| Reacquired Debt                                            |       | 1        |       | (77      | )          | (83      | )          |
| Software Amortization                                      |       | 178      |       | 114      |       | —   |       |
| Cancelled Plant                                            |       | 203      |       | —   |       | —   |       |
| Net Operating Loss Carryforwards of Continuing  Operations |       | (1,055   | )          | —   |       | —   |       |
| Discontinued Operations                                    |       | (4,333   | )          | 123      |       | —   |       |
| Other                                                      |       | (61      | )          | 11       |       | (13      | )          |
| Total Temporary  Differences—Statutory Rates          |       | $        | (3,806     | )        | $          | 893      |       | $ | 684 |   |

 

The Company has not accrued U.S. income taxes on theundistributed earnings of Me&NB, as the withholding taxes due on thedistribution of any remaining amount would be principally offset by foreign taxcredits. No dividends were received from Me&NB in 2006, 2005 or 2004.

As required by SFAS 109, Management of the Company hasevaluated the positive and negative evidence bearing upon the realizability ofthe Company’s deferred tax assets, which consist principally of losses expectedto be generated from the sale of TMG and MTI, pension and post-retirementbenefits and 

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OCI—interest rate hedge.For the year ended December 31, 2006, Management evaluated the deferredtax asset valuation allowance and determined that no valuation was needed.

Thefollowing summarizes accumulated deferred income tax (assets) and liabilitiesestablished on temporary differences under SFAS 109 as of December 31,2006 and 2005 (*in thousands of dollars)*:

| ** **                                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Seabrook                                                                    |       | $        | 5,737      |     | $          | 6,350 |   |
| Property                                                                    |       | 9,526    |       | 8,899    |       |
| Flexible Pricing  Revenue                                                   |       | 596      |       | 584      |       |
| Deferred Fuel                                                               |       | 13,839   |       | 11,931   |       |
| Wheelabrator-Sherman  Upfront Payment                                       |       | —   |       | 579      |       |
| Pension and  Post-Retirement Benefits                                       |       | (1,992   | )          | (938     | )          |
| Net Operating  Loss Carryforwards                                           |       | (1,055   | )          | —   |       |
| Other  Comprehensive Income                                                 |       | (602     | )          | (519     | )          |
| Other                                                                       |       | 323      |       | (53      | )          |
| Net Accumulated  Deferred Income Tax Liability from Continuing Operations   |       | 26,372   |       | 26,833   |       |
| Goodwill  Impairment Loss                                                   |       | $        | (1,018     | )        | $          | — |   |
| Estimated Loss on  Sale of Discontinued Operations                          |       | (2,485   | )          | —   |       |
| Net Operating  Loss Carryforwards                                           |       | (1,204   | )          | —   |       |
| Amortization of  Goodwill                                                   |       | 375      |       | 90       |       |
| Other  Comprehensive Income                                                 |       | 287      |       | 377      |       |
| Other                                                                       |       | (26      | )          | 33       |       |
| Net Accumulated  Deferred Income Tax Liability from Discontinued Operations |       | (4,071   | )          | 500      |       |
| Net Accumulated Deferred  Income Tax Liability                              |       | $        | 22,301     |     | $          | 27,333 |   |

 

**3.**                 DISCONTINUEDOPERATIONS

Since the resignation ofthe former CEO in August 2006, the Company has re-assessed its corporatestrategy.  As described more fully in Section 7of the annual report on Form 10-K to which these financialstatements are attached, it is probable that this strategy will lead to thedivestiture of all unregulated assets within the next twelve months. As aresult, both TMG and MTI have been reclassified as discontinued operations inthese financial statements, in accordance with FAS 144.

**The Maricor Group**

As noted above, the Company has embarked on a newcourse, and it is expected to result in the divestiture of substantially all ofthe assets reported as the Unregulated Engineering Services operating segmentwithin the next twelve months. The Company recognized a loss from discontinuedoperations from TMG of $5.45 million in 2006, $754,000 in 2005, and $553,000 in2004. The majority of the loss in 2006 is attributable to the estimated loss of$2.96 million, net of tax, expected to be incurred on the sale of TMG, the $1.0million loss from operations for 2006, and the goodwill impairment of $1.53million, net of tax, recorded in the third quarter of 2006 related to the RESacquisition.

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Thenet loss for TMG is composed of the following:

| ** **                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Estimated Loss on  Sale                         |       | $        | (4,717     | )        | $          | —   |       | $ | — |   |
| Goodwill  Impairment Loss                       |       | (2,546   | )          | —   |       | —   |       |
| Loss From Operations:                           |       |     |       |     |       |     |       |
| Operating Revenue                               |       | 5,735    |       | 5,291    |       | 3,412    |       |
| Expenses                                        |       | (7,401   | )          | (6,555   | )          | (4,219   | )          |
| Loss from Operations                            |       | (1,666   | )          | (1,264   | )          | (807     | )          |
| Benefit of Income  Taxes                        |       | 3,478    |       | 510      |       | 254      |       |
| Net  Loss—Unregulated Engineering Services |       | $        | (5,451     | )        | $          | (754     | )          | $ | (553 | ) |

 

TheTMG balance sheet as of December 31, 2006, 2005 and 2004 is as follows:

| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Assets:                                          |       |     |       |     |       |     |       |
| Cash & Cash Equivalents                 |       | $        | 202        |     | $          | 225      |       | $ | 127 |   |
| Accounts Receivable, Net                         |       | 1,715    |       | 1,551    |       | 1,397    |       |
| Unbilled Contract Revenue                        |       | 1,155    |       | 816      |       | 399      |       |
| Other Current Assets                             |       | 72       |       | 72       |       | 107      |       |
| Current Assets                                   |       | 3,144    |       | 2,664    |       | 2,030    |       |
| Fixed Assets, Net of Depreciation                |       | 226      |       | 538      |       | 441      |       |
| Intangible Assets and Goodwill                   |       | 162      |       | 7,032    |       | 5,703    |       |
| Income Taxes Receivable                          |       | 875      |       | 1,269    |       | 638      |       |
| Deferred Tax Assets                              |       | 2,495    |       | —   |       | —   |       |
| Other Assets                                     |       | —   |       | 15       |       | 614      |       |
| Long-Term and Other Assets                       |       | 3,758    |       | 8,854    |       | 7,396    |       |
| Total Assets                                     |       | $        | 6,902      |     | $          | 11,518   |       | $ | 9,426 |   |
| Shareholder’s  Equity and Liabilities:      |       |     |       |     |       |     |       |
| Shareholder’s (Deficit) Equity              |       | $        | (4,646     | )        | $          | 1,087    |       | $ | 1,809 |   |
| Notes Payable to Banks                           |       | 1,000    |       | 1,000    |       | 789      |       |
| Accounts Payable and Accrued Employee Benefits   |       | 1,596    |       | 747      |       | 830      |       |
| Intercompany Accounts Payable                    |       | 1,673    |       | 2,326    |       | 823      |       |
| Unearned Revenue                                 |       | 139      |       | 92       |       | 109      |       |
| Other Current Liabilities                        |       | 50       |       | 429      |       | 37       |       |
| Current Liabilities                              |       | 4,458    |       | 4,594    |       | 2,588    |       |
| Intercompany Notes Payable                       |       | 4,890    |       | 3,637    |       | 2,829    |       |
| Long-Term Debt                                   |       | 2,200    |       | 2,200    |       | 2,200    |       |
| Long-Term and Other Liabilities                  |       | 7,090    |       | 5,837    |       | 5,029    |       |
| Total  Shareholder’s Equity and Liabilities |       | $        | 6,902      |     | $          | 11,518   |       | $ | 9,426 |   |

 

**MaricorTechnologies**

As noted above, the Company has embarked on a newcourse, and it is expected to result in the divestiture of substantially all ofthe assets reported as the Unregulated Software Technology operating segmentwithin the next twelve months. The Company recognized a loss from discontinuedoperations from MTI of $1.3 million in 2006 and $318,000 from the time ofacquisition in February 2005 through December 31, 2005. An estimatedloss of $620,000, net of tax, was recorded in 2006 as a result of theanticipated divestiture of these MTI assets.

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Theoperating revenue and net loss for MTI for 2006 and 2005 is as follows:

| ** **                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Estimated Loss on  Sale                        |       | $        | (1,033     | )        | $          | — |   |
| Loss From Operations:                          |       |     |       |     |       |
| Operating Revenue                              |       | 183      |       | 115      |       |
| Expenses                                       |       | (1,281   | )          | (655     | )          |
| Loss From Operations                           |       | (1,098   | )          | (540     | )          |
| Benefit of Income  Taxes                       |       | 856      |       | 222      |       |
| Net  Loss—Unregulated Software Technology |       | $        | (1,275     | )        | $          | (318 | ) |

 

MTI’sassets, liabilities and shareholder’s equity at December 31, 2006 and 2005were:

| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Assets:                                          |       |     |       |     |       |
| Accounts Receivable, Net                         |       | $        | 29         |     | $          | 28 |   |
| Current Assets                                   |       | 29       |       | 28       |       |
| Fixed Assets, Net of Depreciation                |       | 203      |       | 1,396    |       |
| Income Taxes Receivable                          |       | 329      |       | 324      |       |
| Deferred Tax Assets                              |       | 586      |       | —   |       |
| Long-Term and Other Assets                       |       | 1,118    |       | 1,720    |       |
| Total Assets                                     |       | $        | 1,147      |     | $          | 1,748 |   |
| Shareholder’s  Equity and Liabilities:      |       |     |       |     |       |
| Shareholder’s (Deficit) Equity              |       | $        | (330       | )        | $          | 846 |   |
| Accounts Payable and Accrued Employee Benefits   |       | 133      |       | 73       |       |
| Intercompany Accounts Payable                    |       | 1,120    |       | 554      |       |
| Unearned Revenue                                 |       | 24       |       | 40       |       |
| Current Liabilities                              |       | 1,277    |       | 667      |       |
| Other Liabilities                                |       | 200      |       | 235      |       |
| Other Liabilities                                |       | 200      |       | 235      |       |
| Total  Shareholder’s Equity and Liabilities |       | $        | 1,147      |     | $          | 1,748 |   |

 

**Energy Atlantic**

On March 1,2004, EA suspended all active operations and since that date has beenclassified as a discontinued operation in accordance with SFAS No. 144. TheCompany recognized income (loss) from EA discontinued operations of $1,000,$(1,000), and $(408,000), for the years ended December 31, 2006, 2005 and2004, respectively. The following table summarizes the statement of operationsfor EA for each of the past three years:

| ** **                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenue                                              |       |     | $          | —   |       |     |       | $ | — |   |   | $ | 572 |   |
| Expenses                                             |       |     | —     |     |       |     | —     |   |   | (1,164 | ) |
| Other Income,  Deductions and Interest               |       |     | 2          |     |       |     | (3         | ) |   | (86 | ) |
| Pretax Income (Loss)                                 |       |     | 2          |     |       |     | (3         | ) |   | (678 | ) |
| (Provision for)  Benefit of Income Taxes             |       |     | (1         | )        |       |     | 2          |   |   | 270 |   |
| Net Income  (Loss)—Unregulated Energy Marketing |       |     | $          | 1        |       |     |       | $ | (1 | ) |   | $ | (408 | ) |

 

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Themajor classes of assets and liabilities of the discontinued operations includedin the Company’s consolidated balance sheets as of December 31, 2006, 2005and 2004, are as follows:

| ** **                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Assets:                              |       |     |       |     |       |     |       |
| Cash and Cash Equivalents            |       | $        | —     |     | $          | —   |       | $ | 183 |   |
| Income Tax Benefit—Intercompany |       | 334      |       | 235      |       | 263      |       |
| Other Assets                         |       | —   |       | —   |       | 21       |       |
| Total Assets                         |       | $        | 334        |     | $          | 235      |       | $ | 467 |   |
| Liabilities:                         |       |     |       |     |       |     |       |
| Accounts Payable                     |       | $        | —     |     | $          | 6        |       | $ | 67 |   |
| Total Liabilities                    |       | $        | —     |     | $          | 6        |       | $ | 67 |   |

 

**4.**                 SEGMENTINFORMATION

The Company isorganized based on products and services. Management monitors the operations ofthe Company in the following operating segments:

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

·       Unregulatedengineering services: The Maricor Group and all of its subsidiaries and productand service lines, classified as discontinued operations;

·       Unregulatedsoftware technology: Maricor Technologies, Inc., classified asdiscontinued operations;

·       Unregulatedenergy marketing: EA, an inactive subsidiary classified as discontinuedoperations; and

·       Other:Corporate costs directly associated with the unregulated subsidiaries, commoncosts not allocated to the regulated utility, operations of Mecel Propertiesand inter-company eliminations.

The segment information for 2005 and 2004 has beenreclassified to conform to the 2006 presentation.

The accounting policies of the segments are the sameas those described in Note 1, “Summary of Significant Accounting Policies.”  MAM provides certain administrative supportservices to MPS, TMG, and MTI and their subsidiaries. The cost of servicesprovided to MPS is billed to MPS based on a combination of direct charges andallocations. The cost of corporate services provided to the other unregulatedentities remains at the holding company, and is not allocated or charged to thevarious subsidiaries. MPS also provides services to MAM and other affiliates. Theseservices are billed to MAM at cost through inter-company transactions.

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| ** **                                   | ** ** | ** **                                   | ** ** | **Twelve Months Ended December 31, 2006** | ** ** | ** **               | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | ** **                                   | ** ** | **Unregulated**                                                    | ** ** | ** **               | ** ** |
| ** **                                   | ** ** | **Regulated**                                | ** ** | ** **                                                         | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Electric  Utility**                        | ** ** | **Engineering  Services**                                          | ** ** | **Software  Technology** | ** ** | **Energy  Marketing** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(In thousands of dollars)** | ** ** |
| Revenue from External  Customers             |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operating Revenue                  |       |                                         | $          | 35,601                                                             |       |                     |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | — |   | $ | 35,601 |   |
| Operating Expenses                           |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operation & Maintenance        |       |                                         | 15,266     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 15,266 |   |
| Unregulated Operation & Maintenance |       |                                         | —     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 1,960 |   | 1,960 |   |
| Depreciation                                 |       |                                         | 2,893      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 15 |   | 2,908 |   |
| Amortization of Stranded Cost                |       |                                         | 10,960     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 10,960 |   |
| Amortization                                 |       |                                         | 155        |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 155 |   |
| Taxes Other than Income                      |       |                                         | 1,774      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 33 |   | 1,807 |   |
| Income Taxes                                 |       |                                         | 1,575      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (1,057 | ) | 518 |   |
| Total Operating Expenses                     |       |                                         | 32,623     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 951 |   | 33,574 |   |
| Operating Income (Loss)                      |       |                                         | 2,978      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (951 | ) | 2,027 |   |
| Other Income  (Deductions)                   |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in Income of Associated Companies     |       |                                         | 289        |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (6 | ) | 283 |   |
| Interest and Dividend Income                 |       |                                         | 52         |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (32 | ) | 20 |   |
| Other Income (Deductions)                    |       |                                         | (139       | )                                                                  |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (1 | ) | (140 | ) |
| Total Other Income (Deductions)              |       |                                         | 202        |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (39 | ) | 163 |   |
| Income (Loss) Before Interest Charges        |       |                                         | 3,180      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (990 | ) | 2,190 |   |
| Interest Charges                             |       |                                         | 1,051      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 335 |   | 1,386 |   |
| Income (Loss) from Continuing Operations     |       |                                         | 2,129      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (1,325 | ) | 804 |   |
| (Loss) Income from  Discontinued Operations: |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Estimated Loss on Sale                       |       |                                         | —     |                                                               |       |                     | (4,717     | ) |   |   | (1,033 | ) |   |   | — |   |   | — |   | (5,750 | ) |
| Goodwill Impairment Loss                     |       |                                         | —     |                                                               |       |                     | (2,546     | ) |   |   | — |   |   |   | — |   |   | — |   | (2,546 | ) |
| (Loss) Income From Operations                |       |                                         | —     |                                                               |       |                     | (1,666     | ) |   |   | (1,098 | ) |   |   | 2 |   |   | — |   | (2,762 | ) |
| Benefit of (Provision for) Income Taxes      |       |                                         | —     |                                                               |       |                     | 3,478      |   |   |   | 856 |   |   |   | (1 | ) |   | — |   | 4,333 |   |
| (Loss) Income from Discontinued Operations   |       |                                         | —     |                                                               |       |                     | (5,451     | ) |   |   | (1,275 | ) |   |   | 1 |   |   | — |   | (6,725 | ) |
| Net Income (Loss)                            |       |                                         | $          | 2,129                                                              |       |                     |       | $ | (5,451 | ) |   |   | $ | (1,275 | ) |   |   | $ | 1 |   |   | $ | (1,325 | ) | $ | (5,921 | ) |
| Total Assets                                 |       |                                         | $          | 134,037                                                            |       |                     |       | $  | 6,902 |   |   |   | $ | 1,147 |   |   |   | $ | 334 |   |   | $  | 5,827 |   | $ | 148,247 |   |
| Capital  Expenditures                        |       |                                         | $     | 3,502                                                              |       |                     |       | $ | 49 |   |   |   | $ | 244 |   |   |   | $ | — |   |   | $ | 30 |   | $ | 3,825 |   |

 

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| ** **                                   | ** ** | ** **                                   | ** ** | **Twelve Months Ended December 31, 2005** | ** ** | ** **               | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | ** **                                   | ** ** | **Unregulated**                                                    | ** ** | ** **               | ** ** |
| ** **                                   | ** ** | **Regulated  Electric  Utility**             | ** ** | **Engineering  Services**                                          | ** ** | **Software  Technology** | ** ** | **Energy  Marketing** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(In thousands of dollars)** | ** ** |
| Revenue from External  Customers             |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operating Revenue                  |       |                                         | $          | 34,314                                                             |       |                     |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | (15 | ) | $ | 34,299 |   |
| Operating Expenses                           |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operation &  Maintenance  |       |                                         | 14,352     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 14,352 |   |
| Unregulated Operation & Maintenance |       |                                         | —     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 2,019 |   | 2,019 |   |
| Depreciation                                 |       |                                         | 2,781      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 1 |   | 2,782 |   |
| Amortization of Stranded Cost                |       |                                         | 10,533     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 10,533 |   |
| Amortization                                 |       |                                         | 365        |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 365 |   |
| Taxes Other than Income                      |       |                                         | 1,671      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 34 |   | 1,705 |   |
| Income Taxes                                 |       |                                         | 1,506      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (863 | ) | 643 |   |
| Total Operating Expenses                     |       |                                         | 31,208     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 1,191 |   | 32,399 |   |
| Operating Income (Loss)                      |       |                                         | 3,106      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (1,206 | ) | 1,900 |   |
| Other Income (Deductions)                    |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in Income of Associated Companies     |       |                                         | 182        |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (232 | ) | (50 | ) |
| Interest and Dividend Income                 |       |                                         | 55         |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (31 | ) | 24 |   |
| Other Income (Deductions)                    |       |                                         | (39        | )                                                                  |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (52 | ) | (91 | ) |
| Total Other Income (Deductions)              |       |                                         | 198        |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (315 | ) | (117 | ) |
| Income (Loss) Before Interest Charges        |       |                                         | 3,304      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (1,521 | ) | 1,783 |   |
| Interest Charges                             |       |                                         | 1,040      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (105 | ) | 935 |   |
| Income (Loss) from Continuing  Operations    |       |                                         | 2,264      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (1,416 | ) | 848 |   |
| (Loss) Income from  Discontinued Operations: |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Loss) Income From Operations                |       |                                         | —     |                                                               |       |                     | (1,264     | ) |   |   | (540 | ) |   |   | (3 | ) |   | 5 |   | (1,802 | ) |
| Benefit of Income Taxes                      |       |                                         | —     |                                                               |       |                     | 510        |   |   |   | 222 |   |   |   | 2 |   |   | — |   | 734 |   |
| (Loss) Income from Discontinued Operations   |       |                                         | —     |                                                               |       |                     | (754       | ) |   |   | (318 | ) |   |   | (1 | ) |   | 5 |   | (1,068 | ) |
| Net Income (Loss)                            |       |                                         | $          | 2,264                                                              |       |                     |       | $ | (754 | ) |   |   | $ | (318 | ) |   |   | $ | (1 | ) |   | $  | (1,411 | ) | $ | (220 | ) |
| Total Assets                                 |       |                                         | $          | 137,440                                                            |       |                     |       | $ | 11,518 |   |   |   | $ | 1,748 |   |   |   | $ | 235 |   |   | $ | 362 |   | $ | 151,303 |   |
| Capital  Expenditures                        |       |                                         | $          | 4,822                                                              |       |                     |       | $ | 238 |   |   |   | $ | 446 |   |   |   | $ | — |   |   | $ | 23 |   | $ | 5,529 |   |
|                                              |            |                                              |            |                                                                    |            |                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| ** **                                   | ** ** | ** **                                   | ** ** | **Twelve Months Ended December 31, 2004** | ** ** | ** **               | ** ** |
|----------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | ** **                                   | ** ** | **Unregulated**                                                    | ** ** | ** **               | ** ** |
| ** **                                   | ** ** | **Regulated  Electric  Utility**             | ** ** | **Engineering  Services**                                          | ** ** | **Software  Technology** | ** ** | **Energy  Marketing** | ** ** | **Other** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(In thousands of dollars)** | ** ** |
| Revenue from External  Customers             |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operating Revenue                  |       |                                         | $          | 33,734                                                             |       |                     |       | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | (1 | ) | $ | 33,733 |   |
| Operating Expenses                           |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Regulated Operation & Maintenance   |       |                                         | 14,065     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 14,065 |   |
| Unregulated Operation & Maintenance |       |                                         | —     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 1,254 |   | 1,254 |   |
| Depreciation                                 |       |                                         | 2,635      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 1 |   | 2,636 |   |
| Amortization of Stranded Cost                |       |                                         | 10,011     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 10,011 |   |
| Amortization                                 |       |                                         | 194        |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 194 |   |
| Taxes Other than Income                      |       |                                         | 1,603      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | — |   | 1,603 |   |
| Income Taxes                                 |       |                                         | 1,234      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (531 | ) | 703 |   |
| Total Operating Expenses                     |       |                                         | 29,742     |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 724 |   | 30,466 |   |
| Operating Income (Loss)                      |       |                                         | 3,992      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (725 | ) | 3,267 |   |
| Other Income  (Deductions)                   |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity in Income of Associated  Companies    |       |                                         | 204        |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | 14 |   | 218 |   |
| Interest and Dividend Income                 |       |                                         | 17         |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (16 | ) | 1 |   |
| Other Income (Deductions)                    |       |                                         | (186       | )                                                                  |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (85 | ) | (271 | ) |
| Total Other Income (Deductions)              |       |                                         | 35         |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (87 | ) | (52 | ) |
| Income (Loss) Before Interest Charges        |       |                                         | 4,027      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (812 | ) | 3,215 |   |
| Interest Charges                             |       |                                         | 985        |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (49 | ) | 936 |   |
| Income (Loss) from Continuing Operations     |       |                                         | 3,042      |                                                               |       |                     | —     |   |   |   | — |   |   |   | — |   |   | (763 | ) | 2,279 |   |
| (Loss) Income from  Discontinued Operations: |       |                                         |       |                                                               |       |                     |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loss From Operations                         |       |                                         | —     |                                                               |       |                     | (807       | ) |   |   | — |   |   |   | (678 | ) |   | — |   | (1,485 | ) |
| Benefit of Income Taxes                      |       |                                         | —     |                                                               |       |                     | 254        |   |   |   | — |   |   |   | 270 |   |   | — |   | 524 |   |
| Loss from Discontinued Operations            |       |                                         | —     |                                                               |       |                     | (553       | ) |   |   | — |   |   |   | (408 | ) |   | — |   | (961 | ) |
| Net Income (Loss)                            |       |                                         | $          | 3,042                                                              |       |                     |       | $ | (553 | ) |   |   | $ | — |   |   |   | $ | (408 | ) |   | $ | (763 | ) | $ | 1,318 |   |
| Total Assets                                 |       |                                         | $          | 137,742                                                            |       |                     |       | $ | 9,426 |   |   |   | $ | — |   |   |   | $ | 467 |   |   | $ | 3,041 |   | $ | 150,676 |   |
| Capital  Expenditures                        |       |                                         | $          | 6,276                                                              |       |                     |       | $ | 258 |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 265 |   | $ | 6,799 |   |

 

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The following tables present the operations and assetsof the Company by geographic location:

**FinancialInformation about Foreign and Domestic Operations (In thousands of U.S. dollars)**

| ** **                                         | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Revenue:**                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  Revenue from Domestic Operations:       |       |       |       |       |       |       |       |
| Maine Public Service Company                       |       | $          | 35,601     |       | $          | 34,314     |       | $ | 33,734 |   |
| Other(1)                                           |       | —     |       | (15        | )          | (1         | )          |
| Operating Revenue                                  |       | 35,601     |       | 34,299     |       | 33,733     |       |
| **Intercompany Revenue:**                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Intercompany  Revenue from Domestic Operations:    |       |       |       |       |       |       |       |
| Maine Public Service Company                       |       | $          | —     |       | $          | 15         |       | $ | — |   |
| Intercompany Revenue                               |       | —     |       | 15         |       | —     |       |
| **Operating Income (Loss):**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating  Income (Loss) from Domestic Operations: |       |       |       |       |       |       |       |
| Maine Public Service Company                       |       | $          | 2,989      |       | $          | 3,118      |       | $ | 4,009 |   |
| Other(1)                                           |       | (1,007     | )          | (1,250     | )          | (740       | )          |
| Subtotal                                           |       | 1,982      |       | 1,868      |       | 3,269      |       |
| Operating  Loss from Foreign Operations:           |       |       |       |       |       |       |       |
| Maine & New Brunswick                          |       | (11        | )          | (12        | )          | (17        | )          |
| Mecel Properties                                   |       | 56         |       | 44         |       | 15         |       |
| Subtotal                                           |       | 45         |       | 32         |       | (2         | )          |
| Operating Income                                   |       | 2,027      |       | 1,900      |       | 3,267      |       |
| **Net Income (Loss):**                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  Income (Loss) from Domestic Operations:       |       |       |       |       |       |       |       |
| Maine Public Service Company                       |       | $          | 2,122      |       | $          | 2,261      |       | $ | 3,054 |   |
| The Maricor Group(2)                               |       | (2,408     | )          | (694       | )          | (433       | )          |
| Maricor Technologies, Inc.(2)                      |       | (1,275     | )          | (318       | )          | —     |       |
| Other(1)                                           |       | (1,340     | )          | (1,429     | )          | (1,177     | )          |
| Subtotal                                           |       | (2,901     | )          | (180       | )          | 1,444      |       |
| Net  (Loss) Income from Foreign Operations:        |       |       |       |       |       |       |       |
| The Maricor Group, Canada(2)                       |       | (3,043     | )          | (60        | )          | (120       | )          |
| Maine & New Brunswick                          |       | 7          |       | 3          |       | (12        | )          |
| Mecel Properties                                   |       | 16         |       | 17         |       | 6          |       |
| Subtotal                                           |       | (3,020     | )          | (40        | )          | (126       | )          |
| Total Net (Loss) Income                            |       | (5,921     | )          | (220       | )          | 1,318      |       |
| **Identifiable Assets:**                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Identifiable  Assets from Domestic Operations:     |       |       |       |       |       |       |       |
| Maine Public Service Company                       |       | $          | 133,087    |       | $          | 137,312    |       | $ | 137,572 |   |
| The Maricor Group(2)                               |       | 3,677      |       | 4,207      |       | 3,882      |       |
| Maricor Technologies, Inc.(2)                      |       | 1,147      |       | 1,706      |       | —     |       |
| Other(1)                                           |       | 5,559      |       | 47         |       | 2,497      |       |
| Subtotal                                           |       | 143,470    |       | 143,272    |       | 143,951    |       |
| Identifiable  Assets from Foreign Operations:      |       |       |       |       |       |       |       |
| The Maricor Group, Canada(2)                       |       | 3,225      |       | 7,320      |       | 6,059      |       |
| Maine & New Brunswick                          |       | 950        |       | 128        |       | 170        |       |
| Mecel Properties                                   |       | 602        |       | 583        |       | 496        |       |
| Subtotal                                           |       | 4,777      |       | 8,031      |       | 6,725      |       |
| Total Identifiable  Assets                         |       | 148,247    |       | 151,303    |       | 150,676    |       |

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(1)             "Other" includes the holding company, MAM,Energy Atlantic, and intercompany eliminations.

(2)             TMG (including TMGC) and MTI are presentedas discontinued operations in the consolidated financial statements.

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**5.        INVESTMENTSIN ASSOCIATED COMPANIES**

**Maricor PropertiesLtd**

On June 30,2006, Maricor Properties sold one share of stock representing a 50% ownershipinterest to Ashford Investments Inc. This sale specifically excluded Mecel,with MAM retaining 100% of the economic ownership of Mecel. See Note 15 forfurther disclosure of this transaction. Management reviewed the characteristicsof Maricor Properties subsequent to this transaction in accordance withFinancial Accounting Standards Board Interpretation No. (“FIN”) 46(R), “*Consolidation of Variable Interest Entities, an Interpretation of ARB51*,” and determined that MAM remained the primary beneficiary ofMecel, but is not the primary beneficiary of Maricor Properties, including theVaughan Harvey building and Cornwallis, as of the date of this transaction. Therefore,the assets and liabilities of Mecel remain consolidated in these financialstatements, while the assets and liabilities of the other components of MaricorProperties are no longer consolidated as of June 30, 2006.  MAM’s investment in Maricor Properties isreported within “Investments in Associated Companies,” and receivables from andpayable to MAM and its wholly-owned subsidiaries from Maricor Properties andits subsidiaries are presented within the lines “Accounts Receivable fromAssociated Companies,” and “Accounts Payable to Associated Companies.”

Condensedfinancial information, as of December 31, 2006, for the components ofMaricor Properties not consolidated in these financial statements is asfollows:

| Total Assets                     |   | $      | 7,705  |   |
|----------------------------------|--------|--------|--------|--------|
| Less:                            |   |   |   |
| Long-term Debt                   |   | 5,543  |   |
| Short-term Debt                  |   | 1,716  |   |
| Other Liabilities                |   | 88     |   |
| Net Assets                       |   | $      | 358    |   |
| MAM’s Equity in Net  Assets |   | $      | 179    |   |

 

MAM recorded equity in theincome of Maricor Properties, excluding Mecel, of $181,000 in 2006.

**Maricor Ashford Ltd**

Maricor Properties Ltd isan equal partner in Maricor Ashford Ltd, a joint venture with AshfordInvestments, Ltd. Maricor Ashford Ltd is a real estate development andredevelopment company based in Moncton, New Brunswick, Canada. Managementreviewed the characteristics of this joint venture in accordance with FinancialAccounting Standards Board Interpretation No. 46(R), “Consolidation ofVariable Interest Entities, an Interpretation of ARB 51” (“FIN 46(R)”), anddetermined that Maricor Properties Ltd is not the primary beneficiary of thisjoint venture. Accordingly, the activity of Maricor Ashford Ltd has beenrecorded in these financial statements under the equity method, and MaricorAshford Ltd is not consolidated with these financial statements. MaricorProperties’ investment in the joint venture totaled $58,000 at December 31,2006. Also, Maricor Properties recognized $111,000 or 50% of the loss ofMaricor Ashford as equity earnings in 2005.

**Maine Yankee andMEPCO**

MPS owns 5% of the common stock of Maine Yankee AtomicPower Company (“Maine Yankee”), a jointly-owned nuclear electric power company,and 7.49% of the common stock of MEPCO, a jointly-owned electric transmissioncompany. Although MPS’s ownership percentage of these entities is relativelylow, it does have influence over the operating and financial decisions of thesecompanies through board representation, and therefore MPS records its investmentin MEPCO and Maine Yankee using the equity method. This is consistent withindustry practice for similar joint-owned units.

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Dividendsreceived during 2006, 2005 and 2004 from Maine Yankee were $60,000, $91,000 and$355,000, respectively, and from MEPCO $7,000, $174,000 and $7,000,respectively. In 2006, 2005 and 2004, MPS also received Maine Yankee stockredemptions of $598,000, $350,000 and $200,000, respectively, withapproximately $250,000 of stock redemptions receivable at December 31,2006. Substantially all earnings of Maine Yankee and MEPCO are distributed toinvestor companies. Condensed financial information for Maine Yankee and MEPCOis as follows *(in thousands of dollars)*:

| ** **                                  | ** ** | **Maine Yankee** | ** ** | **MEPCO** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|-----------|------------|
| ** **                                  | ** ** | **2006**              | ** ** | **2005**  | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Earnings**                                |       |                  |       |      |       |   |   |   |   |   |   |   |   |
| Operating  revenues                         |       | $                     | 63,356     |      | $          | 60,060 |   | $ | 62,032 |   | $ | 3,833 |   | $ | 3,339 |   | $ | 3,628 |   |
| Earnings  applicable to Common Stock        |       | 3,200                 |       | 1,879     |       | 2,494 |   | 1,776 |   | 988 |   | 1,207 |   |
| Company’s equity share of net earnings |       | $                     | 160        |      | $          | 94 |   | $ | 125 |   | $ | 133 |   | $ | 74 |   | $ | 90 |   |
| **Investment**                              |       |                  |       |      |       |   |   |   |   |   |   |   |   |
| Total assets                                |       | $                     | 419,305    |      | $          | 451,377 |   | $ | 478,299 |   | $ | 8,804 |   | $ | 9,927 |   | $ | 8,966 |   |
| Less:                                       |       |                  |       |      |       |   |   |   |   |   |   |   |   |
| Other liabilities  and deferred credits     |       | 405,426               |       | 422,511   |       | 442,486 |   | 365 |   | 3,167 |   | 898 |   |
| Net assets                                  |       | $                     | 13,879     |      | $          | 28,866 |   | $ | 35,813 |   | $ | 8,439 |   | $ | 6,760 |   | $ | 8,068 |   |
| MPS’s  equity in net assets            |       | $                     | 694        |      | $          | 1,443 |   | $ | 1,791 |   | $ | 632 |   | $ | 506 |   | $ | 604 |   |

 

Inaccordance with a plan approved by the Securities and Exchange Commission,Maine Yankee has started the redemption of its common stock periodically through2008. The following table shows the common stock redemptions to date:

| ** **                                    | ** ** | **Total Shares** | ** ** | **MPS**      | ** ** | **Amounts** | ** ** | ** **   | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|--------------|------------|-------------|------------|--------------|------------|
| **Maine Yankee Board Meeting** | ** ** | ** **            | ** ** | **Redeemed** | ** ** | **Shares**  | ** ** | **Received** | ** ** | **Date Received** | ** ** |
| September 27,  2001                      |       |                  | 75,200     |         |       | 3,760       |       | $            | 499,484    |   | October 4,  2001 |   |
| June 27,  2002                           |       |                  | 22,600     |         |       | 1,130       |       | $            | 150,110    |   | July 11,  2002 |   |
| September 26,  2002                      |       |                  | 33,900     |         |       | 1,695       |       | $            | 225,166    |   | October 4,  2002 |   |
| December 18,  2002                       |       |                  | 33,800     |         |       | 1,690       |       | $            | 224,502    |   | January 9,  2003 |   |
| September 25,  2003                      |       |                  | 45,200     |         |       | 2,260       |       | $            | 300,222    |   | October 14,  2003 |   |
| December 17,  2003                       |       |                  | 30,100     |         |       | 1,505       |       | $            | 199,926    |   | January 7,  2004 |   |
| March 29,  2005                          |       |                  | 52,700     |         |       | 2,635       |       | $            | 350,037    |   | April 13,  2005 |   |
| March 7,  2006                           |       |                  | 30,100     |         |       | 1,505       |       | $            | 199,926    |   | April 3,  2006 |   |
| June 13,  2006                           |       |                  | 60,200     |         |       | 3,010       |       | $            | 399,853    |   | July 10,  2006 |   |
| December 5,  2006                        |       |                  | 37,600     |         |       | 1,880       |       | $            | 249,742    |   | January 18,  2007 |   |
|                                          |       |                  | 421,400    |         |       | 21,070      |       | $            | 2,798,968  |   |   |   |
|                                               |            |                       |            |              |            |             |            |              |            |  |  |  |  |  |

 

 

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**6.**                 SHORT-TERM CREDITARRANGEMENTS

Thefollowing table summarizes the balances outstanding under the Company’sshort-term credit arrangements at December 31, 2006 and 2005:

| ** **                                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Maine Public Service Company**                                                        |       |     |       |     |       |
| Bank of America, N.A. $10,000,000, 3 Year Revolving  Working Capital Line of Credit     |       | $        | 8,000      |     | $          | 7,900 |   |
| **Maine &  Maritimes**                                                         |       |     |       |     |       |
| Bank of America, N.A. $4,000,000, 3 Year Revolving  Working Capital Line of Credit      |       | 2,270    |       | 1,500    |       |
| Bank of America, N.A. $1,700,000, Term Note                                             |       | 1,700    |       | —   |       |
| **Total**—**Continuing Operations**                                                |       | 11,970   |       | 9,400    |       |
| **The  Maricor Group**                                                                  |       |     |       |     |       |
| Katahdin Trust Company $1,000,000 Secured Revolving  Working Capital Credit Arrangement |       | 1,000    |       | 1,000    |       |
| **Total**—**Discontinued Operations**                                              |       | 1,000    |       | 1,000    |       |
| **Total  Short-Term Credit Arrangements**                                               |       | $        | 12,970     |     | $          | 10,400 |   |

 

On June 13, 2006, MAM entered into an agreementto borrow up to $1.7 million from Bank of America. This loan has interestpayable on the last day of each month beginning at June 30, 2006, untilfull payment of any outstanding principal at a rate of the Bank’s prime rateplus 1%. The rate at December 31, 2006, was 9.25%. This term loan wasavailable to the Company until December 31, 2006, or earlier if the loanprincipal was paid down. Minimum principal payments in the amount of $140,000 atthe end of each month began on January 31, 2007, and end the earlier of December 31,2007, or until the loan is fully repaid. As of December 31, 2006, therewas $1.7 million outstanding on this term note, with no additional amountsavailable.

On October 7, 2005, MPS arranged a three-year,$10 million revolving, working capital line of credit with Bank of America asAgent, secured by $6.0 million of first mortgage bonds. This line of creditreplaces the former $6 million line of credit with Bank of New York as Agent. Interestrates on the new facility are 30-, 60-, or 90-day LIBOR plus1.375% or Bank of America’s prime rate. This line of credit is subject tocertain financial covenants, measured quarterly beginning December 31,2005. These covenants include a minimum tangible net worth, a minimum debtservice coverage ratio and a maximum debt-to-total capital ratio. As of December 31,2006, there was $8.0 million outstanding on this line of credit, with $2.0million available.

On October 21, 2005, MAM arranged a new,three-year $4.0 million revolving line of credit with Bank of America forworking capital, letters of credit and the repayment of the $750,000 KatahdinTrust Company ninety-day line of credit. Of this $4.0 million line of credit,$1.73 million is in the form of a letter of credit (“LOC”) securing a loan fromRoyal Bank of Canada which loan was used as a portion of the funds to acquireCornwallis Court Developments. The MAM line of credit is secured by a generalsecurity interest in the business assets of MAM, excluding the assets of MPS. Theinterest rate is 30-, 60- or 90-day LIBOR plus 2.5% or Bankof America’s prime rate. The loan agreement contains certain financialcovenants, measured quarterly beginning December 31, 2005, which requireMAM to maintain a minimum tangible net worth, a minimum debt service coverageratio and a maximum debt-to-total capital ratio. At December 31, 2006,there was $2.27 million outstanding on this line of credit, with no additionalavailability.

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The Maricor Group has a revolving credit arrangementwith Katahdin Trust Company for borrowings up to $1 million. Thisrevolving credit arrangement was arranged on November 29, 2005, with aninterest rate of LIBOR plus 2.75%. It is for a term of one year and is subjectto extension with the consent of the bank. This facility was renewed on November 29,2006, with an amendment of the interest rate margin from 2.75% to 3.25%, andeffective June 30, 2007, the availability of the revolving line of creditwill be reduced to $800,000. All other terms and conditions remained the same.This loan is guaranteed by MAM and by The Maricor Group, Canada Ltd. The loanagreement contains certain financial covenants, measured quarterly beginning December 31,2005, which require MAM to maintain a minimum tangible net worth, a minimumdebt service coverage ratio and a maximum debt-to-total capital ratio andrequire The Maricor Group to maintain a minimum debt service coverage ratio. Asof December 31, 2006, there was $1 million outstanding under the revolvingcredit arrangement at a variable interest rate of three month LIBOR plus 3.25%.Under the terms of the credit agreement with Katahdin Trust Company, the $1million TMG line of credit must be repaid in full for at least one 30-dayperiod during each year. On July 19, 2006, Katahdin Trust Company waivedthis requirement for 2006. This facility replaced the $1 million revolvingcredit facility previously with TD BankNorth N.A.

MAM did not meet the interest coverage ratio requiredunder the MAM Credit Agreement with Bank of America or the TMG facility withKatahdin Trust Company for the third quarter of 2006 and the fourth quarter of2006. Bank of America and Katahdin Trust Company granted waivers fromcompliance with the interest coverage ratio requirements for both the third andfourth quarters. The waivers included three provisions.  First, waiver fees totaling $56,000 wereassessed. Second, a modification was made to the interest coverage ratiorequirements for 2007 for the Bank of America $1.7 million term note, the Bankof America $4.0 million line of credit and the Katahdin Trust Company $1.0million line of credit.  For the three,six and twelve months ended March 31, June 30 and December 31, 2007, MAM mustmeet a 1.75:1 interest coverage ratio, calculated as earnings before interestand income taxes divided by interest expense. For the nine months ended September 30, 2007, 1.25:1 is the minimumratio required.  The third provision isthe conversion of the Bank of America $4.0 million line of credit from arevolving credit agreement to a term note, effective March 13, 2007.  With this conversion, the principal balancesmust be repaid at a rate of $40,000 per month, beginning January 31, 2008.

During 2006, MPS deferredapproximately $229,000 of financing costs, primarily associated with itsletters of credit, compared to $138,000 deferred in 2005. The unregulatedcompanies deferred $107,000, for the $1.7 million Bank of America term note,during 2006, compared to $91,000 deferred in 2005.

**7.**                 ACCUMULATEDOTHER COMPREHENSIVE INCOME (LOSS)

MPS has three issues of long-term debt with variableinterest rates. Pursuant to its rate order in MPUC Docket 2003-85, MPSagreed to fix its interest rates and the MPUC allowed recovery of the fixedinterest costs in rates. On September 9, 2003, MPS executed swapagreements for the three variable-rate issues, locking in the rates over theremaining terms of the issues. For the Finance Authority of Maine (“FAME”) 1998Taxable Elective Rate Stabilization Revenue Notes due 2008, the effective fixedinterest rate has been set at 2.79%. For the two series of tax-exempt bondsissued by the Maine Public Utilities Financing Bank (“MPUFB”), the effectivefixed interest rates for the 1996 Series due 2021 and the 2000 Series due2025 are 4.42% and 4.53%, respectively.

At December 31, 2006, the fair value of thesequalified cash flow hedges was $(1.64) million, reflecting a change in interestswap rates since the execution date. For the year ended December 31, 2006,the difference between the fixed rates and the underlying variable rates on theissues of approximately $146,000 was charged to interest expense. Although thefixed interest rates were higher than the underlying variable rates, a portionof the MPUC approved rate increase was to cover this difference. Managementbelieves that the fixing of interest rates over the terms of the Company’s debtwill prove to protect both shareholders and consumers from upward interest raterisk. The loss in fair value on the 

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interest rate swaps from December 31,2005 to December 31, 2006, of $249,000 less the deferred tax of $100,000has been recorded as Other Comprehensive Income (Loss), affecting commonshareholder’s equity. Gains or losses in the fair market value of the interestrate swaps do not impact net income or the revenues of the Company, unless MPS’sshareholder’s common equity falls below the minimum allowable 48 percent ofcommon equity rates, the floor established by the MPUC Order in Docket No. 2002-676authorizing the formation of the holding company, MAM.

On June 1, 1998, MPSpurchased an interest rate cap of 7% at a cost of $172,000, to expire June 8,2008, on $11,450,000 of FAME’s Taxable Electric Rate Stabilization Notes, Series 1998A,issued on behalf of MPS. In accordance with the rate treatment prescribed bythe MPUC, the original cost of the interest rate cap has been amortized alongwith other issuance costs with $28,000, $45,000 and $62,000 remaining at theend of 2006, 2005 and 2004, respectively, as a regulatory asset. The providerof the cap estimated its value at the end of 2006 at approximately $(32).

**8.**                 LONG-TERM DEBT

On October 19, 2000, the Maine Public UtilitiesFinancing Bank (“MPUFB”) issued $9 million of its tax-exempt bonds due October 1,2025 (“2000 Series”) on behalf of MPS. The proceeds were placed in trust to bedrawn down for the reimbursement of issuance costs and for the construction ofqualifying distribution property. On October 17, 2003, MPS received thefinal distribution from the trust. Pursuant to the long-term note issued undera loan agreement between MPS and the MPUFB, MPS has agreed to make payments tothe MPUFB for the principal and interest on the bonds. Concurrently, pursuantto a letter of credit and reimbursement agreement, MPS caused a Direct PayLetter of Credit for an initial term of nineteen months, subsequently extendeduntil June, 2006, to be issued by The Bank of New York for the benefit of theholders of such bonds. On February 28, 2006, Bank of America issued itsDirect Pay Letter of Credit to expire March 2009, to replace Bank of NewYork’s Letter of Credit. To secure MPS’s obligations under the letter of creditand reimbursement agreement, MPS issued first and second mortgage bonds, in theamounts of $5.0 million and $4.53 million, respectively. MPS has the option ofselecting weekly, monthly, annual or term interest rate periods for the 2000Series, and, at issuance, selected the weekly interest period, with an initialinterest rate of 4.35%. On November 20, 2000, MPS purchased an interestrate cap of 6% at a cost of $36,000 that expired in November 2003, thatapplied to the 2000 and 1996 Series, as described below. For 2006, thecumulative effective interest rate of the 2000 Series, including the effectivefixed swap rate of 4.53%, issuance costs and credit enhancement fees sinceissuance were 6.10%.

A similarly structured series of Bonds was issued onbehalf of MPS by the MPUFB in 1996 (“1996 Series”), with $13.6 millionoutstanding due in 2021. A Direct Pay Letter of Credit was issued by The Bankof New York, which had been extended to June 2006, and is secured by $14.4million of second mortgage bonds. On February 28, 2006, Bank of Americaissued its Direct Pay Letter of Credit to expire March 2009, to replaceBank of New York’s Letter of Credit. At the end of 2006, the cumulativeeffective interest rate of the 1996 series, including the effective fixed swaprate of 4.43%, issuance costs and credit enhancement fees were 5.99%.

On May 29, 1998, FAME issued $11,540,000 of its TaxableElectric Rate Stabilization Revenue Notes, Series 1998A (“Notes”) onbehalf of MPS. The Notes were issued pursuant to, and are secured under, aTrust Indenture by and between FAME and Peoples Heritage Bank (now TDBankNorth), Portland, Maine, as Trustee (“the Trustee”), for the purpose of: (i) financingthe up-front payment to Wheelabrator-Sherman of approximately $8.7 million, asrequired under an amended purchase power agreement; (ii) for the CapitalReserve Fund, as required by FAME under their Electric Rate StabilizationProgram; and (iii) for issuance costs. The Notes are limited obligationsof FAME, payable solely out of the trust estate available under the Indenture,principally the Loan Note and Loan Agreement with MPS and the Capital ReserveFund held by the Trustee, which was approximately $2.38 million at the end of2005 and 2004. 

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MPS has issued $4.0million of its first mortgage bonds and $7.54 million of its second mortgagebonds as collateral for its performance under the Loan Note issue pursuant tothe Loan Agreement. The Notes will bear interest at a Floating Interest Rateand are adjusted weekly. On June 1, 1998, MPS purchased an interest ratecap of 7% at a cost of $172,000, to expire June 2008, to limit itsinterest rate exposure to quarterly U.S. LIBOR rates. At the end of 2006, thecumulative effective interest rate, including the fixed swap rate of 2.79%,issuance costs and credit enhancement fees for the Notes were 3.01%.

The MPUFB tax-exempt issues are subject to the samerestrictive covenants as those discussed for MPS’s revolving credit arrangementin Note 6, “Short-Term Credit Arrangements.”

The first and second mortgage bonds described abovethat secure MPS’s long-term debt are supported by the bondable additions ofsubstantially all of MPS’s utility plant.

On November 22,2004, MPS entered into a $6,000,000, unsecured, 7-year term loan withFleet National Bank, now Bank of America. The proceeds of the loan were used torepay and refinance a portion of the amounts outstanding under MPS’s revolvingcredit arrangement associated with the Company’s prior capital expenditures.The loan agreement contains certain covenants requiring the maintenance of aminimum Tangible Net Worth, maximum Ratio of Indebtedness for Borrowed Money toTotal Capital and a minimum Ratio of Net Income to Fixed Charges. Interest ispayable monthly at a variable interest rate of one-month LIBOR plus 1.5%. Theloan is to be repaid in scheduled monthly principal payments as follows:

| December 1,  2004 through November 1, 2007 |   | $ | 50,000 |   |
|------------------------------------------------------|--------|---|--------|--------|
| December 1,  2007 through November 1, 2009 |   | $ | 80,000 |   |
| December 1, 2009  through November 1, 2011 |   | $ | 95,000 |   |

 

As of December 31, 2006, $4.75 million of thisloan remained outstanding.

On November 29, 2005,The Maricor Group entered into a $2.2 million, secured, five-year term loanwith Katahdin Trust Company. The proceeds of the loan were used to repay andrefinance a $2.2 million term loan from BankNorth N.A. (now TD BankNorth). Theloan requires interest-only payments at a variable interest rate of three-monthLIBOR, plus 2.75% through November 29, 2007. Monthly, principal paymentsof approximately $18,300 commence December 29, 2007, with a final paymentof $1.54 million at maturity on December 29, 2010. This loan is guaranteedby MAM and by The Maricor Group, Canada Ltd. The loan agreement containscertain financial covenants, measured quarterly beginning December 31,2005, which require MAM to maintain a minimum tangible net worth, a minimumdebt service coverage ratio and a maximum debt-to-total capital ratio andrequire The Maricor Group to maintain a minimum debt service coverage ratio. Asof December 31, 2006, $2.2 million remained outstanding on this note.

*Long-term Debt ofMaricor Properties*

On July 5, 2006, Maricor Properties borrowed$2.45 million CDN from Merrill Lynch Mortgage Lending to refinance temporarydebt at the Royal Bank of Canada. The new debt is a 10-year mortgageloan, with monthly payments of principal and interest based on a 25-yearamortization schedule throughout the term of the loan, and the remaining loanbalance payable at the end of the term. The interest rate is variable,calculated as the greater of (a) 135 basis points over the yield on theGovernment of Canada mortgage benchmark bond most closely approximating theterm of the loan or (b) a floor of 5.20%. As of the date of borrowing, theinterest rate was 6.011%. This loan is secured by the Vaughan Harvey Blvd.property in Moncton, New Brunswick, and is guaranteed by Ashford InvestmentsInc., which is a 50% equity owner of Maricor Properties.

On August 4, 2006,Maricor Properties also borrowed $4.05 million CDN from Merrill Lynch MortgageLending to refinance the J. Angus MacDonald Building. The proceeds were used torepay the 

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StandardLife mortgage. The debt is a 10-year mortgage loan, with monthly paymentsof principal and interest based on a 25-year amortization schedulethroughout the term of the loan, and the remaining loan balance payable at theend of the term. The interest rate is variable, calculated as the greater of (a) 135basis points over the yield on the Government of Canada mortgage benchmark bondmost closely approximating the term of the loan or (b) a floor of 5.20%. Asof the date of borrowing, the interest rate was 5.695%. This loan is secured bythe J. Angus MacDonald building, and is guaranteed by Ashford Investments Inc.and Maricor Properties.

**9.**                 STOCKCOMPENSATION PLAN

Upon approval by MPS’s shareholders in June 2002,MPS adopted the 2002 Stock Option Plan (the “Plan”). The Plan was subsequentlyadopted by MAM after its formation. The Plan provides designated employees ofthe Company and its Subsidiaries with stock ownership opportunities andadditional incentives to contribute to the success of the Company, and toattract, reward and retain employees of outstanding ability. The Plan isadministered by the members of the Performance and Compensation Committee ofthe Board of Directors, who are not employees of the Company or itssubsidiaries. 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 for shares to be issued under any incentivestock option shall not be less than one-hundred percent (100%) of the fairmarket value of such shares on the date the option is granted. An option’smaximum term is ten years.

As of December 31, 2006, the former CEO has beenthe only employee to receive stock options. With his resignation in August 2006,the options granted in 2004 through 2006 were forfeited, with only the 2002 and2003 issues remaining vested and outstanding. In November 2006, threemonths from the resignation of the CEO, 6,568 options were forfeited, leaving3,932 options outstanding as of December 31, 2006, for the remainder ofthe original ten-year term of these options.

The Company accounts for the fair value of its grantsunder the Plan in accordance with the expense provisions of Statement ofFinancial Accounting Standards No. 123(R), “Accounting for Stock-BasedCompensation.”

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model with the following weighted-average assumptionsused for the grants:

| **Year of Issuance**            | ** ** | ** ** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Number of Options  Granted                |       | 1,966      |       | 1,966    |       |
| Vesting Period                            |       | 3 years    |       | 3 years  |       |
| Number of Options  Vested and Exercisable |       | 1,966      |       | 1,966    |       |
| Dividend Yield                            |       | 4.60%      |       | 4.70%    |       |
| Volatility                                |       | 20.00%     |       | 20.00%   |       |
| Risk-Free  Interest Rate                  |       | 3.00%      |       | 4.60%    |       |
| Expected Life                             |       | 7 years    |       | 7 years  |       |

 

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Asummary of the status of the Company’s stock option plan as of December 31,2006, and changes during the year then ended is presented below:

| **Options**                                     | ** ** | ** ** | ** ** | **Shares  2006** | ** ** | **Average Exercise Price  2006** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------------|------------|--------------------------------------------|------------|
| Outstanding at  December 31, 2005          |       | 21,000     |       |             | $          | 29.80                                      |       |   |
| Granted                                         |       | 5,250      |       |             | 15.45      |                                       |       |
| Exercised                                       |       | —     |       |             | —     |                                       |       |
| Forfeited                                       |       | 22,318     |       |             | 26.34      |                                       |       |
| Outstanding at  December 31, 2006          |       | 3,932      |       |             | $          | 30.28                                      |       |   |
| Options  exercisable at December 31, 2006  |       | 3,932      |       |             | $          | 30.28                                      |       |   |
| Weighted-average fair  value of options granted |       | $          | 4.17       |             |       |                                       |       |   |
|                                                 |            |            |            |                  |            |                                            |            |  |  |  |  |

 

Thefollowing table summarizes information about fixed stock options outstanding atDecember 31, 2006:

| ** **                              | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**              | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | ** **                   | ** ** | **Number  Outstanding at  12/31/06** | ** ** | **Weighted-  Average  Remaining  Contractual Life** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Number  Exercisable at  12/31/06** | ** ** | **Weighted-  Average  Exercise Price** | ** ** |
| $30.10 - $30.45               |       |                         | 3,932      |                                      |       |   | 5.92 yrs |   |   |   | $ | 30.28 |   |   |   | 3,932 |   |   |   | $ | 30.28 |   |   |
|                                         |            |                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Dilutiveearnings per share impact of outstanding stock options:

| ** **                                                                             | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net (Loss) Income  (in thousands)                                                      |       | $                                          | (5,921     | ) | $ | (220 | ) | $ | 1,318 |   |
| Shares Used in  Computation of Earnings                                                |       |                                       |       |   |   |   |   |
| Weighted-Average Common Shares Outstanding in  Computation of Basic Earnings per Share |       | 1,637,815                                  |       | 1,636,322 |   | 1,612,696 |   |
| Dilutive Effect of Common Stock Options                                                |       | —                                     |       | — |   | 13,125 |   |
| Dilutive Effect of Preferred Shares                                                    |       | —                                     |       | — |   | — |   |
| Shares Used in Computation of Earnings per Common  Share Assuming Dilution             |       | 1,637,815                                  |       | 1,636,322 |   | 1,625,821 |   |
| Net (Loss) Income per Share (Basic)                                                    |       | $                                          | (3.62      | ) | $ | (0.13 | ) | $ | 0.82 |   |
| Net (Loss) Income per  Share (Diluted)                                                 |       | $                                          | (3.62      | ) | $ | (0.13 | ) | $ | 0.80 |   |

 

Thecommon stock options and preferred shares were anti-dilutive in 2006 and 2005,and are therefore omitted from the calculation of Diluted Earnings per Share. Theweighted-average number of potentially dilutive shares outstanding during 2006and 2005 were:

| ** **                   | ** ** | **Year Ended  December 31,** | ** ** |
|------------------------------|------------|----------------------------------------|------------|
| ** **                   | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Common Stock  Options        |       | 12,466                                 |       | 18,375 |   |
| Preferred Shares             |       | 54,987                                 |       | 5,955 |   |
| Potentially  Dilutive Shares |       | 67,453                                 |       | 24,330 |   |

 

**10.**          BENEFITPROGRAMS

The Company provides certain pension, post-retirementand welfare benefit programs to its employees. Benefit programs are an integralpart of the Company’s commitment to hiring and retaining 

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top grade employees,providing market-based compensation that rewards individual and corporateperformance. The Company offers welfare benefit plans to all employees,consisting of healthcare, life insurance, long-term disability, and accidentaldisability insurance. The Company also offers retirement savings programs tomost employees in the form of 401(k) plans in the United States or definedcontribution plans in Canada. These plans allow voluntary contributions by theemployee and may contain a contribution by the Company.

In September 2006,the FASB issued SFAS No. 158, which requires companies to record on theirbalance sheets as an asset or liability the over- or under-funded status oftheir defined benefit pension and post-retirement medical plans, based on theprojected benefit obligation (“PBO”), instead of the accumulated benefitobligation (“ABO”) previously recognized under SFAS 87 and 106. Because thefuture service and salary accruals under the Pension Plan were frozen effectiveDecember 31, 2006, the projected and accumulated benefit obligations werethe same as of that date. An additional liability was recorded for thepost-retirement medical plan, however. MPS sought and received, under MPUCDocket No. 2007-057, regulatory approval to defer this difference asa regulatory asset, net of deferred income tax. The incremental impact on lineitems of the Consolidated Balance Sheet of applying SFAS 158 as of December 31,2006, is (in thousands):

| ** **                                               | ** ** | **Before  SFAS 158** | ** ** | **SFAS 158  Adjustments** | ** ** | **After  SFAS 158** | ** ** |
|----------------------------------------------------------|------------|---------------------------|------------|--------------------------------|------------|--------------------------|------------|
| Regulatory  Assets—Post-Retirement Medical Benefits |       |                      | $          | 91                             |       |                     |       | $ | 2,114 |   |   |   | $ | 2,205 |   |   |
| Deferred Income  Tax Asset                               |       |                      | 583        |                           |       |                     | 1,409      |   |   |   | 1,992 |   |   |
| Total Assets                                             |       |                      | $          | 674                            |       |                     |       | $ | 3,523 |   |   |   | $ | 4,197 |   |   |
| Accrued Postretirement Benefits and Pension Costs        |       |                      | $          | 5,108                          |       |                     |       | $ | 3,523 |   |   |   | $ | 8,631 |   |   |
| Total Liabilities                                        |       |                      | $          | 5,108                          |       |                     |       | $ | 3,523 |   |   |   | $ | 8,631 |   |   |

 

**U. S. DefinedBenefit Pension Plan**

The Company has a non-contributory defined benefitpension plan covering Maine Public Service and certain former MAM employees. Noemployees of other unregulated businesses are eligible for this benefit plan.Benefits under the plan are based on employees’ years of service andcompensation prior to retirement. On December 31, 2006, future salary andservice accruals for current participants in the plan ceased, and any newemployees hired on or after January 1, 2006, are not eligible for thepension plan. In conjunction with this pension freeze, MPS recorded a one-timecurtailment expense of approximately $98,000. The Company agreed to additionalemployer contributions to the Retirement Savings Plan to compensate employeesin part or in full, depending on their number of years of service, for thislost benefit. This additional contribution ranges from 5% to 25%, and isimmediately fully vested.

The Company’s policy has been to fund pension costsaccrued. In accordance with that policy, the Company made tax-deductiblecontributions to the plan of approximately $977,000 in 2006; $642,000 for the2006 plan year, and $335,000 for the 2005 plan year, prior to the filing of the2005 corporate income tax return. In 2005, the Company contributed $520,000 forthe 2005 plan year and $441,000 for the 2004 plan year. The Company alsocontributed $214,000 to the pension plan for 2006 in January 2007, andplans to contribute an additional $843,000 to the pension plan in 2007 for the2006 plan year, prior to the filing of its 2006 corporate income tax return.

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Thefollowing table shows the components of net periodic pension cost (“NPPC”):

| **Components of NPPC (in thousands)** | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Service Cost                                              |       | $          | 561        |     | $          | 488      |       | $        | 478        |   |
| Interest Cost                                             |       | 1,160      |       | 1,133    |       | 1,138    |       |
| Expected Return  on Assets                                |       | (1,086     | )          | (1,078   | )          | (1,123   | )          |
| Amortization of  Remaining Prior Service Cost             |       | 90         |       | 90       |       | 90       |       |
| Amortization of  Remaining Net Loss                       |       | 173        |       | 104      |       | 35       |       |
| Curtailment Loss                                          |       | 98         |       | —   |       | —   |       |
| Subtotal of NPPC                                          |       | 996        |       | 737      |       | 618      |       |
| Amounts  Capitalized and Deferred                         |       | (151       | )          | (158     | )          | (172     | )          |
| NPPC Recognized                                           |       | $          | 845        |     | $          | 579      |       | $        | 446        |   |

 

As a result of the recognition of the prior servicecost and net loss due to the curtailment of the pension plan, no amortizationrelated to the prior service cost and actuarial net loss is expected to berecognized in 2007.

Thekey actuarial assumptions used in determining the pension plan values were:

| **Key Assumptions**                                   | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Used to Determine  Benefit Obligation at December 31: |       |       |       |     |       |     |       |
| Discount Rate                                              |       | 5.875      | %          | 5.875    | %          | 6.00     | %          |
| Rate of Future Compensation Increases                      |       | N/A        |       | 4.00     | %          | 4.00     | %          |
| Used to Determine  NPPC for Years Ended December 31:  |       |       |       |     |       |     |       |
| Discount Rate                                              |       | 5.875      | %          | 6.00     | %          | 6.00     | %          |
| Expected Long-Term Rate of Return on Plan Assets           |       | 8.50       | %          | 8.50     | %          | 8.50     | %          |
| Rate of Future  Compensation Increases                     |       | 4.00       | %          | 4.00     | %          | 4.00     | %          |

 

Thefollowing table presents information on the Pension Plan’s PBO, fair value ofplan assets and the Plan’s funded status:

| **Change in Projected Benefit Obligation** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------|------------|----------|------------|----------|------------|
| PBO at Beginning  of Year                                      |       | $        | 20,238     |     | $          | 19,863 |   |
| Service Cost                                                   |       | 561      |       | 488      |       |
| Interest Cost                                                  |       | 1,160    |       | 1,133    |       |
| Curtailment Gain                                               |       | (3,123   | )          | —   |       |
| Benefits Paid                                                  |       | (1,052   | )          | (1,045   | )          |
| Actuarial Gain                                                 |       | (78      | )          | (201     | )          |
| PBO at End of  Year                                            |       | $        | 17,706     |     | $          | 20,238 |   |
| **Change  in Plan Assets**                                     |       |     |       |     |       |
| Fair Value of  Plan Assets at Beginning of Year                |       | $        | 13,803     |     | $          | 13,623 |   |
| Actual Return on Plan Assets                                   |       | 1,803    |       | 413      |       |
| Employer Contributions                                         |       | 977      |       | 961      |       |
| Benefits Paid                                                  |       | (1,052   | )          | (1,045   | )          |
| Administrative Expenses                                        |       | (196     | )          | (149     | )          |
| Fair Value of  Plan Assets at End of Year                      |       | $        | 15,335     |     | $          | 13,803 |   |
| **PBO and  Funded Status**                                     |       |     |       |     |       |
| Fair Value of  Plan Assets                                     |       | $        | 15,335     |     | $          | 13,803 |   |
| PBO                                                            |       | 17,706   |       | 20,238   |       |
| Funded Status                                                  |       | $        | (2,371     | )        | $          | (6,435 | ) |

 

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Theweighted-average investment asset allocations of the Pension Plan atDecember 31 are as follows:

|              | ** ** | ** **           | ** ** | **Percentage of Plan** | ** ** |
|-------------------|------------|----------------------|------------|----------------------------------|------------|
| ** **        | ** ** | ** **           | ** ** | **Assets at**               | ** ** |
| ** **        | ** ** | **2007 Target** | ** ** | **December 31,**            | ** ** |
| ** **        | ** ** | **Allocation**       | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Equity Securities |       |                 | 65-75      | %                                |       |   | 73 | % |   |   | 52 | % |   |
| Debt Securities   |       |                 | 25-35      | %                                |       |   | 27 | % |   |   | 34 | % |   |
| Other             |       |                 | 0          | %                                |       |   | 0 | % |   |   | 14 | % |   |
| Total             |       |                 |       |                             |       |   | 100 | % |   |   | 100 | % |   |

 

The Company’s investment objective is to achievelong-term growth of capital, with exposure to risk set at an appropriate level.The Company seeks to achieve this objective through the utilization of adiversified asset mix consisting of equities (domestic and international) andtaxable fixed income securities. The account is managed on a fullydiscretionary basis to obtain the highest total rate of return in keeping witha moderate level of risk.

The target rate of return for the portfolio is 8.5%with the goal of exceeding returns of the S&P 500 on the equity investmentsand the Lehman Brothers Aggregate Bond Index on the fixed income investments.Management determined the expected portfolio return of 8.5% based on its reviewof published studies from independent third parties, discussion with theCompany’s actuary, as well as the plan’s asset manager, who began custody ofplan assets on January 3, 2006.

Employercontributions to the plan and benefit payments from the plan for 2004 through2006, as well as the estimated employer contributions for 2007 and theestimated future benefit payments are:

| ** **                         | ** ** | **Pension Benefits** | ** ** |
|------------------------------------|------------|---------------------------|------------|
| ** **                         | ** ** | **(in thousands)**   | ** ** |
| **Cash Flows**                |       |                      |       |   |   |
| Employer Contributions             |       |                      |       |   |   |
| 2004                               |       |                      | $          | — |   |   |
| 2005                               |       |                      | 961        |   |   |
| 2006                               |       |                      | 977        |   |   |
| Expected 2007                      |       |                      | 1,638      |   |   |
| Benefit Payments                   |       |                      |       |   |   |
| 2004                               |       |                      | 1,061      |   |   |
| 2005                               |       |                      | 1,045      |   |   |
| 2006                               |       |                      | 1,052      |   |   |
| Estimated Future  Benefit Payments |       |                      |       |   |   |
| 2007                               |       |                      | 1,040      |   |   |
| 2008                               |       |                      | 1,035      |   |   |
| 2009                               |       |                      | 1,043      |   |   |
| 2010                               |       |                      | 1,070      |   |   |
| 2011                               |       |                      | 1,086      |   |   |
| Years 2012 - 2016        |       |                      | 5,873      |   |   |
|                                    |            |                           |            |  |  |  |

 

**Health CareBenefits**

The Company provides certain health care benefits toeligible employees. Eligible employees share in the cost of their medicalbenefits, in addition to plan deductibles and coinsurance payments, with theircontributions totaling approximately 19.4% of the premium costs in 2006,compared to 14.9% in 2005 and 

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13.5% in 2004. The planalso covers retiree medical coverage for certain employees of Maine PublicService Company, the regulated utility. The Company implemented several plandesign changes in 2006 to increase the employee contribution to ever increasinghealthcare costs, including increases in premium sharing, deductible amount andprescription co-pays.

The retiree medical plan was amended in 2005. As aresult, employees hired on or after October 1, 2005, are not eligible forpost-retirement medical coverage. Also, effective January 1, 2006, certainretiree co-pays were increased, and spousal contributions commenced. These amendmentshave been incorporated into the calculation of the projected benefitobligation.

On December 8, 2003, President Bush signed intolaw the Medicare Prescription Drug, Improvement and Modernization Act of 2003(the “Act”). The Act introduces a federal subsidy to sponsors of retiree healthcare benefit plans that provide a benefit that is at least actuariallyequivalent to Medicare Part D. Effective for interim and annual periodsending on or after June 15, 2004, the FASB staff issued FASB Statement ofPosition 106-2, “Account and Disclosure Requirements Related to theMedicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-2”).Under the Act, the Company may be entitled to a subsidy for its prescriptiondrug benefit costs and the effect can be reflected in post-retirement medicalexpense if the effect of the subsidy can be reasonably estimated.

The subsidy for a plan sponsor is 28% of a participant’sannual drug costs between $250 and $5,000, which amounts to a maximum subsidyper participant of $1,330. For the employer to receive this subsidy for anyparticular participant, that participant must decline coverage in Medicare’s Part Ddrug program. The actuary’s calculation of the benefit obligation informationassumes that the prescription drug benefits under the Retiree Medical Planwould be eligible for the subsidy.

Thefollowing table shows the components of net periodic post-retirement benefitcost (“NPPBC”):

| ** **                              | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** |
| **Components of NPPBC ** |       |                    |       |     |       |     |       |
| Service Cost                            |       | $                       | 179        |     | $          | 182      |       | $ | 194 |   |
| Interest Cost                           |       | 494                     |       | 504      |       | 535      |       |
| Expected Return  on Assets              |       | (212                    | )          | (215     | )          | (216     | )          |
| Amortization of  Prior Service Cost     |       | (60                     | )          | (60      | )          | (60      | )          |
| Amortization of  Transition Obligation  |       | 71                      |       | 143      |       | 143      |       |
| Amortization of  Net Loss               |       | 182                     |       | 170      |       | 184      |       |
| Subtotal of NPPBC                       |       | 654                     |       | 724      |       | 780      |       |
| Amounts  Capitalized and Deferred       |       | (157                    | )          | (164     | )          | (145     | )          |
| NPPBC Recognized                        |       | $                       | 497        |     | $          | 560      |       | $ | 635 |   |

 

The amortization of net loss, prior service cost andtransition obligation expected to be recognized in 2007 total $172,000.

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Thekey actuarial assumptions used in determining the retiree medical plan valueswere:

| ** **                                                 | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Key Assumptions**                                   |       |     |       |     |       |     |       |
| Used to Determine  Benefit Obligation at December 31: |       |     |       |     |       |     |       |
| Discount Rate                                              |       | 5.875    | %          | 5.875    | %          | 6.00     | %          |
| Rate of Compensation Increase                              |       | N/A      |       | N/A      |       | N/A      |       |
| Health Care Cost Trend Rate Assumed for Next Year          |       | 6.50     | %          | 7.00     | %          | 7.50     | %          |
| Ultimate Health Care Cost Trend Rate                       |       | 4.00     | %          | 4.00     | %          | 4.00     | %          |
| Year That the Rate Reaches the Ultimate Trend Rate         |       | 2012     |       | 2012     |       | 2012     |       |
| Used to Determine  NPPBC for Years Ended December 31: |       |     |       |     |       |     |       |
| Discount Rate                                              |       | 5.875    | %          | 6.00     | %          | 6.00     | %          |
| Expected Long-Term Rate of Return on Plan Assets           |       | 8.50     | %          | 8.50     | %          | 8.50     | %          |
| Rate of Compensation Increase                              |       | N/A      |       | N/A      |       | N/A      |       |
| Health Care Cost Trend Rate Assumed for Next Year          |       | 7.00     | %          | 7.50     | %          | 7.50     | %          |
| Ultimate Health Care Cost Trend Rate                       |       | 4.00     | %          | 4.00     | %          | 4.00     | %          |
| Year That the  Rate Reaches the Ultimate Trend Rate        |       | 2012     |       | 2012     |       | 2012     |       |

 

Assumedhealth care cost trend rates have a significant effect on the amounts reported.A one-percentage point change in the assumed health care cost trend rates wouldhave the following effects (in thousands):

| ** **                                         | ** ** | **One-Percentage Point** | ** ** |
|----------------------------------------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **Increase**                  | ** ** | **Decrease** | ** ** |
| ** **                                         | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Effect on total  cost of service and interest cost |       | $                             | 120        |   | $ | 124 |   | $ | (95 | ) | $ | (98 | ) |
| Effect on  post-retirement benefit obligation      |       | $                             | 1,347      |   | $ | 1,382 |   | $ | (1,100 | ) | $ | (1,126 | ) |

 

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Thefollowing table presents information on the Retiree Medical Plan’s PBO, fairvalue of plan assets and the Plan’s funded status (in thousands):

| ** **                                                     | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Change in Projected Benefit Obligation** |       |       |       |       |       |
| PBO at Beginning  of Year                                      |       | $          | 8,988      |       | $          | 9,328 |   |
| Service Cost                                                   |       | 179        |       | 182        |       |
| Interest Cost                                                  |       | 494        |       | 504        |       |
| Participant Contributions                                      |       | 40         |       | 32         |       |
| Plan Amendments                                                |       | (492       | )          | —     |       |
| Benefits Paid                                                  |       | (447       | )          | (486       | )          |
| Actuarial Loss (Gain)                                          |       | 95         |       | (572       | )          |
| PBO at End of  Year                                            |       | $          | 8,857      |       | $          | 8,988 |   |
| **Change in Plan Assets**                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair Value of  Plan Assets at Beginning of Year                |       | $          | 2,564      |       | $          | 2,607 |   |
| Actual Return on Plan Assets                                   |       | 287        |       | 89         |       |
| Employer Contributions                                         |       | 245        |       | 322        |       |
| Participant Contributions                                      |       | 40         |       | 32         |       |
| Benefits Paid                                                  |       | (447       | )          | (486       | )          |
| Fair Value of  Plan Assets at End of Year                      |       | $          | 2,689      |       | $          | 2,564 |   |
| **PBO and Funded Status**                                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair Value of  Plan Assets                                     |       | $          | 2,689      |       | $          | 2,564 |   |
| PBO                                                            |       | 8,857      |       | 8,988      |       |
| Funded Status                                                  |       | $          | (6,168     | )          | $          | (6,424 | ) |

 

Theweighted-average investment asset allocations of the Retiree Medical Plan at December 31are as follows:

| ** **        | ** ** | ** **           | ** ** | **Percentage of Plan** | ** ** |
|-------------------|------------|----------------------|------------|----------------------------------|------------|
| ** **        | ** ** | ** **           | ** ** | **Assets at**               | ** ** |
| ** **        | ** ** | **2007 Target** | ** ** | **December 31,**            | ** ** |
| ** **        | ** ** | **Allocation**       | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| Equity Securities |       |                 | 65-75      | %                                |       |   | 71 | % |   |   | 13 | % |   |
| Debt Securities   |       |                 | 25-35      | %                                |       |   | 29 | % |   |   | 33 | % |   |
| Other             |       |                 | 0          | %                                |       |   | 0 | % |   |   | 54 | % |   |
| Total             |       |                 |       |                             |       |   | 100 | % |   |   | 100 | % |   |

 

MPS transferred the pension and post-retirement healthplans’ assets from The Bank of New York to Bank of America on January 3,2006. The health care benefits assets had been partially converted to cash asof December 31, 2005, resulting in a higher percentage of assetsclassified as “Other.”

The Company’s investment objective is to achievelong-term growth of capital, with exposure to risk set at an appropriate level.The Company seeks to achieve this objective through the utilization of adiversified asset mix consisting of equities (domestic and international) andtaxable fixed income securities. The account is managed on a fullydiscretionary basis to obtain the highest total rate of return in keeping witha moderate level of risk.

The target rate of return for the portfolio is 8.5%with the goal of exceeding returns of the S&P 500 on the equity investmentsand the Lehman Brothers Aggregate Bond Index on the fixed income investments.Management determined the expected portfolio return of 8.5% based on its reviewof 

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published studies fromindependent third parties, discussion with the Company’s actuary, as well asthe plan’s asset manager, who began custody of plan assets on January 3,2006.

Employerand participant contributions to the plan and benefit payments from the planfor 2004 through 2006, as well as the estimated employer and participantcontributions for 2007 and the estimated future benefit payments are:

| ** **                  | ** ** | **Health Care Benefits** | ** ** |
|-----------------------------|------------|------------------------------------|------------|
| ** **                  | ** ** | **Employer**                       | ** ** | **Participants** | ** ** |
| ** **                  | ** ** | **(in thousands)**            | ** ** |
| **Cash Flows**         |       |                               |       |   |   |   |   |   |   |
| Contributions               |       |                               |       |   |   |   |   |   |   |
| 2004                        |       |                               | $          | 326 |   |   |   | $ | 29 |   |   |
| 2005                        |       |                               | 322        |   |   |   | 32 |   |   |
| 2006                        |       |                               | 245        |   |   |   | 40 |   |   |
| Expected 2007               |       |                               | 324        |   |   |   | 45 |   |   |
| Benefit Payments            |       |                               |       |   |   |   |   |   |   |
| 2004                        |       |                               | 543        |   |   |   |   |   |   |
| 2005                        |       |                               | 486        |   |   |   |   |   |   |
| 2006                        |       |                               | 447        |   |   |   |   |   |   |
| Estimated Future Benefit    |       |                               |       |   |   |   |   |   |   |
| 2007                        |       |                               | 436        |   |   |   |   |   |   |
| 2008                        |       |                               | 448        |   |   |   |   |   |   |
| 2009                        |       |                               | 454        |   |   |   |   |   |   |
| 2010                        |       |                               | 484        |   |   |   |   |   |   |
| 2011                        |       |                               | 514        |   |   |   |   |   |   |
| Years 2012 - 2016 |       |                               | 2,802      |   |   |   |   |   |   |
|                             |            |                                    |            |  |  |  |  |  |  |  |  |

 

Based on prior MPUC accounting orders, the Companyestablished a regulatory asset of approximately $1.06 million, representingdeferred post-retirement benefits. 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. This regulatory asset was fullyamortized as of December 31, 2005.

The Company maintains a401(h) sub-account of the Pension Trust for non-union retiree medicalpayments, and a Voluntary Employee Benefit Association (“VEBA”) trust fund, anindependent external trust fund for union retiree medical payments. Thesepayments provide funding for future post-retirement health care costs at suchtime as customers are paying for these costs in their rates. Union retireecontributions were remitted ot the VEBA trust fund each year. No contributionswere made to the 401(h) account during 2004, 2005, or 2006.

**Retirement SavingsPlan**

The Company has adopted a defined contribution plan(under Section 401(k) of the Internal Revenue Code) coveringsubstantially all of the Company’s employees. Participants may elect to deferfrom 1% to 25% of current compensation, and the Company contributes suchamounts to the plan. The Company also matches contributions, with a maximummatching contribution of 2% of current compensation. Effective January 1,2006, new MPS employees under the collective bargaining agreement receive amatching contribution of 4%, to compensate for their ineligibility in thepension plan. Participants are 100% vested at all times in contributions theymake; employer match contributions are vested after three years.

In conjunction with the December 31, 2006,pension freeze, the Company agreed to additional employer contributions to theRetirement Savings Plan to compensate existing pension participant 

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employees in part or infull, depending on their number of years of service, for the lost benefit. Thisadditional non-elective contribution ranges from 5% to 25%, and is immediatelyfully vested.

The Company’s matching contributions to the plan wereapproximately $148,000, $109,000 and $104,000 in 2006, 2005, 2004,respectively.

Effective July 1,2004, the Company also offered a defined contribution Canadian Pension Plansimilar to a 401(k) plan for eligible Canadian employees. The Companymatches employee contributions of 1% of current compensation. The plan alsoprovides for a discretionary match based on profitability. The matchingcontributions were $17,000, $76,000 and $25,000 in 2006, 2005 and 2004,respectively.

**11.**          FAIRVALUE OF FINANCIAL INSTRUMENTS

The Company’s financialinstruments consist primarily of cash in banks, receivables and debt. Thecarrying amounts for cash, receivables, and short-term debt approximate theirfair value due to the short-term nature of these items. At December 31,2006, the Company’s long-term debt had a carrying value and a fair value ofapproximately $32.73 million.

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

**Maine PublicUtilities Commission 2006 Distribution Rate Case**

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

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

The stipulation requiredadjustment of the amortization of the Oracle system from a seven-yearamortization period to a ten-year amortization period, retroactive to thecapitalization of the system in 2004. The impact of this retroactive adjustmentof approximately $128,000 was recognized in the second quarter of 2006. Thestipulation also required that one-third of the hosting fee and travel expensesassociated with the Delinea contract for support of the Oracle system remainwith MAM and its unregulated subsidiaries, instead of being charged to MPS. MPSalso agreed to file regular reports indicating its performance under certainservice quality index standards as part of this stipulation.

**MPUC Approves thePass-Through of Retail Transmission Rates to MPS Retail JurisdictionalCustomers, and the Increase to DSM Mil Rate, MPUC Docket No. 2003-516**

Per agreement with theMaine Public Utilities Commission, the new transmission rates for retailcustomers were put into retail rates on July 15, 2006, to coincide withMPS’s distribution rate increase. These rates were approved by the MPUC on July 5,2006. Per this filing, the DSM mil rate was increased 

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by 20%,or approximately $111,000, and the retail transmission rate was decreased by13.43%, or approximately $534,000.

**Maine PublicUtilities Commission 2006 Stranded Cost Rate Case**

The Company filed its 2006Stranded Cost case on August 31, 2006, in MPUC Docket No. 2006-506.The filing is an update of the Stipulation in the prior Stranded Cost case,MPUC Docket No. 2003-666. MPS proposed that stranded cost ratesremain the same as those agreed to in the prior filing. The initial caseconference was held on September 26, 2006, and the Stipulation wasapproved by the Commission on November 30, 2006, and had no impact onrates for the period beginning on January 1, 2007, and ending December 31,2009. The Stipulation also included an annual reconciliation provision toreconcile actual sales volume to the projections made by MPS.

**Federal EnergyRegulatory Commission 2006 Open Access Transmission Tariff Formula Rate Filing**

On May 31, 2006, pursuant to Section 205 ofthe Federal Power Act, 16 U.S.C. Section 824d, and Title 18 CFRSections 35.11 and 35.13 of the regulations of the FERC, MPS submitted forfiling its proposed revisions to its FERC Open Access Transmission Tariff inDocket No. ER 05 (the “2006 OATT”) to modify its transmission rate formula.MPS filed its updated rates under the 2006 OATT formula on June 15, 2006,pursuant to Docket ER00-1053, with an effective date of June 1,2006, for both wholesale and retail customers, subject to a customer refundthat may occur as a result of the proceeding and potential settlementnegotiations. The retail transmission revenue requirement was decreased byapproximately $534,000 on July 15, 2006, under the 2006 OATT. Thisrepresented a decrease of 13.43% to the transmission component of retaildelivery rates. The primary reasons for the decrease were a shift in costsbetween transmission and distribution and the settlement of the 2005 OpenAccess Transmission Tariff through rates, as described more fully below.

A settlement between theparties to the 2006 OATT was provided to the FERC on December 22, 2006. Thesignificant elements of the settlement included a return on equity (“ROE”) of10.5% on transmission assets, recovery of 90% of the expenditures associatedwith Line 3875 in transmission rate base to be amortized over three years, theinclusion of new depreciation rates beginning January 1, 2007, and Oracleallocation consistent with the distribution rate case. This settlement wasapproved on February 8, 2007.

**Federal EnergyRegulatory Commission 2005 Open Access Transmission Tariff Formula Rate Filing**

On May 31, 2005, pursuant to Section 205 ofthe Federal Power Act, 16 U.S.C. Section 824d, and Title 18 CFRSections 35.11 and 35.13 of the regulations of the FERC, MPS submitted forfiling its proposed revisions to its FERC Open Access Transmission Tariff inDocket No. ER 05 (the “2005 OATT”) to modify its transmission rate formula.MPS filed its updated rates under the 2005 OATT formula on June 15, 2005,pursuant to Docket ER00-1053 with an effective date of June 1, 2005,for both wholesale and retail customers, subject to a customer refund that mayoccur as a result of the proceeding and potential settlement negotiations. Theretail transmission revenue requirement was increased by approximately $289,000on June 1, 2005, under the 2005 OATT. This represented an increase of 8%to the transmission component of retail delivery rates or an overall impact ontotal retail delivery rates of 0.7%. The primary reasons for the increase werethe increase to costs due to mandated Sarbanes-Oxley requirements, and thepurchase of a new Oracle-based accounting system.

As part of the settlementdata request process, the Company identified several adjustments to its FERC Form 1filing for 2004, which flow through the Company’s transmission rate formula. Theapproximate net impact of these corrections, once implemented, was to reducethe overall increase to the projected retail transmission revenue and result ina revised projected net increase to the retail 

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transmissionrevenue requirement of approximately $171,000 instead of the previouslyprojected increase of approximately $289,000. The final Settlement Agreement for the 2005 OATT was filed with theFERC on April 14, 2006, and final approval was received from the FERC on June 21,2006. This adjustment flowed through the MPS OATT effective June 1,2006, and was passed through retail rates beginning on July 15, 2006.

**Requests forIssuance of Certificates of Public Convenience and Necessity in Connection Withthe Construction of a Proposed Transmission Line and Various TransmissionService Reservations.**

On October 4, 2004, MPS filed a Petition with theMPUC requesting the issuance of a Certificate of Public Convenience andNecessity (“CPCN”) pursuant to 35-A M.R.S.A. Section 3132 toconstruct a 138 kV transmission line originating at an existing substation inLimestone, Maine and extending to the Canadian Border near Hamlin, Maine.

The project was proposed in order to ensure thereliability and integrity of the MPS transmission grid under scenarios ofreduced on-system generator availability and peak load growth. MPS submittedthat the available firm transfer capability of the transmission system whenadded to the remaining on-system hydro generation was not sufficient to meetpeak load conditions, should existing on-system wood-fired generation becomeunavailable. The proposed line would have addressed this by significantlyincreasing the load-serving capability of the northern Maine region and wouldhave served to reinforce the vital transmission ties between northern Maine andthe New Brunswick transmission grid. Additional benefits of the proposed lineinclude the potential for increasing the number of competitive retail electricsuppliers and increasing the attractiveness of the region for development ofadditional generation, such as wind farms, by providing increased transmissionexport capacity.

The MPUC Commissioners deliberated the Docket on August 29,2005, and denied the petition, determining that there was no immediatereliability risk in northern Maine. The Commission concluded that the risk oflosing on-system wood-fired generation was not sufficient to warrant the newtransmission line. The Commission’s Order denying the certificate, which wasissued on October 21, 2005, described actions to be taken by MPS and theNorthern Maine Independent System Administrator (“NMISA”) to reduce certainreliability risks identified by MPS. The Company filed for reconsideration ofthe Order on November 8, 2005, based on the possibility that AroostookWind Energy Company, LLC (“AWE”) might elect to utilize the CPCN requested byMPS in this Docket in order to have MPS construct transmission facilitiesnecessary to connect their proposed generation project to the MPS electricalsystem. On March 30, 2006, the Company filed a status report with theCommission with regard to the proposed transmission facilities. Additionally,on November 23, 2005, the Commission granted an MPS request for suspensionof certain of the specific requirements of the October 21, 2005, Orderpending Commission consideration of certain proposed market rule changeswhich NMISA presented to the Commission on March 1, 2006. Through September 30,2006, approximately $844,000 was spent on this transmission project.

As noted above, as aresult of the proposed settlement of its 2006 Open Access Transmission TariffFormula Rate Filing. MPS will recoverapproximately 90% of the expenditures associated with Line 3875 in transmissionrate base to be amortized over three years, with the other 10% or approximately$81,000 expensed in 2006.

**StakeholderInitiative Regarding the Competitiveness and Reliability of the Northern MainePower Grid .**

In November of 2006, the MPUC issued an Order inthe Docket opened for the purpose of selecting a new standard offer providerfor the Company’s service territory for the period beginning January 1,2007. The then-existing standard offer arrangement was due to expire on December 31,2006. The Commission’s November 16, 2006 Order stated that it had receivedtwo bids from a single supplier. Based on this, the 

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Commission concluded thatnorthern Maine lacked a competitive power market and directed the Company tofurnish default standard offer service for the fourteen-month period beginning January 1,2007. On December 18, 2006, the Commission granted reconsideration of its November 16Order and awarded the standard offer contract to WPS Energy, Inc,, theincumbent supplier.

As a result of theCommission’s determination regarding the absence of a competitive power market,and also in an effort to deal with the system reliability issues raised by theCompany’s unsuccessful bid to secure a certificate for the construction of anew transmission line, the MPUC held a three-day stakeholders conference inmid-December, 2006, in an attempt to resolve, on a collaborative basis, theissues raised in these cases. As a result of this effort, two parallelinitiatives have been launched:

(a) the stakeholders will attempt to develop aprotocol that will allow for the possibility of generation suppliers obtaininglong-term power delivery commitments through the standard offer process. Thiscould encourage the construction of new generation in the Company’s serviceterritory, and/or secure the availability of existing on-system generatingsources on a long-term (multi-year) basis. The Company cannot at this timepredict whether this initiative will be finalized and accepted by theCommission.

(b)  the stakeholders will address thefeasibility of one or more proposals for transmission projects that willinterconnect the northern Maine grid with the ISO New England grid, possibly bymeans of a tap into the Maine Electric Power Company (“MEPCO”) 345 kV transmissionline that connects the high voltage systems of Maine and New Brunswick.

Already, in part as aresult of initiative (b) above, the Company has announced that it hasjoined with Central Maine Power Company in a effort to determine thefeasibility of such a line.

**Wheelabrator-Sherman**

MPS was ordered into a Power Purchase Agreement (“PPA”)with Wheelabrator-Sherman (“WS”) in 1986, which required the purchase of theentire output (up to 126,582 MWH per year) of a 17.6 MW biomass plant through December 31,2006. The PPA was subsequently amended in 1997, with WS agreeing to pricereductions of $10.0 million through the end of the original term in exchangefor an up-front payment of $8.7 million in May 1998. The MPUC’s December 1997approval of the amended PPA included a determination that the up-front paymentwould be treated as stranded cost and, therefore, recovered in MPS’s rates.Total stranded costs included as regulatory assets under the caption “DeferredFuel and Purchased Energy Costs” in the accompanying balance sheet related tothis contract are $34.69 million, $29.91 million and $25.54 million at December 31,2006, 2005 and 2004, respectively.

MPS and WS also agreed torenew the PPA for an additional six years at agreed-upon prices and an increaseof output to 136,982 MW beginning in 2001. Energy supply purchases under thiscontract through February 29, 2000, were $2.6 million. Purchases from WSafter March 1, 2000, are reflected as stranded costs. The PPA expired on December 31,2006.

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**Poly ChlorinatedBi-Phenol Transformers**

In response to a Maineenvironmental regulation to phase out Poly Chlorinated Bi-phenol (“PCB”)transformers, MPS has implemented a program to eliminate transformers on itssystem that do not meet the new State environmental guidelines. The program isin the process of testing almost 7,400 distribution transformers over aten-year period. MPS is currently in its seventh year of this ten-year program.Approximately 35% of the transformers visited require “in service” PCB oilsampling. In addition, transformers that pass the inspection criteria will berefitted with new lightning arrestors and animal guards, where necessary. Thecurrent total estimated cost of the project is $2.6 million; as of December 31,2006, $1.8 million of this total has been spent on this effort. The remainingcost of the project has been accrued on the Balance Sheet as “Accrued RemovalObligations.”

***Maine Yankee***

MPS owns 5% of the common stock of Maine Yankee AtomicPower Company (“MY”), which operated an 860 MW nuclear power plant inWiscasset, Maine, that has ceased power operations and is now in the finalstages of decommissioning.

Based on the decommissioning of the Maine YankeeAtomic nuclear plant, MPS believes it is entitled to recover substantially allof its share of such costs from its customers and, as of December 31,2006, is carrying on its consolidated balance sheet a regulatory asset and acorresponding liability in the amount of $7.74 million, which reflects MPS’s 5%share of Maine Yankee’s most recent estimate of the remaining decommissioningcosts, less actual decommissioning payments made since then, and discounted bya risk-free interest rate.

In accordance with its 1999 FERC rate case settlement,on October 20, 2003, MY filed a revised formula rate schedule with theFERC, proposing an effective date of January 1, 2004, when majordecommissioning activities were expected to be nearing completion. The filingcontained a revised decommissioning cost estimate and collection schedule toassure that adequate funds are available to safely and promptly decommissionthe Plant and operate and manage the independent spent fuel storageinstallation (“ISFSI”). In the filing, MY also requested a change in itsbilling formula, as well as an increase in the level of collection for certainpost-retirement benefits. To meet these needs, MY proposed to collect anadditional $3.77 million per year through October 2008, over currentdecommissioning collection levels, exclusive of any income-tax liability, forthe decommissioning and spent-fuel management expense, and to collect theamounts needed to replenish its Spent Fuel Trust for funds previously used forISFSI construction from November 2008 through October 2010. On September 16,2004, the FERC approved the new rates pursuant to a settlement reached by theactive parties the reflected substantially similar terms to those proposed byMY in its October 2003 filing. MPS’s share of this increase, approximately$189,000, will be recovered as stranded costs.

Federal legislation enacted in 1987 directed theDepartment of Energy (“DOE”) to proceed with the studies necessary to developand operate a permanent high-level waste repository at Yucca Mountain inNevada. The project has encountered significant delays, and the DOE indicatedthat the permanent disposal site was not expected to open before 2012, althoughoriginally scheduled to open in 1998. Maine Yankee cannot predict when orwhether the Yucca Mountain project or any other project that would provideinterim storage will be completed.

As an interim measure until the DOE meets itscontractual obligation to dispose of its spent fuel, MY constructed an ISFSI,utilizing dry-cask storage, on the Plant site and completed the transfer of thespent fuel and a comparatively small amount of greater-than-Class C wasteto the ISFSI in February 2004. MY’s current cost estimate is based on anassumption of long-term on-site storage.

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In accordance with a planapproved by the Securities and Exchange Commission, Maine Yankee has startedthe redemption of its common stock periodically through 2008.

**MEPCO**

MPS also owns 7.49% of thecommon stock of Maine Electric Power Company, Inc., (“MEPCO”). MEPCO ownsand operates a 345-KV (“kilovolt”) transmission line approximately 180miles long which connects the NB Power system with the New England Power Pool.

**Seabrook NuclearPower Project**

In 1986, MPS sold its 1.46% ownership interest in theSeabrook Nuclear Power Project with a cost of approximately $92.1 million for$21.4 million. Both the MPUC and the FERC allowed recovery of MPS’s remaininginvestment in Seabrook Units 1 and 2, adjusted by disallowed costs and saleproceeds, with the costs being amortized over thirty years.

RecoverableSeabrook costs at December 31, 2006, and 2005, are as follows *(in thousands of dollars)*:

| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| Recoverable  Seabrook Costs                      |       | $        | 43,136     |     | $          | 43,136 |   |
| Accumulated  Amortization                        |       | (32,577  | )          | (31,467  | )          |
| Recoverable Seabrook  Costs, Net of Amortization |       | $        | 10,559     |     | $          | 11,669 |   |

 

In March 2000, MPSwas allowed to offset $7.0 million of the recoverable Seabrook costs with theavailable value from its deferred asset sale gain. The decrease in recoverableSeabrook costs represents monthly amortization, recorded as amortizationexpense in January and February 2000, and then as stranded costsapplied to the deferred asset sale gain beginning in March 2000.

**Nuclear Insurance**

In 1988, Congress extendedthe Price-Anderson Act for fifteen years and increased the maximum liabilityfor a nuclear-related accident. In the event of a nuclear accident, coveragefor the higher liability now provided for by commercial insurance coverage willbe provided by a retrospective premium of up to $88.1 million for each reactorowned, with a maximum assessment of $10 million 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. Theselimits are also subject to inflation indexing at five-year intervals as well asan additional 5% surcharge, should total claims exceed funds available to paysuch claims. Based on MPS’s 5% equity ownership in Maine Yankee (see Note 5, “Investmentsin Associated Companies”), MPS’s share of any retrospective premium would notexceed approximately $1.8 million or $500,000 annually, without consideringinflation indexing.

**Off-Balance SheetArrangements**

Maricor Properties and the Maricor Ashford Ltd jointventure are variable interest entities, as defined by Financial AccountingStandards Board Interpretation No. 46, “Consolidation of Variable InterestEntities,” (“FIN 46”) promulgated on January 17, 2003. However, Managementhas determined that neither Maricor Properties nor Maricor Ashford should beconsolidated with these financial statements, as MAM is not the primarybeneficiary of the joint venture.

Exceptfor operating leases used for office and field equipment, vehicles and computerhardware and software, accounted for in accordance with Financial AccountingStandards No. 13, “Accounting for Leases,” (“FAS 13”) the Company has noother form of off-balance sheet arrangements. The following 

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summarizes payments for leases for a period in excessof one year for the years ended December 31, 2006, and 2005 *(in thousands of dollars)*:

| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|
| Office Equipment                |       | $        | 15         |     | $          | 15 |   |
| Building                        |       | 204      |       | 174      |       |
| Vehicles                        |       | 22       |       | 7        |       |
| Computer Hardware  and Software |       | —   |       | 29       |       |
| Rights of Way                   |       | 1        |       | 32       |       |
| Field Equipment                 |       | 21       |       | 20       |       |
| Total                           |       | $        | 263        |     | $          | 277 |   |

 

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

| ** ** | ** ** | **Minimum Operating Lease** | ** ** |
|------------|------------|---------------------------------------|------------|
| **Year**   | ** ** | ** **                            | ** ** | **Payments** | ** ** |
| 2007       |       |                                  | $          | 229 |   |   |
| 2008       |       |                                  | 231        |   |   |
| 2009       |       |                                  | 185        |   |   |
| 2010       |       |                                  | 107        |   |   |
| 2011       |       |                                  | 37         |   |   |
|            |            |                                       |            |  |  |  |  |  |

 

**FinancialInformation System Hosting Agreement**

In December 2003, the Company entered into aten-year agreement with Delinea Corporation to host and provide technical andfunctional support for the integrated Oracle Financial Information System. Thebase hosting fees were $450,000 for 2004, $510,000 for 2005, and $575,000 peryear for years 2006 through 2013. The contract also included an adjustment forinflation, as well as travel expenses for on-site support services. Theseamounts are not reflected in the base hosting fee amounts above. The totalhosting fee, inflation factor and travel expenses for 2006 was $606,000.

This contract wasre-negotiated effective January 1, 2007. The annual fee was reduced to$537,500 per year from 2007 through 2013 due to a reduced support requirement,plus reimbursement for travel costs. Further, based on certain service qualitytargets, contingent payments of $8,000 per quarter could also be earned.

**13.**          GUARANTORARRANGEMENTS

In November 2002, the FASB issued FIN No. 45,“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others: An Interpretation of FASBStatements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34,”(“FIN 45”). FIN 45 requires that a guarantor recognize, at the inception of aguarantee, a liability for the fair value of the obligation undertaken byissuing the guarantee. FIN 45 also requires additional disclosures to be madeby a guarantor in its interim and annual financial statements about itsobligations under certain guarantees it has issued.

The following is a summaryof our agreements that Management has determined are within the scope of FIN45:  As permitted under Maine law, theCompany has agreements that indemnify the Company’s Officers and Directors forcertain events or occurrences while the Officer or Director is, or was serving,at the Company’s request in such capacity. The term of the indemnificationperiod is for the Officer’s or Director’s lifetime. The maximum potentialamount of future payments that could be required under these indemnificationagreements is unlimited; however, the Company has a Director and Officerinsurance 

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policythat limits exposure and enables recovery of a portion of any future amountspaid. As a result of the insurance policy coverage, the Company believes theestimated fair value of these indemnification agreements is minimal.Accordingly, no liability is recorded for these agreements as of December 31,2006.

**14.**          ACQUISITIONS

**Pace EngineeringLimited Acquisition**

On May 12, 2006, TheMaricor Group, Canada Ltd purchased certain assets of Pace Engineering Limited(“Pace”), a New Brunswick company specializing in electrical engineering designservices. TMGC did not acquire any receivables arising from invoices datedbefore May 15, 2006, or any real estate from Pace. The present value ofthe purchase price is approximately $413,000, including three future paymentsthat are contingent on achieving certain levels of revenue within TMGC’selectrical engineering division. Based on the projected revenue of theelectrical engineering division, these payments are considered likely, andtherefore have been accrued.

**Cornwallis CourtAcquisition****

On October 7, 2005, Maricor Properties completedthe purchase of Cornwallis Court Developments Ltd. Maricor Properties acquiredall of the outstanding shares of Cornwallis for $2.0 million CDN and theassumption of a $3.69 million CDN mortgage. The $2.0 million acquisition costwas financed through RBC and is secured by a $1.73 million USD letter of creditfrom Bank of America. The term of the new RBC note is one-year at an interestrate of Royal Bank prime plus 0.25%. The only asset of Cornwallis was the J. AngusMacDonald Building, a 60,000 square foot facility located in downtown Halifax,Nova Scotia, Canada. The building was fully leased at the time of acquisition.

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of acquisition for the Cornwallis CourtDevelopments Ltd acquisition.

| Current Assets             |   | $     | 215    |   |
|----------------------------|--------|-------|--------|--------|
| Building and Land          |   | 4,968 |   |
| Total Assets Acquired      |   | 5,183 |   |
| Current Liabilities        |   | 413   |   |
| Long-Term Debt             |   | 2,922 |   |
| Total Liabilities Acquired |   | 3,335 |   |
| Net Assets Acquired        |   | $     | 1,848  |   |

 

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Thefollowing unaudited Pro Forma information represents the 2005 consolidatedstatements of income as if Cornwallis Court Developments Ltd had been acquiredat the beginning of 2005.

| ** **                                                                    | ** ** | ** **                                                                                     | ** ** | **Income**         | ** ** | ** **         | ** ** |
|-------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                                    | ** ** | **Income**                                                                                     | ** ** | **Statement**      | ** ** | **Income**         | ** ** |
| ** **                                                                    | ** ** | **Statement As**                                                                          | ** ** | **Pro Forma** | ** ** | **Statement**      | ** ** |
| ** **                                                                    | ** ** | **Presented**                                                                                  | ** ** | **Additions**      | ** ** | **Pro Forma** | ** ** |
| **Consolidated Pro Forma (unaudited)**                         | ** ** | ** **                                                                                     | ** ** | **2005**           | ** ** | **2005**           | ** ** | **2005** | ** ** |
| ** **                                                                    | ** ** | **(In thousands of dollars, except per share information)** | ** ** |
| Operating Revenues                                                            |       |                                                                                           |       |               |       |               |       |   |   |   |   |   |   |
| Regulated                                                                     |       |                                                                                           | $          | 34,299             |       |               |       | $ | — |   |   |   | $ | 34,299 |   |   |
| Unregulated                                                                   |       |                                                                                           | 5,383      |               |       |               | —     |   |   |   | 5,383 |   |   |
| Rental Income                                                                 |       |                                                                                           | 292        |               |       |               | 517        |   |   |   | 809 |   |   |
| Total Revenues                                                                |       |                                                                                           | $          | 39,974             |       |               |       | $ | 517 |   |   |   | $ | 40,491 |   |   |
| Net (Loss) Income  from Continuing Operations                                 |       |                                                                                           | $          | (224               | )          |               |       | $ | 98 |   |   |   | $ | (126 | ) |   |
| Income from  Discontinued Operations                                          |       |                                                                                           | 4          |               |       |               | —     |   |   |   | 4 |   |   |
| Net Income (Loss)  Available for Common Stockholders                          |       |                                                                                           | $          | (220               | )          |               |       | $ | 98 |   |   |   | $ | (122 | ) |   |
| Average Shares  Outstanding                                                   |       |                                                                                           | 1,636,322  |               |       |               | 1,636,322  |   |   |   | 1,636,322 |   |   |
| Average Shares  Outstanding—Diluted                                      |       |                                                                                           | 1,636,322  |               |       |               | 1,660,652  |   |   |   | 1,660,652 |   |   |
| Basic Earnings (Loss)  Per Share of Common Stock From Continuing Operations   |       |                                                                                           | $          | (0.13              | )          |               |       | $ | 0.06 |   |   |   | $ | (0.07 | ) |   |
| Basic Loss Per  Share of Common Stock From Discontinued Operations            |       |                                                                                           | —     |               |       |               | —     |   |   |   | — |   |   |
| Basic Earnings  (Loss) Per Share of Common Stock From Net Income (Loss)       |       |                                                                                           | $          | (0.13              | )          |               |       | $ | 0.06 |   |   |   | $ | (0.07 | ) |   |
| Diluted Earnings  (Loss) Per Share of Common Stock From Continuing Operations |       |                                                                                           | $          | (0.13              | )          |               |       | $ | 0.06 |   |   |   | $ | (0.07 | ) |   |
| Diluted Loss Per  Share of Common Stock From Discontinued Operations          |       |                                                                                           | —     |               |       |               | —     |   |   |   | — |   |   |
| Diluted Earnings (Loss) Per  Share of Common Stock From Net Income (Loss)     |       |                                                                                           | $          | (0.13              | )          |               |       | $ | 0.06 |   |   |   | $ | (0.07 | ) |   |
|                                                                               |            |                                                                                                |            |                    |            |                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

**Formation ofMaricor Technologies and Asset Acquisition**

On February 22, 2005,the Company announced the formation of Maricor Technologies, Inc. (“MTI”),a wholly-owned, technology-based subsidiary. Concurrently, MTI acquired certainlifecycle asset management and capital budget planning software assets from HCISystems Asset Management, LLC. MTI is headquartered in Presque Isle, Maine,with offices in Portland, Maine. The total purchase price at closing wasapproximately $1.0 million, which was in the form of convertible preferredshares worth approximately $950,000 and $50,000 in cash, paid in exchange forsoftware and an immaterial amount of net assets.  In addition, HCI has an option to acquire 10%of MTI’s outstanding shares beginning on February 15, 2009 (the “StockOption”). MAM has the right to call the Stock Option at any time for $600,000.Upon the occurrence of certain events, such as a change of control, HCI has theright to put the Stock Option to MAM for $200,000. At MAM’s discretion, half ofeither of these payments can be made in stock.

**2004 Acquisitions**

During 2004, the Company acquired three entities, noneof which individually is deemed material. The total cost of the acquisitionswas $6.0 million, consisting of 54,332 shares of MAM common stock, valued at$1.68 million, $3.62 million of cash and $700,000 of external costs for theacquisition. The 

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aggregate amount ofgoodwill and other intangible assets arising from the acquisitions was $5.21million, and is reported in the unregulated engineering services andunregulated real estate operating segments.

Following is a brief description of each of theentities acquired:

·       Morris &Richard Consulting Engineers Limited (“M&R”), a mechanical and electricalengineering services firm headquartered in Halifax, Nova Scotia, Canada,acquired on June 1, 2004, a division of The Maricor Group, Canada Ltd.

·       MecelProperties Limited, a real estate holding company headquartered in Halifax,Nova Scotia, Canada, acquired on June 1, 2004, a wholly-owned subsidiaryof Maricor Properties Ltd.

·       RESEngineering Inc. (“RES”), a mechanical and electrical engineering services firmheadquartered in Hudson, Massachusetts, acquired on June 15, 2004, awholly-owned subsidiary of The Maricor Group.

Under the terms of the agreements, the formershareholders of these companies are prohibited from selling their shares ofstock for a certain period after the acquisition. For a period following thatrestricted period, if the former shareholders sell their stock for a price lessthan the value per share used to calculate the purchase price, additional cashconsideration will be paid to the former shareholders for that difference. Theexposure for such “true-up” provisions is $606,000 at December 31, 2006.

Thefollowing table summarizes the fair values of the assets acquired andliabilities assumed at the date of acquisition for the three acquisitions madeduring 2004. None of these acquisitions were deemed individually material.

| Current Assets                         |   | $      | 1,887  |   |
|----------------------------------------|--------|--------|--------|--------|
| Property,  Plant, & Equipment |   | 574    |   |
| Goodwill                               |   | 5,210  |   |
| Intangibles                            |   | — |   |
| Total Assets Acquired                  |   | 7,671  |   |
| Current  Liabilities                   |   | 1,670  |   |
| Long-Term Debt                         |   | — |   |
| Total Liabilities Assumed              |   | 1,670  |   |
| Net Assets  Acquired                   |   | $      | 6,001  |   |

 

Goodwill is deductible for tax purposes in the UnitedStates for the acquisition of RES. Goodwill is not deductible in Canada for theacquisitions of M&R and Eastcan. The deductibility of goodwill is subjectto the details of each individual transaction.

The following unaudited consolidated MAM pro formainformation includes the 2004 acquisitions of M&R and RES as if they hadbeen owned from the beginning of the year ending 2004. Mecel Properties wasacquired as a holding company and owns the building in which M&R resides.There is no revenue or profit in the pro forma numbers below related to Mecelas these intercompany revenues and profits are eliminated in consolidation.

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| **Consolidated Pro Forma (unaudited)**                          | ** ** | ** **                                                                                 | ** ** | **Income  Statement As  Presented  2004** | ** ** | **Income  Statement  Pro Forma  Additions  2004** | ** ** | **Income  Statement  Pro Forma  2004** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                     | ** ** | **(In thousands of dollars,  except per share information)** | ** ** |
| Operating Revenues                                                             |       |                                                                                       |       |                                           |       |                                                   |       |                                        |       |
| Regulated                                                                      |       |                                                                                       | $          | 33,733                                         |       |                                                   | $          | —                                      |       | $ | 33,733 |   |
| Unregulated                                                                    |       |                                                                                       | 3,405      |                                           |       | 3,485                                                  |       | 6,890                                       |       |
| Total Revenues                                                                 |       |                                                                                       | $          | 37,138                                         |       |                                                   | $          | 3,485                                       |       | $ | 40,623 |   |
| Net Income (Loss)  from Continuing Operations                                  |       |                                                                                       | $          | 1,726                                          |       |                                                   | $          | (603                                        | )          | $ | 1,123 |   |
| Discontinued Operations                                                        |       |                                                                                       |       |                                           |       |                                                   |       |                                        |       |
| Loss from Discontinued Operations (including loss on  disposal of $69 in 2004) |       |                                                                                       | (678       | )                                              |       | —                                                 |       | (678                                        | )          |
| Income Tax Benefit                                                             |       |                                                                                       | 270        |                                           |       | —                                                 |       | 270                                         |       |
| Loss from  Discontinued Operations                                             |       |                                                                                       | (408       | )                                              |       | —                                                 |       | (408                                        | )          |
| Net Income (Loss)  Available for Common Stockholders                           |       |                                                                                       | $          | 1,318                                          |       |                                                   | $          | (603                                        | )          | $ | 715 |   |
| Average Shares Outstanding                                                     |       |                                                                                       | 1,612,696  |                                           |       | 1,612,696                                              |       | 1,612,696                                   |       |
| Average Shares  Outstanding—Diluted                                       |       |                                                                                       | 1,625,821  |                                           |       | 1,625,821                                              |       | 1,625,821                                   |       |
| Basic Earnings  (Loss) Per Share of Common Stock From Continuing Operations    |       |                                                                                       | $          | 1.07                                           |       |                                                   | $          | (0.37                                       | )          | $ | 0.70 |   |
| Basic Loss Per  Share of Common Stock From Discontinued Operations             |       |                                                                                       | (0.25      | )                                              |       | —                                                 |       | (0.25                                       | )          |
| Basic Earnings  (Loss) Per Share of Common Stock From Net Income (Loss)        |       |                                                                                       | $          | 0.82                                           |       |                                                   | $          | (0.37                                       | )          | $ | 0.45 |   |
| Diluted Earnings  (Loss) Per Share of Common Stock From Continuing Operations  |       |                                                                                       | $          | 1.06                                           |       |                                                   | $          | (0.37                                       | )          | $ | 0.69 |   |
| Diluted Loss Per  Share of Common Stock From Discontinued Operations           |       |                                                                                       | (0.25      | )                                              |       | —                                                 |       | (0.25                                       | )          |
| Diluted Earnings (Loss)  Per Share of Common Stock From Net Income (Loss)      |       |                                                                                       | $          | 0.81                                           |       |                                                   | $          | (0.37                                       | )          | $ | 0.44 |   |

 

**15.**          ISSUANCEOF MARICOR PROPERTIES STOCK ACQUIRED BY ASHFORD INVESTMENTS, INC.

Maricor Properties Ltd is a Canadian real estatedevelopment, redevelopment and investment company focused on sustainabledevelopment and “smart growth” principles within second and third tier Canadianmarkets emphasizing the development and revitalization of downtowns andexisting suburbs. It seeks to develop or invest in public and private facilityprojects involving the renewal or development of building infrastructure withinrevitalization districts, promoting renewal of existing areas, thus negatingthe need for extension of additional infrastructure and promotion of sprawl. MaricorProperties was a wholly-owned subsidiary of MAM until June 30, 2006.

On that date, Maricor Properties issued one share ofits stock acquired by Ashford Investments Inc. (“Ashford”), a real estatemanagement, development, and investment company, for approximately $586,000. As50% owner of Maricor Properties, Ashford assumed 50% of the outstanding debt ofMaricor Properties Ltd and its subsidiaries, and it agreed to guarantee Maine &Maritimes Corporation’s debt with Merrill Lynch Mortgage Lending related tofinancing on the Vaughan Harvey Building owned by Maricor Properties inMoncton, New Brunswick and the MacDonald Building owned by Cornwallis CourtDevelopments in Halifax, Nova Scotia.

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In accordance with SEC Staff Accounting Bulletin (“SAB”)51, “*Accounting for Sales of Stock by a Subsidiary,”*the Company recognized a gain in the amount of $429,000 as non-operating income.This gain was partially offset by the deferred income tax impact of $172,000.

Under the terms of this agreement, Maine &Maritimes Corporation and Ashford Investments Inc. are now equal shareholdersof Maricor Properties and its wholly-owned subsidiary, Cornwallis CourtDevelopments Ltd. While Ashford, as co-owner of Maricor Properties Ltd, owns50% of Mecel Properties Ltd, it does not experience economic benefit or risksassociated with this entity and Mecel’s owned real estate as a result of ashareholders agreement with MAM. A 120-day period beginning at the timeof the closing of the transaction was set aside to either gain necessaryapprovals to sell one-half interest in Mecel to Ashford for additionalcompensation or to transfer ownership of Mecel to Maine & MaritimesCorporation or another one of its entities. That period has been extended bymutual agreement of the parties.

As part of theshareholders agreement, MAM has indemnified Ashford against a guarantee byMecel Properties for a MAM term loan of $1.7 million with Bank of America,described in Note 5. Ashford Properties, a subsidiary of Ashford InvestmentsInc., provides property management services for all properties owned by MaricorProperties and its subsidiaries, including Mecel.

**16.**          CAPITALLEASES

In2006, MPS negotiated capital lease arrangements for certain of its 2006 vehicleand computer equipment purchases, totaling $319,000. The remaining liability asof December 31, 2006, for these capital lease arrangements isapproximately $273,000, and is recorded within Miscellaneous Liabilities on theConsolidated Balance Sheet. Future minimum lease payments are:

| **Year** | ** ** | ** ** | ** ** | **Minimum Capital  Lease Payments** | ** ** |
|----------|------------|------------|------------|-----------------------------------------------|------------|
| 2007     |       |       | $          | 70                                            |       |   |
| 2008     |       |       | 86         |                                          |       |
| 2009     |       |       | 68         |                                          |       |
| 2010     |       |       | 62         |                                          |       |
| 2011     |       |       | 26         |                                          |       |

 

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**17.**          QUARTERLYINFORMATION (UNAUDITED)

Thefollowing tables summarize the quarterly financial data for the two years endedDecember 31, 2006:

| ** **                                  | ** ** | **2006 by Quarter**                                                  | ** ** |
|---------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **1**st                                                                        | ** ** | **2**nd | ** ** | **3**rd | ** ** | **4**th | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands,  except per share amounts)** | ** ** |
| Operating  Revenues                         |       |                                                                           |       |   |   |   |   |   |   |
| Regulated Electric Utility                  |       | $                                                                              | 10,051     |   | $ | 7,414 |   | $ | 8,033 |   | $ | 10,103 |   |
| Operating  Expenses                         |       | 8,768                                                                          |       | 7,240 |   | 8,667 |   | 8,899 |   |
| Operating Income  (Loss)                    |       | 1,283                                                                          |       | 174 |   | (634 | ) | 1,204 |   |
| Other Income  (Deductions)                  |       | (82                                                                            | )          | 242 |   | (37 | ) | 40 |   |
| Income (Loss)  Before Interest Charges      |       | 1,201                                                                          |       | 416 |   | (671 | ) | 1,244 |   |
| Interest Charges                            |       | 316                                                                            |       | 302 |   | 376 |   | 392 |   |
| Income (Loss)  From Continuing Operations   |       | 885                                                                            |       | 114 |   | (1,047 | ) | 852 |   |
| Income (Loss)  from Discontinued Operations |       | (352                                                                           | )          | (424 | ) | (2,063 | ) | (3,886 | ) |
| Net Income (Loss)                           |       | $                                                                              | 533        |   | $ | (310 | ) | $ | (3,110 | ) | $ | (3,034 | ) |
| Earnings (Loss) Per  Share                  |       | $                                                                              | 0.33       |   | $ | (0.19 | ) | $ | (1.90 | ) | $ | (1.86 | ) |

 

| ** **                                  | ** ** | **2005 by Quarter**                                                 | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **1**st                                                                       | ** ** | **2**nd | ** ** | **3**rd | ** ** | **4**th | ** ** |
| ** **                                  | ** ** | **(Dollars in thousands  except per share amounts)** | ** ** |
| Operating  Revenues                         |       |                                                                          |       |   |   |   |   |   |   |
| Regulated Electric Utility                  |       | $                                                                             | 10,315     |   | $ | 7,073 |   | $ | 7,445 |   | $ | 9,466 |   |
| Operating  Expenses                         |       | 8,568                                                                         |       | 7,632 |   | 7,686 |   | 8,513 |   |
| Operating Income  (Loss)                    |       | 1,747                                                                         |       | (559 | ) | (241 | ) | 953 |   |
| Other Income  (Deductions)                  |       | (9                                                                            | )          | 78 |   | (58 | ) | (128 | ) |
| Income (Loss)  Before Interest Charges      |       | 1,738                                                                         |       | (481 | ) | (299 | ) | 825 |   |
| Interest Charges                            |       | 250                                                                           |       | 138 |   | 241 |   | 306 |   |
| Income (Loss)  From Continuing Operations   |       | 1,488                                                                         |       | (619 | ) | (540 | ) | 519 |   |
| Income (Loss)  from Discontinued Operations |       | (211                                                                          | )          | (179 | ) | (380 | ) | (298 | ) |
| Net Income (Loss)                           |       | $                                                                             | 1,277      |   | $ | (798 | ) | $ | (920 | ) | $ | 221 |   |
| Earnings (Loss) Per  Share                  |       | $                                                                             | 0.78       |   | $ | (0.49 | ) | $ | (0.56 | ) | $ | 0.14 |   |

 

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**Item 9.**                        ChangesIn and Disagreements With Accountants On Accounting and Financial Disclosure

None.

**Item 9A.**                Controlsand Procedures

1.                 Evaluation ofdisclosure controls and procedures.

The Company’sManagement, including the Company’s Interim Chief Executive Officer, and ChiefFinancial Officer, are responsible for establishing and maintaining disclosurecontrols and procedures for the Company and its subsidiaries. Management hasdesigned such controls and procedures to (a) give reasonable assurancethat the information required to be disclosed by the Company in reports that itfiles under the Exchange Act is recorded, processed, summarized and reportedwithin the time periods specified in the rules and forms of the SEC, and (b) ensurethat such information is accumulated and communicated to Management to allowtimely decisions regarding required disclosure. Management evaluated theCompany’s disclosure controls and procedures as of the end of the periodcovered by this quarterly report. Based on the evaluation, the aforementionedofficers concluded that the Company’s disclosure controls and procedures areworking effectively.

2.                 Changes inInternal Controls over Financial Reporting

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

As a non-accelerated filer, the Company is evaluatingactions necessary to comply with Section 404 of The Sarbanes-Oxley Actwith respect to its internal control over financial reporting.

The Company continues toassess the internal control environment, control designs and operatingeffectiveness, to ensure no significant deficiencies or material weaknessesexist.  The Company also continues tomonitor the potential changes to the requirements of the Act fornon-accelerated filers.

**Item 9B.**               OtherInformation

None.

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**PART III**

**Item 10.**                 Directors,Executive Officers and Corporate Governance

Information with regard tothe Directors of the registrant is set forth in the Proxy Statement of theregistrant relating to its 2007 Annual Meeting of Stockholders, whichinformation is incorporated herein by this reference. Certain informationregarding Executive Officers is set forth below and also in the Proxy Statementof the registrant relating to the 2007 Annual Meeting of Stockholders, under “Compliancewith Section 16(a) of the Securities and Exchange Act of 1934,” whichinformation is incorporated by this reference. We have adopted a Code ofBusiness Conduct and Ethics that applies to our Chief Executive Officer, ChiefFinancial Officer and other Senior Financial Officers. The Code of BusinessConduct and Ethics is publicly available on our website atwww.maineandmaritimes.com.

***Executive Officers***

TheExecutive Officers of the registrant are as follows:

| **Name**            | ** ** | ** **                                                                                                | ** ** | **Title** | ** ** | **Age**                  | ** ** | **Current Position  Held Since** |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|-----------|------------|--------------------------|------------|---------------------------------------|
| Nathan L. Grass     |       | Interim President and  Chief Executive Officer                                                            |       | 68        |       | August 17, 2006     |
| Michael I. Williams |       | Senior Vice  President, Chief Financial Officer, Interim Chief Operating Officer and  Assistant Secretary |       | 39        |       | August 17,  2006    |
| Annette N. Arribas  |       | Vice President,  Investor Relations, Corporate Compliance and Treasurer                                   |       | 42        |       | September 15,  2006 |
| Patrick C. Cannon   |       | Vice President,  General Counsel and Secretary                                                            |       | 35        |       | May 10, 2006        |
| Mark M. Hovey       |       | Vice President of  Human Resources and Organizational Development                                         |       | 48        |       | September 15,  2006 |
| Michael A. Eaton    |       | Vice President,  Information and Technology Management                                                    |       | 43        |       | September 15,  2006 |
| Randi J. Arthurs    |       | Vice President and  Controller                                                                            |       | 26        |       | May 9, 2006         |

 

**Nathan L. Grass**, age 68, InterimPresident and Chief Executive Officer. Mr. Grass is President of GrasslandEquipment, Inc., and has been a member of the Board of Directors of MPSand then MAM since 1983. Mr. Grass is a retired Brigadier General and agraduate of the University of Maine, the Maine Military Academy, as well as Commandand General Staff College. He also attended the American Institute of Banking. Mr. Grasshas seventeen years of experience in banking, and fifteen years experience inthe farm and industrial machine industry.

**Michael I. Williams**,CPA, CIA, age 39, Senior Vice President, Chief Financial Officer, Interim ChiefOperating Officer and Assistant Secretary, Interim Director. A Certified PublicAccountant and Certified Internal Auditor, Mr. Williams has over seventeenyears of experience, including positions in accounting, external auditing,internal auditing, project management, operations management, and informationtechnology management. Mr. Williams also brings thirteen years ofexperience in the utilities industry. Hired in May 2004 by Maine PublicService Company  as Director of RegulatedAccounting & Risk Management, he has held various Accounting andFinance positions including Vice President, Chief Accounting Officer &Controller, Assistant Treasurer and Assistant Secretary. Mr. Williams is agraduate of the University of Maine.

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**Annette N. Arribas**,CTP, CCEP, age 42, Vice President, Investor Relations, Corporate Compliance andTreasurer. Ms. Arribas is responsible for all investor relationsactivities and the corporate compliance function, as well as the corporatetreasury function. She joined Maine Public Service in February 1997 asMarketing Specialist, and, in December 1998, transferred to EnergyAtlantic, a subsidiary of Maine Public Service and then Maine &Maritimes Corporation., as Retail Sales Marketing Manager. In January 2003,Ms. Arribas returned to Maine Public Service Company, where she served asManager of Special Projects, Director of Investor Relations &Marketing, and, since March 2004, has held various positions as VicePresident in investor relations, compliance and treasury. Her experienceincludes having worked in both the regulated and unregulated electric energysectors, as well as managerial and investor relations positions in the bankingand insurance/investment industries. She holds a Masters in BusinessAdministration degree from the University of Maine, Graduate School ofBusiness, a Bachelor of Arts degree in Management from the University of Maine,is a graduate of the Investor Relations Program of the National Investor RelationsInstitute at the University of Michigan Business School, and has earned thedesignation of Certified Treasury Professional and Certified Compliance andEthics Professional.

**Patrick C. Cannon**,Esquire, age 35, Vice President, General Counsel and Secretary. Mr. Cannonwas hired in December 2004 as General Counsel. He was promoted to GeneralCounsel, Secretary and Clerk in May 2005, and, in May 2006, the titleof Vice President was added. Mr. Cannon serves as General Counsel andSecretary. He is responsible for managing legal affairs for the Company andeach of its subsidiaries. Prior to joining Maine & MaritimesCorporation, Mr. Cannon spent seven years in private practice with lawfirms in Seattle, Washington and Salt Lake City, Utah, concentrating on corporatefinance, mergers and acquisitions and corporate governance matters. He is agraduate of Brigham Young University and received his Juris Doctorate degreefrom Boston College Law School.

**Mark M. Hovey**, age 48, VicePresident of Human Resources and Organizational Development.  Mr. Hovey joined Maine Public ServiceCompany in April 2004. He provides leadership in all aspects of individualand organizational development and focuses on alignment of human resourcepolicies, benefit programs and risk management strategies which fully supportobjectives to advance business revenues and shareholder value. He hastwenty-four years of regulated and unregulated business operations management,including nine years of experience in personnel, administration and consumerlending in banking; four years of experience in commercial real estatebrokerage and development; and nine years with a regulated nuclear power plant,Maine Yankee, where he administered benefits, human resources, internal audit,and document control. Mr. Hovey holds a Bachelor of Arts degree inBiology-Chemistry with a minor in Business from the University of Maine and aMasters degree in Business Administration from the University of SouthernMaine. He is a graduate of the New England School of Banking, Williams College.

**Michael A. Eaton**, age 43, VicePresident, Information and Technology Management. Mr. Eaton is responsiblefor integrated Information Technology for Maine & MaritimesCorporation and all of its affiliates, and has for thirteen years directed andmanaged the Company’s Information Technology group. He was hired in June 1987in the Corporate Planning Department, and held several positions in CorporatePlanning, Power Supply and Planning Groups. In April 1993, he was promotedto Manager of Information Systems, in 2002 promoted to Director, and, in November 2004,was named Vice President, Information and Technology Management. In addition, Mr. Eatonhas held the following roles: Project Manager for Oracle ERP implementation;Project Manager for the corporate Y2K effort; Project Manager for CISdevelopment and implementation and member of the Retail Choice Team; Chairmanof the Maine Electronic Business Transaction Working Group for the last threeyears; and Principal Econometric Load Forecaster, Load Research, and AdvancedMetering Technology. He holds a Bachelor of Arts in Computer Science from theUniversity of Maine, has completed graduate level courses in InformationTechnology, and is a graduate of the Stone & Webster UtilityManagement Program.

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**Randi J. Arthurs**, CPA, age 26,Vice President and Controller. A Certified Public Accountant, Ms. Arthurshas over five years of experience in accounting and auditing. Hired by MainePublic Service Company in April 2004 as Corporate Accountant, she waspromoted to Director of Regulated Accounting in September 2004, and, in March 2006,promoted to Director of Consolidated Accounting & Assistant Controller.While an employee of PriceWaterhouseCoopers, her clients included regulatedutilities and construction companies. She is a graduate of the University ofMaine.

Each executive office is a full-time position and hasbeen the principal occupation of each Officer since first elected. All Officerswere elected to serve until the next annual election of Officers and untiltheir successors shall have been duly chosen and qualified. The next annualelection of Officers will be on May 8, 2007.

There are no familyrelationships among Executive Officers.

**Item 11.**                 ExecutiveCompensation

Information for this item is set forth in the ProxyStatement of the registrant relating to its 2007 Annual Meeting ofStockholders, which information is incorporated herein by this reference.

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

Information for this itemis set forth in the Proxy Statement of the registrant relating to its 2007Annual Meeting of Stockholders, which information is incorporated herein bythis reference.

**Item 13.**                 CertainRelationships and Related Transactions, and Director Independence

Information for this itemis set forth in the Proxy Statement of the registrant relating to its 2007Annual Meeting of Stockholders, which information is incorporated herein bythis reference.

**Item 14.**                 PrincipalAccountant Fees and Services

Information for this item is set forth in the ProxyStatement of the registrant relating to its 2007 Annual Meeting ofStockholders, which information is incorporated herein by this reference.

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**PART IV**

**Item 15.**                 Exhibits,Financial Statement Schedules

(a)           The following documentsare filed as part of this report:

(1)         Consolidated FinancialStatements are included in Part II—Item 8 of this report.

(2)         Schedule I—CondensedFinancial Information of Registrant

(3)         Schedule II—Valuation ofQualifying Accounts and Reserves.

All other schedules have been omitted for the reasonthat they are not required or are not applicable, or the required informationis shown in the financial statements or notes thereto.

(4)         Exhibits for Maine &Maritimes Corporation are listed in the Index to Exhibits.

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**Signatures**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, hereunto duly authorized, on the 16th of March,2007.

|        | MAINE & MARITIMES CORPORATION |
|--------|----------------------------------------|
|   | By:                                    | /s/  RANDI J. ARTHURS |
|   |                                   | Randi J. Arthurs |
|   | * *                               | *Vice President &  Controller* |

 

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

|                              | **Signature** | ** **                                                               | ** ** | ** ** | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** | ** ** |
|------------------------------|---------------|--------------------------------------------------------------------------|------------|------------|-----------|------------|------------|------------|----------|------------|------------|
| /s/ RICHARD  G. DAIGLE  |          | Chairman of the  Board and Director                                      |       |       |      |
| (Richard  G. Daigle)         |          |                                                                     |       |       |      |
| /s/ NATHAN  L. GRASS    |          | Interim President  and Chief                                             |       |       |      |
| (Nathan  L. Grass)           |          | Executive Officer and  Director                                          |       |       |      |
| /s/ ROBERT  E. ANDERSON |          | Director                                                                 |       |       |      |
| (Robert  E. Anderson)        |          |                                                                     |       |       |      |
| /s/ D. JAMES DAIGLE          |          | Director                                                                 |       |       |      |
| (D.  James Daigle)           |          |                                                                     |       |       |      |
| /s/ DAVID N. FELCH           |          | Director                                                                 |       |       |      |
| (David  N. Felch)            |          |                                                                     |       |       |      |
| /s/ MICHAEL W.  CARON        |          | Director                                                                 |       |       |      |
| (Michael  W. Caron)          |          |                                                                     |       |       |      |
| /s/ DEBORAH L.  GALLANT      |          | Director                                                                 |       |       |      |
| (Deborah  L. Gallant)        |          |                                                                     |       |       |      |
| /s/ LANCE A. SMITH           |          | Director                                                                 |       |       |      |
| (Lance  A. Smith)            |          |                                                                     |       |       |      |
| /s/ BRIAN N. HAMEL           |          | Director                                                                 |       |       |      |
| (Brian  N. Hamel)            |          |                                                                     |       |       |      |
| /s/ MICHAEL I.  WILLIAMS     |          | Senior Vice  President, Chief                                            |       |       |      |
| (Michael I.  Willaims)       |          | Financial Officer, Interim Chief Operating Officer  and Interim Director |       |       |      |

 

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**ScheduleICondensed Financial Information of Registrant**

**Maine &Maritimes CorporationStatements of Operations(In thousands of dollars)**

| ** **                                                                 | ** ** | **For the Years Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Operating Expenses**                                                     |       |                                                          |       |   |   |   |   |
| Unregulated Operation & Maintenance and  Other Operating Expenses |       | $                                                             | 2,195      |   | $ | 2,238 |   | $ | 1,335 |   |
| Income Taxes                                                               |       | (1,068                                                        | )          | (879 | ) | (556 | ) |
| **Total Operating Expenses**                                               |       | 1,127                                                         |       | 1,359 |   | 779 |   |
| **Operating  Loss**                                                        |       | (1,127                                                        | )          | (1,359 | ) | (779 | ) |
| **Other Income (Deductions)**                                              |       |                                                          |       |   |   |   |   |
| Equity in (Loss) Income of Subsidiaries and  Associated Companies          |       | (4,427                                                        | )          | 1,126 |   | 2,145 |   |
| Interest and Dividend Income                                               |       | 1                                                             |       | 112 |   | 48 |   |
| Other—Net                                                             |       | (1                                                            | )          | (25 | ) | (83 | ) |
| **Total**                                                                  |       | (4,427                                                        | )          | 1,213 |   | 2,110 |   |
| **(Loss)  Income Before Interest Charges**                                 |       | (5,554                                                        | )          | (146 | ) | 1,331 |   |
| **Interest  Charges**                                                      |       | 367                                                           |       | 74 |   | 13 |   |
| **Net  (Loss) Income**                                                     |       | $                                                             | (5,921     | ) | $ | (220 | ) | $ | 1,318 |   |
| **Average Shares Outstanding—Basic**                                  |       | 1,637,815                                                     |       | 1,636,322 |   | 1,612,696 |   |
| **Average  Shares Outstanding—Diluted**                               |       | 1,637,815                                                     |       | 1,636,322 |   | 1,625,821 |   |
| **Basic (Loss) Earnings Per Share**                                        |       | $                                                             | (3.62      | ) | $ | (0.13 | ) | $ | 0.82 |   |
| **Diluted (Loss) Earnings Per  Share**                                     |       | $                                                             | (3.62      | ) | $ | (0.13 | ) | $ | 0.81 |   |

 

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**ScheduleICondensed Financial Information of Registrant**

**Maine &Maritimes CorporationCondensed Statements of Cash Flows(In thousands of dollars)**

| ** **                                                                      | ** ** | **For the Years Ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Cash Flow from Operating  Activities**                                        |       |                                                      |       |   |   |   |   |
| Net (Loss) Income                                                               |       | $                                                         | (5,921     | ) | $ | (220 | ) | $ | 1,318 |   |
| Equity in (Loss) Earnings of Subsidiaries                                       |       | 4,427                                                     |       | (1,126 | ) | (2,145 | ) |
| Adjustments to  Reconcile Net (Loss) Income to Net Cash Provided by Operations: |       |                                                      |       |   |   |   |   |
| Changes in  Current Assets and Liabilities:                                     |       |                                                      |       |   |   |   |   |
| Intercompany Accounts Receivable                                                |       | 2,669                                                     |       | (2,501 | ) | (2,123 | ) |
| Other Current Assets                                                            |       | (1,612                                                    | )          | 80 |   | 227 |   |
| Current Liabilities                                                             |       | (615                                                      | )          | 288 |   | 509 |   |
| Other—Net                                                                  |       | (156                                                      | )          | 512 |   | (444 | ) |
| **Net Cash Flow Used By Operating Activities**                                  |       | $                                                         | (1,208     | ) | $ | (2,967 | ) | $ | (2,658 | ) |
| **Cash Flow  From Financing Activities**                                        |       |                                                      |       |   |   |   |   |
| Dividend Payments                                                               |       | —                                                    |       | (1,227 | ) | (2,161 | ) |
| Retirements of Long-Term Debt                                                   |       | —                                                    |       | (2,000 | ) | — |   |
| Borrowings of Long-Term Debt                                                    |       | —                                                    |       | — |   | 2,000 |   |
| Short-Term Borrowings (Repayments), Net                                         |       | 2,470                                                     |       | 1,500 |   | — |   |
| Notes Receivable from Subsidiaries, Net                                         |       | (470                                                      | )          | 320 |   | (3,949 | ) |
| **Net Cash Flow Used By Financing Activities**                                  |       | $                                                         | 2,000      |   | $ | (1,407 | ) | $ | (4,110 | ) |
| **Cash  Flow From Investing Activities**                                        |       |                                                      |       |   |   |   |   |
| Dividends Received from Subsidiaries                                            |       | 1,462                                                     |       | 3,309 |   | 3,363 |   |
| Other Changes in Investments in Subsidiaries                                    |       | (1,998                                                    | )          | 1,145 |   | 751 |   |
| Cash Paid for Stock Contingencies from Acquisition  Agreements                  |       | (147                                                      | )          | (122 | ) | — |   |
| **Net Cash Flow Provided By Investing Activities**                              |       | $                                                         | (683       | ) | $ | 4,332 |   | $ | 4,114 |   |
| **Decrease in Cash and Cash Equivalents**                                       |       | 109                                                       |       | (42 | ) | (2,654 | ) |
| Cash and Cash Equivalents at Beginning of Period                                |       | —                                                    |       | 42 |   | 2,696 |   |
| **Cash  and Cash Equivalents at End of Period**                                 |       | $                                                         | 109        |   | $ | — |   | $ | 42 |   |

 

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**ScheduleICondensed Financial Information of Registrant**

**Maine &Maritimes CorporationCondensed Balance Sheets(In thousands of dollars)**

| ** **                                     | ** ** | **As of December 31,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **2006**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| **ASSETS**                                     |       |                                  |       |   |   |   |   |
| **Plant:**                                     |       |                                  |       |   |   |   |   |
| Non-Utility Plant                              |       | $                                     | 3          |   | $ | 3 |   | $ | 266 |   |
| Accumulated Depreciation                       |       | (2                                    | )          | (1 | ) | (1 | ) |
| **Net Plant in Service**                       |       | 1                                     |       | 2 |   | 265 |   |
| **Investment  in Subsidiaries**                |       | 37,930                                |       | 41,821 |   | 43,936 |   |
| **Net  Plant and Investment in Subsidiaries**  |       | 37,931                                |       | 41,823 |   | 44,201 |   |
| **Current  Assets:**                           |       |                                  |       |   |   |   |   |
| Cash and Cash Equivalents                      |       | 109                                   |       | — |   | 42 |   |
| Intercompany Accounts Receivable               |       | 2,177                                 |       | 4,846 |   | 2,345 |   |
| Other Current Assets                           |       | 1,612                                 |       | — |   | 80 |   |
| **Total**                                      |       | 3,898                                 |       | 4,846 |   | 2,467 |   |
| **Other  Assets:**                             |       |                                  |       |   |   |   |   |
| Intercompany Notes Receivable                  |       | 4,618                                 |       | 4,148 |   | 4,468 |   |
| Miscellaneous                                  |       | 110                                   |       | 195 |   | 592 |   |
| **Total**                                      |       | 4,728                                 |       | 4,343 |   | 5,060 |   |
| **Total  Assets**                              |       | $                                     | 46,557     |   | $ | 51,012 |   | $ | 51,728 |   |
| **CAPITALIZATION &  LIABILITIES**     |       |                                  |       |   |   |   |   |
| **Capitalization:**                            |       |                                  |       |   |   |   |   |
| Shareholders’ Equity                      |       | $                                     | 41,527     |   | $ | 47,984 |   | $ | 48,564 |   |
| Long-Term Debt                                 |       | —                                |       | — |   | 2,000 |   |
| **Total**                                      |       | 41,527                                |       | 47,984 |   | 50,564 |   |
| **Current  Liabilities:**                      |       |                                  |       |   |   |   |   |
| Notes Payable to Banks                         |       | 3,970                                 |       | 1,500 |   | — |   |
| Accounts Payable and Other Current Liabilities |       | 429                                   |       | 1,044 |   | 756 |   |
| **Total**                                      |       | 4,399                                 |       | 2,544 |   | 756 |   |
| **Other  Liabilities:**                        |       |                                  |       |   |   |   |   |
| Miscellaneous                                  |       | 631                                   |       | 484 |   | 408 |   |
| **Total**                                      |       | 631                                   |       | 484 |   | 408 |   |
| **Total Capitalization and  Liabilities**      |       | $                                     | 46,557     |   | $ | 51,012 |   | $ | 51,728 |   |

 

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**ScheduleICondensed Financial Information of Registrant (Continued)**

**Maine &Maritimes CorporationNotes to Condensed Financial Information**

**1.**                 BASIS OFPRESENTATION AND CREATION OF HOLDING COMPANY

**Basis ofPresentation**

In the parent company onlyfinancial statements, the Company’s investment in its subsidiaries is stated atcost plus equity in undistributed earnings (losses) of its subsidiaries. Theseparent company only financial statements should be read in conjunction with theCompany’s Annual Report to Shareholders for the year ended December 31,2006.

**Creation of Maine &Maritimes Corporation**

Maine & MaritimesCorporation is a utility holding company organized effective June 30,2003.

**2.**                 DIVIDENDS ANDRETURNS OF EQUITY FROM SUBSIDIARIES

Thefollowing common stock cash dividends and returns of equity were paid to Maine &Maritimes Corporation by its subsidiaries:

| ** **                    | ** ** | **For the Years Ended  December 31,** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                    | ** ** | **2006**                                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Maine Public  Service Company |       | $                                                         | 1,462      |   | $ | 2,317 |   | $ | 2,663 |   |
| Maricor  Properties           |       | —                                                    |       | 802 |   | — |   |
| Energy Atlantic,  LLC         |       | —                                                    |       | 183 |   | 700 |   |
| The Maricor Group             |       | —                                                    |       | 7 |   | — |   |
| **Total**                     |       | $                                                         | 1,462      |   | $ | 3,309 |   | $ | 3,363 |   |

 

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**Schedule II**

**Maine &Maritimes Corporation & SubsidiariesValuation of Qualifying Accounts & ReservesFor the Years Ended December 31, 2006, 2005 and 2004**

| ** **                                                         | *** *** | ** **                                     | ** **   | **Additions**                  | ** ** | **Deductions**                                                 | ** ** | ** **                                 | ** ** |
|--------------------------------------------------------------------|--------------|------------------------------------------------|--------------|--------------------------------|------------|----------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | *** *** | **Balance at  Beginning of  Period** | ** **   | **Costs &  Expenses** | ** ** | **Recoveries of  Accounts  Previously  Written Off** | ** ** | **Reserve on  Acquired  Receivables** | ** ** | **Accounts  Written Off As  Uncollectible** | ** ** | **Balance at  End of  Period** | ** ** |
| ** **                                                         | *** *** | **(In thousands of dollars)**   | ** **   |
| Reserve Deducted From  Asset To Which It Applies:                  | *** *** |                                           | *** *** |                           |       |                                                           |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allowance for  uncollectible accounts—Continuing Operations   | *** *** |                                           | *** *** |                           |       |                                                           |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2006                                                               |         |                                           | 162          |                           |       |                                                           | 139        |                                       |       |   | 89 |   |   |   | — |   |   |   | 235 |   |   |   | 155 |   |   |
| 2005                                                               |         |                                           | 218          |                           |       |                                                           | (105       | )                                          |       |   | 163 |   |   |   | — |   |   |   | 114 |   |   |   | 162 |   |   |
| 2004                                                               |         |                                           | 208          |                           |       |                                                           | 329        |                                       |       |   | 123 |   |   |   | — |   |   |   | 442 |   |   |   | 218 |   |   |
| Allowance for  uncollectible accounts—Discontinued Operations | *** *** |                                           | *** *** |                           |       |                                                           |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 2006                                                               |         |                                           | 211          |                           |       |                                                           | 28         |                                       |       |   | — |   |   |   | — |   |   |   | 116 |   |   |   | 123 |   |   |
| 2005                                                               |         |                                           | 472          |                           |       |                                                           | 16         |                                       |       |   | — |   |   |   | — |   |   |   | 277 |   |   |   | 211 |   |   |
| 2004                                                               |         |                                           | 28           |                           |       |                                                           | 138        |                                       |       |   | 12 |   |   |   | 305 |   |   |   | 11 |   |   |   | 472 |   |   |

 

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**INDEX TO EXHIBITS**

Certainof the following exhibits are filed herewith. Certain other of the followingexhibits have heretofore been filed with the Commission and are incorporatedherein by reference. (* indicates filed herewith)
| 3(a)  |   | Articles of  Incorporation (Exhibit 3(a) to 2004 MAM Form 10-K)                                                                                                                                                                                     |   |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3(b)  |   | By-laws of the Company (Exhibit 3.2 to  MAM Form 8-K filed February 23, 2007)                                                                                                                                                                       |   |
| 4(a)  |   | Indenture of Mortgage and Deed of Trust  defining the rights of the holders of MPS’s First Mortgage Bonds. (Exhibit  4(a) to 1980 MPS Form 10-K)                                                                                               |   |
| 4(b)  |   | Nineteenth Supplemental Indenture, Dated  May 1, 1998. (Exhibit 4(v) to 1998 MPS Form 10-K)                                                                                                                                                    |   |
| 4(c)  |   | Twentieth Supplemental Indenture, Dated  October 1, 2000. (Exhibit 4(w) to 2000 MPS Form 10-K)                                                                                                                                                 |   |
| 4(d)  |   | Twenty-first Supplemental Indenture,  Dated March 1, 2005 (Exhibit 4(d) to 2005 MAM Form 10-K).                                                                                                                                                |   |
| 4(e)  |   | Indenture of Second Mortgage and Deed of  Trust, dated as of October 1, 1985, made by MPS to J. Henry Schroder Bank and  Trust Company, as Trustee. (Exhibit 10(i) to MPS Form 8-K dated November 1,  1985)                                         |   |
| 4(f)  |   | Fourth Supplemental Indenture of the  Second Mortgage and Deed of Trust Dated May 1, 1998. (Exhibit 10(v) to 1998  MPS Form 10-K).                                                                                                                  |   |
| 4(g)  |   | Fifth Supplemental Indenture of the Second  Mortgage and Deed of Trust dated October 1, 2000. (Exhibit 10(y) to 2000 MPS  Form 10-K).                                                                                                               |   |
| 4(h)  |   | Sixth Supplemental Indenture of the  Second Mortgage and Deed of Trust dated June 1, 2002. (Exhibit 10.1 to MPS’s  Form 10-Q for the quarter ended June 30, 2002).                                                                             |   |
| 10(a) |   | Agreement of Purchase and Sale between  Maine Public Service and Eastern Utilities Associates, dated April 7, 1986.  (Exhibit 28(a) to MPS Form 10-Q for the quarter ended June 30, 1986)                                                      |   |
| 10(b) |   | Addendum to Agreement of Purchase and  Sale, dated June 26, 1986. (Exhibit 28(b) to MPS Form 10-Q for the Quarter  ended June 30, 1986)                                                                                                             |   |
| 10(c) |   | Capital Funds Agreement, dated as of May  20, 1968 between Maine Yankee Atomic Power Company and MPS. (Exhibit 10(b)(1)  to MPS Form 10-Q for the quarter ended March 31, 1983)                                                                     |   |
| 10(d) |   | Power Contract, dated as of May 20, 1968  between Maine Yankee Atomic Power Company and MPS. (Exhibit 10(b)(2) to MPS  Form 10-Q for the quarter ended March 31, 1983)                                                                              |   |
| 10(e) |   | Stipulation between Maine Public Service  Company, the Staff of the Commission and the Maine Public Utilities Commission  and the Maine Public Advocate, dated July 14, 1986. (Exhibit 28(c) to MPS  Form 10-Q for the quarter ended June 30, 1986) |   |
| 10(f) |   | Participation Agreement, as of June 20,  1969, with Maine Electric Power Company, Inc. (Exhibit 10(c)(1) to MPS Form  10-Q for the quarter ended March 31, 1983)                                                                                    |   |
| 10(g) |   | Agreement, as of June 20, 1969, among  MPS and the other Maine Participants. (Exhibit 10(c)(2) to MPS Form 10-Q  for quarter ended March 31, 1983)                                                                                             |   |

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| 10(h) |   | Power Purchase and Transmission  Agreement Supplement to Participation Agreement, dated as of August 1, 1969, with  Maine Electric Power Company, Inc. (Exhibit 10(c)(3) to MPS Form 10-Q  for quarter ended March 31, 1983)                                                                                                             |   |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10(i) |   | Supplement Amending Participation  Agreement, as of June 24, 1970, with Maine Electric Power Company, Inc. (Exhibit  10(c)(4) to MPS Form 10-Q for quarter ended March 31, 1983)                                                                                                                                                              |   |
| 10(j) |   | Second Supplement to Participation  Agreement, dated as of December 1, 1971, including as Exhibit A the Unit Participation  Agreement dated November 15, 1971, as amended, between Maine Electric Power  Company, Inc. and the New Brunswick Electric Power Commission. (Exhibit  10(c)(5) to MPS Form 10-Q for quarter ended March 31, 1983) |   |
| 10(k) |   | Assignment Agreement as of January 1,  1981, between Central Maine Power Company and MPS. (Exhibit 10(c)(8) to MPS  Form 10-Q for the quarter ended March 31, 1983)                                                                                                                                                                           |   |
| 10(l) |   | Amendment to July 14, 1986 Stipulation,  dated July 18, 1986. (Exhibit 28(d) to MPS Form 10-Q for the quarter  ended June 30, 1986)                                                                                                                                                                                                      |   |
| 10(m) |   | Order of the Maine Public Utilities  Commission dated July 21, 1986, Docket Nos. 84-80, 84-113 and 86-3. (Exhibit 28(q)  to 1986 MPS Form 10-K)                                                                                                                                                                                               |   |
| 10(n) |   | Order of the Maine Public Utilities  Commission, dated May 9, 1986, Docket Nos. 84-113 and 86-3 (with attached Stipulations).  (Exhibit 28(r) to 1986 MPS Form 10-K)                                                                                                                                                                          |   |
| 10(o) |   | Order of the Maine Public Utilities  Commission, dated July 31, 1987, Docket Nos. 84-80, 84-113, 87-96 and  87-167 (with attached Stipulation). (Exhibit 28(i) to 1988 MPS Form 10-K)                                                                                                                                                         |   |
| 10(p) |   | Agreement between Maine Public Service  Company and various current Seabrook Nuclear Project Joint Owners, dated  January 13, 1989. (Exhibit 28(o) to 1988 MPS Form 10-K)                                                                                                                                                                     |   |
| 10(q) |   | Maine Public Service Company, Prior  Service Executive Retirement Plan, dated May 12, 1992. (Exhibit 10(o) to 1992  MPS Form 10-K)                                                                                                                                                                                                            |   |
| 10(r) |   | Further Settlement Agreement between the  Maine Public Utilities Commission, the Public Advocate and MPS dated January  24, 2002 regarding Maine Yankee Power costs. (Exhibit 99(ak) to 2001 MPS  Form 10-K)                                                                                                                             |   |
| 10(s) |   | Order dated March 26, 2003 of Maine  Public Utilities Commission in Docket No. 2002-676 approving reorganization.  (Exhibit 99(ao) to 2003 MAM Form 10-K.)                                                                                                                                                                                    |   |
| 10(t) |   | Order dated October 29, 2003 of Maine  Public Utilities Commission in Docket No. 2003-85 giving final approval to  increase in MPS electric delivery rates. (Exhibit 99(ap) to 2003 MAM Form  10-K.)                                                                                                                                          |   |
| 10(u) |   | Agreement between WPS Power Development,  Inc. and Maine Public Service Company, dated July 7, 1998. (Exhibit 10(w) to  1998 MPS Form 10-K)                                                                                                                                                                                                   |   |
| 10(v) |   | Settlement Agreement dated February 11,  2004, among, MPS, other parties, FERC Trial Staff, and the MPUC regarding  changes to the MPS Formula Rate under the FERC Open Access Transmission  Tariff. (Exhibit 99(aq) to 2003 MAM Form 10-K.)                                                                                                  |   |
| 10(w) |   | 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 1998  MPS Form 10-K)                                                                                                                           |   |

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| 10(x)   |   | Stipulation dated February 19, 2004,  approved by order dated February 27, 2004 of Maine Public Utilities Commission  dated April 29, 2002 in Docket No. 2003-666 approving stranded cost revenue  requirements effective March 1, 2004. (Exhibit 99 to MAM Form 8-K, dated  March 2, 2004.) |   |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10(y)   |   | Maine & Maritimes Corporation 2002  Stock Option Plan (Exhibit 10(y) to 2005 MAM Form 10-K)                                                                                                                                                                                         |   |
| 10(z)   |   | Form of Stock Option Agreement between  Maine & Maritimes Corporation and the person listed at the end of such Agreement  (Exhibit 10(z) to 2005 MAM Form 10-K).                                                                                                                         |   |
| 10(aa)  |   | Maine Public Service Company, Deferred  Compensation Plan for Outside Directors (Exhibit 10(aa) to 2005 MAM Form  10-K).                                                                                                                                                                |   |
| 10(ab)  |   | Form of Deferred Compensation Agreement  between Maine Public Service Company and the persons listed at the end of  such Agreement (Exhibit 10(ab) to 2005 MAM Form 10-K).                                                                                                                   |   |
| 10(ac)  |   | Maine & Maritimes Corporation Stock  Plan for Outside Directors (Exhibit 4 to Post-Effective Amendment No. 1 to Form  S-8, dated July 30, 2003)                                                                                                                                          |   |
| 10(ad)  |   | Interest Rate Swap Confirmation for 1996  Tax-Exempt Bonds, dated September 9, 2003. (Exhibit 10(aj) to 2003 MAM Form  10-K.)                                                                                                                                                                |   |
| 10(ae)  |   | Interest Rate Swap Confirmation for 1998  FAME Note, dated September 9, 2003. (Exhibit 10(ak) to 2003 MAM Form  10-K.)                                                                                                                                                                  |   |
| 10(af)  |   | Interest Rate Swap Confirmation for 2000  Tax-Exempt Bonds, dated September 9, 2003. (Exhibit 10(al) to 2003 MAM Form  10-K.)                                                                                                                                                                |   |
| *10(ah) |   | Form of Employee Retention Agreement  between Maine & Maritimes Corporation and the persons listed at the end of  such Agreement.                                                                                                                                                        |   |
| 10(ai)  |   | Term Note between MPS and Fleet Bank,  dated November 22, 2004 (Exhibit 10(ai) to 2005 MAM Form 10-K).                                                                                                                                                                                       |   |
| 10(aj)  |   | Credit Agreement between MPS and Bank of  America, dated October 7, 2005 (Exhibit 10(aj) to 2005 MAM Form 10-K).                                                                                                                                                                             |   |
| 10(ak)  |   | Credit Agreement between MAM and Bank of  America, dated October 21, 2005 (Exhibit 10(ak) to 2005 MAM Form 10-K).                                                                                                                                                                       |   |
| 10(al)  |   | Letter of Credit and Reimbursement  Agreements between MPS and Bank of America, dated February 28, 2006 (Exhibit  10(al) to 2005 MAM Form 10-K).                                                                                                                                             |   |
| *21     |   | Subsidiaries of the Company                                                                                                                                                                                                                                                                  |   |
| *23     |   | Consent of Independent Registered Public  Accounting Firm.                                                                                                                                                                                                                                   |   |
| *31     |   | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                                                      |   |
| *32     |   | Certification of Financial Reports  Pursuant to 18 USC Section 1350                                                                                                                                                                                                                          |   |

 

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